Short Sellers Have A $11 Billion Bet Crypto Stock Rally Is Over

Despite the recent surge in Bitcoin boosting cryptocurrency-related stocks, short sellers are persistently wagering billions against these, anticipating the crypto rally’s end. This year, total short interest in crypto stocks has escalated to nearly $11 billion, as reported by S3 Partners LLC.

The majority of these bets are concentrated on MicroStrategy Inc. and Coinbase Global Inc., constituting over 80% of the sector’s total short interest.

As Bitcoin’s value has increased by over 65% year-to-date, elevating the entire sector, short sellers have incurred paper losses close to $6 billion. Nonetheless, these traders are intensifying their short positions, either in anticipation of a Bitcoin price correction or as a hedge against their actual Bitcoin holdings.

Particularly, in the last 30 days, there has been a notable increase in short positions against MicroStrategy, with traders investing $974 million against the company, despite its share price growth. This move has surpassed the reduction in short positions—known as short covering—in companies like Coinbase, Marathon Digital Holdings Inc., and Hive Digital Technologies Ltd., according to S3.

This trend has elevated MicroStrategy’s short interest, now exceeding 20% of its available stock, positioning it as one of the most shorted stocks in the US, alongside major firms such as Nvidia Corp., Microsoft Corp., and Apple Inc.

However, if the market does not align with the short sellers’ predictions, they may face significant losses. Stocks like MicroStrategy, Coinbase, and Cleanspark Inc. are particularly vulnerable to short squeezes, an event that could force short sellers to purchase stocks to close losing positions, potentially driving prices even higher. This year, MicroStrategy’s stock has soared almost 200%, with Coinbase and Cleanspark also experiencing substantial gains of about 60% and 115%, respectively.

Risk of Stock Price Volatility

Heavy short selling can lead to increased volatility in a company’s stock price. Short sellers borrow shares to sell them with the hope of buying them back at a lower price. If a significant number of shares are sold short, any positive news or unexpected favorable financial results can lead to a rapid increase in the stock price as short sellers rush to cover their positions, a phenomenon known as a “short squeeze.” Conversely, the act of selling shares short in large volumes can put downward pressure on the stock price, which might not only affect the market perception of the company but can also impact the morale of existing shareholders and employees who are stockholders.

Companies that are heavily shorted might find themselves in a challenging position regarding investor relations. The perception of being targeted by short sellers can lead to a lack of confidence among potential and existing investors. Companies may need to allocate more resources to investor relations efforts to counteract the negative sentiment and provide reassurance about the company’s financial health and strategic direction. This scenario requires transparent communication about the company’s performance metrics, future outlook, and any plans to mitigate risks associated with the market’s current perception.

Also note that the impact of short selling can extend into a company’s operational decisions. For example, a persistently low stock price due to heavy short selling might limit a company’s ability to raise capital through equity offerings. This could, in turn, affect the company’s expansion plans, R&D investment, or debt repayment strategies. Companies might need to explore alternative financing methods or adjust their operational strategies to navigate the financial challenges posed by a depressed stock price.

Furthermore, a company under the pressure of short sellers might adopt more aggressive financial or business strategies to prove the short sellers wrong. This could include accelerating timelines for product launches, making bold acquisitions, or implementing cost-cutting measures to bolster financial performance. While these actions could potentially enhance shareholder value, they also come with risks that could exacerbate the company’s situation if not carefully managed.