Why Are So Many Skeptical Investors Shorting Bitcoin Mining Stocks?

Short interest targeting Bitcoin miners has soared a whopping 50% to $4.6 billion in the past 30 days, according to short selling research firm S3 Partners.

Bitcoin mining stocks have attracted a lot of attention from short sellers recently, with short interest increasing by 50% in the past 30 days to reach $4.6 billion, the highest level of short selling activity in 2024, according to short selling research firm S3 Partners.

This level of short interest is particularly noteworthy given that Bitcoin was widely expected to surge if Donald Trump won the US presidential election, and indeed it has soared by 27% since Trump's victory was announced on November 5, hitting an all-time high north of $89,000.

Moreover, analysts are projecting the leading cryptocurrency to hit six digits as early as this year.

Now, short sellers in mining stocks are facing the possibility of a short squeeze, according to Matthew Unterman, managing director at S3 Partners, who spoke to DL News.

Short sellers profit by borrowing stock and selling it in the market, anticipating that its price will decrease. When the price does fall, short sellers buy the stock and return the shares, keeping the difference.

This strategy is inherently risky, as long investors can only lose their initial investment, whereas short sellers can lose significantly more.

Sharp gains in stock prices can be disastrous for short sellers. A short squeeze occurs when a stock's price rises so dramatically that short sellers are compelled to buy the stock to offset their losses.

This buying, in turn, drives the stock's price even higher.

In the ebb and flow of the markets, there are periods when mining stocks outpace Bitcoin, prompting risk-tolerant investors to sell those shares short in anticipation of the gap closing.

For instance, since Bitcoin's last major low on September 6, Riot is up 86%, Marathon Digital is up about 55%, and CleanSpark gained 73%, while Bitcoin is up 65% during the same period.

However, in the past 24 hours, miners have dropped between 5% and 20%.

“There are a lot of forces in the market that prefer they don’t go up,” crypto investor Mike Alfred stated on Thursday.

Unlike companies like MicroStrategy, mining stocks tend to have smaller market capitalisations, which means that large trades can have a disproportionate impact on price movements.

According to Alfred, this implies that there's considerably more upside potential as investors in “wildly undervalued” mining stocks catch up to the overall market sentiment.

“Now you're looking at your portfolio and thinking, ‘How can I add?’ You want to be long everything,” he said.

Many analysts attribute Bitcoin's “euphoria zone” to institutional investors, evidenced by the surging ETF inflows that have propelled Bitcoin and Ethereum prices as providers ramp up.

In contrast, retail participation remains notably low.

“There's no retail interest whatsoever,” stated Alfred.