Short Sellers Are Betting Big Money on Cryptocurrency’s Demise

Collapsing cryptocurrency prices have sent short sellers on a frenzy, and they’re targeting some of digital assets’ biggest companies

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key takeaways

  • Crypto contagion has spread into equities with digital asset exposure
  • Short interest for multiple top crypto stocks has peaked this month

Stock traders looking to profit from tumbling cryptocurrency prices took aim at major players in digital assets this week, with Coinbase and MicroStrategy among the hardest hit.

Short sellers Monday bet more than $631 million, cumulatively, on the continued descent of six top crypto stocks, accounting for 39% of their collective trade volume for the day. 

Spot crypto markets shed 16% over the weekend, suggesting short sellers had eagerly awaited equity markets opening to capitalize on the chaos.

Top US crypto exchange Coinbase took most of the wrath, facing shorts of $393 million Monday — 74% above its yearly average, according to FINRA data compiled by Blockworks. FINRA tracks volume on both the NYSE and Nasdaq, but its data excludes private markets and could count short trades that don’t specifically convert to an open short.

The same day, Coinbase said it would lay off almost one-fifth of staff: more than 1,000 employees. Chief executive Brian Armstrong cited a potential US recession. Coinbase shares have since fallen some 16% since Friday’s close.

Also on Monday, short sellers bet $124 million against MicroStrategy — the data intelligence firm run by bitcoin bull Michael Saylor.

MicroStrategy stock, on average, recorded $70 million in shorts daily over the past year, which means Monday saw 77% more MicroStrategy short selling than usual. The tech company’s shares are now down 25%.

MicroStrategy maintains the largest corporate bitcoin reserves of any public company, holding 129,218 BTC as of April, worth $2.7 billion today. The company’s market capitalization is just $1.8 billion.

New York-based Signature Bank saw an even bigger short surge. Through its crypto-specific Signet service, Signature oversees $29 billion in crypto deposits (as of May), including $7 billion in stablecoins. Market participants including exchanges, miners, funds and fiat-backed stablecoins, such as Circle’s USD Coin (USDC) and TrueUSD, all bank with Signature.

Short sellers initiated around $53 million in bets against Signature Monday, 82% above its yearly average. The company’s shares went on to shed 20%.

Short selling volume over the past year | Data source: FINRA via TradingView

The mounting losses are despite the bank having “virtually zero credit risk” via its crypto operations, as its digital asset balance sheet is almost entirely deposits, according to a recent analysis. 

Rival Silvergate, on the other hand, on Monday only saw 14% more shorts than average, or roughly $24 million. Silvergate oversaw about $15.8 billion in assets under management as of March 31, the most recent available data — making the firm one of the largest crypto banks. 

In February, the firm spent $182 million to acquire assets and technology once intended to power Meta’s failed stablecoin offering Diem. Silvergate also issued a $205 million bitcoin-backed loan to MicroStrategy in March. Its share price is also down 20% since Friday’s close.

Curiously, crypto mining stocks weren’t targeted to the same degree. US-listed outfits Marathon Digital and Riot Blockchain recorded $27 million and $10 million worth of shorts on Monday, respectively, both significantly under their yearly daily averages of $53 million and $67.5 million. 

Short sellers could target crypto mining stocks next

Shorting specialists might not be focusing on top miners just yet, as those companies are, at least in theory, large enough to acquire fresh mining rigs and electricity sources relatively cheaply, bitcoin mining consultant Alejandro De La Torr told Blockworks. 

It could put some public crypto miners in a better position than some of their smaller, unlisted counterparts, at least in the short term. Todd Esse, co-founder of bitcoin mining fund HashWorks, told Blockworks he expects shorters will target certain vulnerable mining stocks moving forward.

In any case, short interest — a measure of how many outstanding shares are attributable — for nearly all these stocks are now at yearly highs, according to data from finance and blockchain analytics startup quantX.

MicroStrategy’s short interest hit 30% in May (3.4 million shares of 11.30 million outstanding), but has since dropped slightly. Signature Bank shorts have surged: Its short interest is up 60% month over month, now at 2.57 million shares of almost 63 million outstanding.

“Pure bitcoin plays have slightly declined in short interest, whereas broader crypto plays have spiked this month,” quantX co-founder Oisin Maher said. The short interest in cryptoasset manager Voyager Digital’s US-listed equity, in particular, has exploded some 600% in June, while Galaxy Digital’s has been steadily growing all year. 

Coinbase short interest over the past year | Source: quantX via Bloomberg Terminal

Top crypto stocks have already booked more short volume in June than last September — when bitcoin was worth more than double its current price. 

Still, FINRA data shows far more bets on crypto’s demise last month, which saw the Terra ecosystem implode and lending platform Celsius begin to falter. 

Indeed, altogether in May, more than $11 billion worth of shorts were opened against Coinbase, MicroStrategy, Signature, Silvergate, Marathon and Riot — almost 70% levied at Coinbase. 

Short sellers only logged more bets against these crypto stocks at one other time throughout the past year; October and November together saw more than $19 billion worth of shorts opened, when bitcoin was just retreating from its $69,000 record high.

The total value of all cryptocurrencies has tanked 65% since then — indicating there’s some very happy short sellers out there. Recent data shows they’ve raked in almost $4 billion by shorting crypto stocks this year.

This article was updated at 5:07 am ET, Jun 17 to include reference to Silvergate’s loan to MicroStrategy.


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