Crypto Short Sellers Up 90% in 2022

Bitcoin fell below $16,000 on Monday following Friday’s announcement that cryptocurrency exchange FTX had filed for bankruptcy protection. FTX, once valued at around $32 billion, collapsed after revealing that it did not have enough liquidity to meet demands for investor withdrawals.

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Because crypto has been declining more or less steadily since the beginning of the year, it only stands to reason that short sellers were going to bet against companies in the industry. S3 Partners’ analysts Ihor Dusaniwsky and Matthew Unterman reviewed the holdings in crypto-related ETFs and identified the eight stocks that were the most extensive crypto holdings in those ETFs: Block Inc. (NYSE: SQ), Coinbase Global Inc. (NASDAQ: COIN), MicroStrategy Inc. (NASDAQ: MSTR), Robinhood Markets Inc. (NASDAQ: HOOD), Marathon Digital Holdings Inc. (NASDAQ: MARA), Riot Blockchain Inc. (NASDAQ: RIOT), Silvergate Capital Corp. (NYSE: SI) and Bakkt Holdings Inc. (NYSE: BKKT).

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As a group, 14.8% of the float of these eight stocks was sold short on Tuesday, November 15. The average U.S.-traded security has short interest of 4.86%, according to S3 data. The fee short sellers pay to finance their short bets is 0.65%. Short sellers of these eight stocks pay nine times that, 5.69% on average for the privilege of shorting the stocks.

In the 30 days before the demolition of the crypto market by FTX, short covering totaled $92.3 million. In the past seven days, short sellers added $121.3 million to their positions.

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Short sellers have made a mark-to-market profit of 89.6% on these eight stocks since the beginning of the year and a 9.6% profit since the beginning of November. On a percentage basis, Riot Blockchain has returned 140% to short sellers so far this year and Marathon Digital has returned nearly 107%. For the month of November, Silvergate Capital has returned more than 49% to short sellers, and MicroStrategy has produced a profit of just over 39%.

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Dusaniwsky and Unterman commented:

We should expect price volatility in these stocks as the FTX bankruptcy comes into focus and more details emerge. Because of this volatility, we expect increased short selling in these stocks as the possibility for broader sector-wide price weakness increases. With the underlying Crypto currency market in temporary disarray, price fluctuations in these stocks will see shorting activity see-saw between shorting and covering as momentum trading overtakes fundamental investing in these stocks.