Be careful! Short sellers are flocking into cryptocurrency stocks, and a short squeeze situation is imminent

Zhitong
2024.03.28 02:11
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Short sellers flock into crypto stocks, with MicroStrategy and Coinbase most likely to face short squeeze. Data shows high short squeeze potential for crypto-related stocks, with MicroStrategy and Coinbase scoring high in short squeeze potential. At the same time, short positions in crypto stocks are significant, with bearish bets totaling $10.7 billion. Additionally, Bitcoin miners Marathon Digital, Riot Platforms, and CleanSpark are heavily shorted. Prices of crypto stocks have surged significantly, especially MicroStrategy and Coinbase

According to the Zhitong Finance and Economics APP, short sellers are pouring into stocks related to cryptocurrencies, betting that the uptrend will reverse. However, data analysis company S3 Partners stated in a report on Monday that trading has become so crowded, setting the stage for a short squeeze in these stocks. It is understood that when stock prices unexpectedly rebound, forcing short sellers to exit their bearish bets, further driving up stock prices, it will trigger a short squeeze.

Ihor Dusaniwsky, Managing Director at S3, stated in the report that MicroStrategy (MSTR.US) and Coinbase (COIN.US) are most likely to experience a short squeeze.

The report stated: "Compared to the US market, these crypto-related stocks are very crowded and prone to short squeezes. The average crowded score for these crypto stocks is 57.34, with a short squeeze score of 78.69, while the average crowded score for US stocks is 32.41, with a short squeeze score of 34.41." The report added: "MicroStrategy, Coinbase, and CleanSpark (CLSK.US) are the stocks with the highest short squeeze risk."

Short squeeze potential for stocks related to cryptocurrencies

Dusaniwsky stated in the report that short bets on crypto stocks amount to $10.7 billion, with MicroStrategy and Coinbase accounting for 84% of the industry's short bets. Other heavily shorted crypto-related stocks include bitcoin miners Marathon Digital (MARA.US), Riot Platforms (RIOT.US), and CleanSpark.

One explanation is that some traders are going long on bitcoin but hedging this position by shorting related stocks. In fact, market participants believe that the "long bitcoin, short mining stocks" trade is one of the reasons why mining stocks have underperformed bitcoin.

Short positions on stocks related to cryptocurrencies

However, as the price of bitcoin reaches historic highs, crypto stocks, especially MicroStrategy and Coinbase, have risen significantly. MicroStrategy has risen by 204% this year, Coinbase by 48%, while bitcoin has risen by 64%The continuous rise of Bitcoin and cryptocurrency stocks has had a certain impact on bearish bets. According to the S3 report, since the beginning of the month, cryptocurrency stock shorts have suffered losses of $4 billion, with MicroStrategy shorts experiencing the largest losses.

In a situation where short positions in an industry become overly crowded, if the stock price continues to rise, it will force shorts to cover their positions, leading to massive losses. In recent years, the short squeeze in GameStop (GME.US) and Tesla (TSLA.US) has resulted in heavy losses for shorts.

S3 warns against doubling down on bets in crowded trades. "Cryptocurrency stock shorts have been selling off in a rebounding market - either looking for a pullback in Bitcoin's rebound or using short positions to hedge actual Bitcoin holdings." "There is a high likelihood of short squeezes for positions in MicroStrategy, Coinbase, and CleanSpark."

Dusaniwsky concludes: "If short positions are for hedging Bitcoin, then regardless of how Bitcoin rebounds, short positions should remain relatively stable."