MicroStrategy (MSTR.US) and Coinbase (COIN.US) are most likely to short the market.
The Zhitong Finance App learned that bears are pouring into crypto-related stocks, betting that the rally will be reversed. However, data analysis firm S3 Partners said in a Monday report that trading has become so crowded that it is preparing for a short run in these stocks. According to information, when stock prices unexpectedly rebound, forcing bears to withdraw from bearish bets, thereby further boosting stock prices, it will cause shortfalls.
S3 managing director Ihor Dusaniwsky said in the report that MicroStrategy (MSTR.US) and Coinbase (COIN.US) are most likely to short the market.
The report said: “Compared to the US market, these crypto-related stocks are very crowded and very prone to shortfalls. These crypto stocks had an average congestion score of 57.34 and a short run score of 78.69, while US stocks had an average congestion score of 32.41 and a short run score of 34.41.” The report added: “MicroStrategy, Coinbase, and CleanSpark (CLSK.US) are the riskiest stocks to roll out.”
The shorting potential of crypto-related stocks
Dusaniwsky said in the report that the bearish bet on crypto stocks was $10.7 billion, with MicroStrategy and Coinbase accounting for 84% of the industry's bearish bet. Other crypto-related stocks that have been severely shorted 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 are hedging this position by shorting related stocks. In fact, market participants believe that “go long on Bitcoin and short on miner stocks” trading is one of the reasons why mining stocks perform less well than Bitcoin.
Short positions on crypto-related stocks
However, as Bitcoin's price reached a record high, crypto stocks, particularly MicroStrategy and CoinBase, have risen substantially. MicroStrategy is up 204% this year, Coinbase is up 48%, and Bitcoin is up 64%.
The continued rise in Bitcoin and crypto stocks has had some impact on bearish betting. The S3 report shows that since the beginning of the month, crypto stock bears have suffered losses of $4 billion, with MicroStrategy bears losing the most.
In a situation where there are too many bears in an industry, if the share price of shorted stocks continues to rise, forcing bears to compete to make up their positions, it will cause huge losses. In recent years, the bearish market for GameStop (GME.US) and Tesla (TSLA.US) has caused heavy losses to bears.
S3 warns against doubling bets in crowded trades. “Crypto stock bears have been selling off in a bouncing market — either looking for a rebound in Bitcoin or using short positions to hedge against actual Bitcoin holdings.” “There is a high possibility that MicroStrategy, Coinbase, and CleanSpark positions will be shorted.”
Dusaniwsky concluded: “If the short position is to hedge against Bitcoin, then the short position should remain relatively stable no matter how Bitcoin rebounds.”