Crypto short sellers face $1.9 bn loss as Bitcoin surges

Bitcoin's recent rally to $70,999 levels, surging over 7% in late-day trading and nearly 12% from its low three days ago, has placed substantial pressure on short sellers of crypto-related stocks. According to data analytics platform, S3 Partners, as on March 25, investors were sitting on a significant $1.9 billion in year-to-date mark-to-market losses.

Bitcoin had earlier come off from $70K levels to $64K levels as ETFs saw a cumulative outflow of $887.6 million, largely owing to withdrawals from Grayscale’s ETF which lost over $350 million last week. Early this year, 11 spot ETFs had debuted in the US, allowing investors to take exposure to the leading cryptocurrency. In fact, the ETFs breached $10 billion in assets under management within a month of getting approval from the securities regulator.

At present, the total short interest in the sector is reported at $10.7 billion, with a notable 84% attributed to just two companies: enterprise software firm MicroStrategy Inc (MSTR), which has been aggressively buying Bitcoin, and Coinbase Global Inc (COIN), a cryptocurrency exchange platform. This concentration highlights an intense scepticism towards crypto as an asset class, particularly when compared to the broader market given that the short interest (% float) for crypto stocks is more than triple the average of 5.13% for US stocks.

For the month of March, crypto-related short positions have declined by 39.2%, translating to a $4 billion loss, and a remarkable 79.1% decrease year-to-date, totalling a $5.7 billion loss.

Despite these significant setbacks, the sector witnessed net short covering, primarily driven by substantial short covering in Coinbase, which more than compensated for the increased short selling observed in MicroStrategy throughout the year.

However, the overall short interest in crypto stocks saw an increase of $3.67 billion, reaching $10.71 billion in 2024. This increase is attributed to a $3.98 billion mark-to-market rise in the share prices of the shorted stocks, slightly offset by $302 million in short covering.

Short sellers in the crypto stock sector appear to be doubling down, possibly in anticipation of a pullback in Bitcoin's rally or utilizing short positions as a hedge against actual Bitcoin holdings. Depending on the nature of these trades—whether as risk positions or hedges—the future of short interest in the sector could vary significantly. According to S3 Partners, those betting against the market may face a potential squeeze, especially in highly shorted stocks such as MSTR, COIN, and CleanSpark Inc, an American Bitcoin miner, whereas hedge positions might maintain steady short interest levels regardless of Bitcoin's performance.

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