Short Sellers Dig In on Crypto Stocks Despite Bitcoin Surge

What's the Deal with Crypto Stock Short Sellers?

Contrary to the rallying crypto-linked stocks fueled by Bitcoin's surge, short sellers are doubling down on their multi-billion-dollar bets against them, seeing an inevitable end to the rally.

Total short interest, an indicator of contrarian traders' bets against crypto stocks, has soared to nearly $11 billion this year, according to S3 Partners. MicroStrategy and Coinbase account for over 80% of the sector's short interest.

Burning Paper Billions

Despite paper losses mounting to nearly $6 billion as Bitcoin's year-to-date ascent lifts the sector, short sellers remain steadfast. "They're either anticipating a Bitcoin rally pullback or hedging against their actual Bitcoin holdings," explains S3's Ihor Dusaniwsky.

MicroStrategy in the Hot Seat

Traders betting against crypto stocks have piled into MicroStrategy, increasing their short positions by $974 million in the past 30 days, despite its soaring share price. This surge pushes MicroStrategy's total short interest above 20% of its float, making it one of the most-shorted stocks in the US, rivaling behemoths like Apple and Microsoft.

Short Squeeze Risk

However, short sellers could face significant losses if their bets prove incorrect. MicroStrategy, Coinbase, and Cleanspark are all poised for short squeezes, where forced buybacks by losing short sellers drive prices higher, pressuring others to follow suit.

Are They Digging Their Own Graves?

Given their rally and limited availability of shortable shares, MicroStrategy, Coinbase, and Cleanspark are vulnerable to squeezes. With MicroStrategy already up nearly 200% and Coinbase and Cleanspark up over 60% and 115%, respectively, short sellers might be in for a painful reckoning.

Moral of the Story

While short sellers remain skeptical, the crypto stock rally continues unabated. Shorting crypto stocks in an upward market can be a risky proposition, exposing traders to the potential for massive losses if their bets go awry.