In 2023, Bitcoin’s remarkable rally is proving detrimental for short sellers who bet against cryptocurrency company stocks. Traders who speculated on declines in companies like Coinbase Global Inc., MicroStrategy Inc., and Marathon Digital Holdings Inc. are facing substantial paper losses amounting to $6 billion this year, as per data from S3 Partners LLC.
Bitcoin’s surge of over 165% is propelling the gains in crypto stocks, closely tied to the digital asset’s price. Optimism regarding additional regulatory clarity and the potential introduction of a US-listed Bitcoin exchange-traded fund has further buoyed the sector. However, this optimism has heightened the risk of a short squeeze, where increasing gains compel short sellers to repurchase the stocks they bet against to exit losing positions, thereby driving shares even higher.
Ihor Dusaniwsky, managing director of predictive analytics at S3, emphasized in a Dec. 5 report that “Buying-to-cover in the most shorted crypto stocks such as Coinbase Global, MicroStrategy, Marathon Digital Holdings, and Riot Platforms will help push stock prices higher along with the long buying that has driven up stock prices since the end of October.”
Among the companies, Coinbase has inflicted the most pain on short sellers this year. Its staggering 290% rally has resulted in losses of approximately $3.5 billion, accounting for more than half of the total losses incurred in 2023. MicroStrategy, with a more than 300% surge this year, has contributed $1.4 billion to the losses faced by crypto shorts.
Even as losses accumulate for short sellers, some are persisting with contrarian trades, anticipating the rally to lose momentum. S3 data reveals that since mid-September, when Bitcoin rebounded from a series of losses, nearly $700 million in new short selling has taken place.
However, this trend is likely to reverse if Bitcoin continues its upward trajectory, lifting crypto stock shares and adding to the approximately $2.2 billion in short covering observed in the sector this year.
Ihor Dusaniwsky commented, “Investors looking for crypto exposure can now choose between actual cryptocurrencies or crypto stocks. If the recent momentum continues, both look set to outperform the market.”
