- Bearish traders betting on crypto stocks falling post losses $1.9 billion in 2024.
- Crypto firms Coinbase and MicroStrategy’s stocks have rallied this year, driving 84% of bears’ losses.
- S3 Partners says soaring open interest makes the market ripe for further price squeezes.
Bearish traders who bet on crypto stocks falling are feeling the burn.
Crypto exchange Coinbase and software firm MicroStrategy have both outperformed Bitcoin this year, up 76% and 170%, respectively, as hype around exchange-traded funds drove a wave of retail investment into the space.
The euphoric rally has left short sellers down $1.9 billion since January, according to a report by data analytics firm S3 Partners. Despite being down billions, bearish investors are betting that the crypto stock rally will falter.
“Crypto stock short sellers have been selling into a rallying market,” Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, said in a report on Tuesday.
These traders are “either looking for a pullback in the Bitcoin rally or using the short positions as a hedge versus actual Bitcoin holdings,” he wrote.
Total short interest in crypto-related stocks is at $10.7 billion. This is three times larger than the average in other sectors.
Short interest is a measure of the number of shares being sold short, or used to bet on the stock price falling, that have not been covered or closed out.
Despite short sellers’ losses, short interest has risen by $4.5 billion in the last 30 days alone. S3 attributed $925 million to new bearish bets, with higher prices accounting for the rest.
Short selling isn’t just a hedge for Bitcoin’s ongoing rally, but a sign that bears are doubling down, Dusaniwsky said.
“If the short exposure is a Bitcoin hedge,” he wrote, “then short interest should remain relatively flat, regardless of the Bitcoin rally.”
Crypto stocks are also “extremely crowded.”
MicroStrategy, Coinbase, and Bitcoin miner CleanSpark are the sector’s “most squeezable” stocks, according to S3 Partners.
As stock prices rise, short sellers are forced to buy stock, or “cover,” their bets to avoid liquidation. During a price rally, excessive covering can lead to a jump in price, called a squeeze.
MicroStrategy and Coinbase make up 84% of the short interest in the sector.
Tyler Pearson is a junior markets correspondent at DL News. Got a tip? Email him at ty@dlnews.com.