Short Sellers Raise Crypto Stocks Despite High Betting Costs

(Bloomberg) — Short sellers have pounced on crypto-focused stocks as the digital asset space crumbles in the wake of FTX’s public meltdown. They pay a big price to place these bets.

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Crypto stocks are nearly three times more shorted than the average stock, even as short sellers pay nearly eleven times more in financing costs to bet against them, according to data compiled by Ihor Dusaniwsky and Matthew Unterman at S3 Partners.

According to S3’s analysis, traders covering losses in a handful of crypto stocks, including Block Inc., Coinbase Global Inc., MicroStrategy Inc. and five others added $55 million worth of new shorts in the week through Friday. Block and Coinbase alone saw about $27 million in new short selling combined. The total crypto interest for these eight stocks is over $4.5 billion.

MicroStrategy, meanwhile, has shorted about 26% of its marketable float, according to S3 data. For Silvergate Capital Corp., the short-term interest rate as a percentage of variation exceeds 10%.

“Sam Bankman-Fried’s failed crypto exchange and subsequent bankruptcy plunged cryptocurrencies and the cryptocurrency industry into a volatile cycle of price action,” Dusaniwsky and Unterman wrote in a note. “Shorting these crypto stocks was a very profitable trade in 2022.”

Even before the collapse of FTX, the cryptocurrency space had been plagued by a number of other explosions and scandals this year. But the mood has worsened even more drastically since FTX was removed, because the company was considered a stable presence in the industry. Bitcoin, the largest digital asset by market value — whose price movements often serve as a readout of crypto market sentiment — has fallen below $17,000, down from nearly $69,000 just a year ago.

Crypto-focused stocks have also suffered. Shares of Coinbase and Silvergate are down more than 80% this year, while those of MicroStrategy are down 70%. Wall Street analysts’ confidence in stocks is also slipping. Coinbase, for example, has the lowest number of market-equivalent valuations since August 2021, according to data compiled by Bloomberg.

FTX is now in bankruptcy, with revelations of its inner workings in its final days slowly spilling out in dramatic fashion through court filings. FTX’s Chapter 11 filing said about 130 related companies have begun voluntary proceedings. And regulators are also looking at the implications of FTX.

His descent into bankruptcy went from, “Oh jeez, that’s bad,” to, ‘Oh my God, that’s horrible,” said Art Hogan, chief market strategist at B. Riley Wealth.

“We have already seen that FTX had many tentacles. In the company alone, the cross-ownership in FTX of almost everything else that touches crypto means there will be more ramifications to it,” he said in an interview. “So it’s intuitive to think that many of these real crypto-related companies will attract a lot of short sellers.”

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