Shorting Crypto Stocks Has Led to ‘Substantial’ Paper Gains, But It’s Getting Harder to Join the Trend

Short selling of cryptocurrency-related stocks has generated “substantial” market value gains this year, but those looking to get in on the action may have more trouble doing so in the future.

Short sellers on a basket of 15 crypto stocks including Coinbase Global Inc. COIN,
MicroStrategy Inc. MSTR,
and crypto miners such as Marathon Digital Holdings Inc. MARA,
they have racked up a year-to-date paper gain of 126% through Tuesday’s session, according to Ihor Dusaniwsky, general manager of predictive analytics at S3 Partners.

In June alone, cryptocurrency shorts surged 42% and saw paper gains of 16% based on Tuesday’s activity alone, in which crypto stocks came under further pressure amid falling prices. digital asset prices and a Coinbase layoff announcement.

See also: Why Coinbase is laying off 18% of employees and what it means for cryptocurrencies

bitcoinbtc usd,
which fell 3.8% in morning trading Wednesday to an 18-month low, fell 33.1% in June and plunged 54.1% this year.

Dusaniwsky noted that interest in crypto short sales has been on the rise, citing $71 million in new short sales in less than two weeks in June.

“But with the pool of equity lending to these names limited, due to a lack of considerable ownership in the funds of the largest and most active equity lenders on the street, would-be short sellers may be late to the party.” , continued in a report. . “While the negative price momentum of crypto stocks may not be over, the ability to downsize stocks may be over.”

Dusaniwsky noted a 91% share lending utilization on crypto names. “There are some stocks available to borrow to cover short sales,” he noted, but “size short sales will be difficult to execute and stock lending rates will be more expensive for both new and existing short sales.” existing”.

Read: Half of bitcoin holders on Coinbase exchange may face losses, says Mizuho

Stock-lending trends mean “short exposure in these stocks won’t increase dramatically going forward,” he wrote, meaning “shorting these stocks will become more expensive and reduce expected alpha.” As such, he expects the continued declines in crypto stocks to be the result of longs, not shorts, selling their shares. He read more about the mechanics of short selling.

Should crypto stocks rally, Dusaniwsky anticipates “a flurry of buying to cover as short sellers look to cash in on their substantial gains.” He added that “[s]Short sellers should not be blamed for short-term downward price movements, but they can be an active participant in future rallies.”

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