Crypto Stocks Are Getting Shorted Big Time. How That Could Go Really Wrong.

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Betting against crypto stocks would seem like a sure thing. But it’s turned into a nightmare for traders over the last month–another sign of how tough it can be to make money in crypto.

With Bitcoin down sharply and the crypto industry reeling, investors have piled into bets against crypto-related stocks. Companies including

Coinbase Global

(ticker: COIN),

Silvergate Capital

(SI),

MicroStrategy

(MSTR), and Marathon Digital (MARA) are now some of the most heavily shorted stocks on the market.

Shorting a stock involves borrowing shares and selling them. The trade is profitable if the stock goes down, allowing investors to buy shares at a lower price and repay the borrowed stock.

However, it can go wrong fast if prices rise and investors face pressure to “cover” the short, forcing them to buy back the stock at a loss. If many short-sellers are under pressure, it can cause more buying, fueling gains in prices while exacerbating losses for short sellers—what is known as a “short squeeze.”

Short squeezes were a big part of the “meme” stock rally in

GameStop

(GME) and other companies in early 2021. The same dynamics settled into crypto after FTX collapsed in late 2022, and they are now causing more volatility in the stocks.

Silvergate, a bank that has drawn scrutiny for its ties to FTX, has been a target of short-sellers. Its shares are down more than 80% in the last year amid cascading crypto prices and a $1 billion fourth-quarter loss.

Shorting Silvergate has also become popular. More than 88% of its outstanding shares are held short, according to data analytics firm S3 Partners. That makes it the most heavily shorted U.S. stock with at least $10 million in short interest.

Coinbase’s stock, for its part, is up 78% this year. That’s turned into a losing bet for short sellers, with 22% of the outstanding shares held short.

MicroStrategy

(MSTR)—a software group with significant Bitcoin holdings—is up 93% this year. And crypto miner Marathon Digital (MARA) is up 112%. Both stocks are also heavily shorted with over 30% of the outstanding shares held short.

Add it all up and net losses on short positions have approached $900 million in the past month on a mark-to-market basis, according to S3. On Feb. 2, when Coinbase and Silvergate stocks both jumped more than 20%, short sellers recorded a loss of $630 million.

The cost of shorting crypto stocks has also risen sharply. Investors looking to short the stocks now face high borrowing fees—upwards of 20% for Marathon and 30% for

MicroStrategy
,
according to S3. That’s because they have become “hard to borrow” with over 95% of the lending pool no longer available, says S3 managing partner Ihor Dusaniwsky. “This will severely limit the amount of new short selling,” he says.

S3 gives all four stocks a “squeeze score” above 80. Silvergate’s score is 90. MicroStrategy‘s is 100. That makes them all especially vulnerable to a squeeze, says Dusaniwsky.

When a stock is heavily shorted, it doesn’t take much to cause a pop. Coinbase, for instance, saw a double-digit spike its shares in January after settling a case with New York state financial regulators linked to compliance issues in 2018-19. While the development barely elicited a shrug from analysts, it caused the stock to spike.

Silvergate, for its part, surged 52% last week between Monday and Wednesday as major investment groups disclosed ownership—even though the stakes were at least a month old and, in some cases, represented neutral positions among market markets.

Bitcoin has rallied this year, up almost 50%, fueling some of the bounce in crypto-related stocks. But regulatory clouds are weighing on the space, while the macro climate remains tough with Federal Reserve rate policy still a headwind.

Even with pressure building, however, betting against crypto stocks could be a losing proposition.

Write to Jack Denton at jack.denton@barrons.com