S3 Partners reported that MicroStrategy (MSTR) and Coinbase (COIN) had the greatest chance of a short squeeze, or rise caused by short sellers selling their negative bets. The research said MicroStrategy and Coinbase account for 84% of the $10.7 billion short interest in crypto equities.
Short sellers are buying crypto-linked equities, betting they will reverse their year-to-date price gains. Data analytics firm S3 Partners reported on Monday that congested trade positioned these equities for a short squeeze. A short squeeze occurs when short sellers unwind their bearish bets after an unexpected stock price rally, causing an even greater jump.
S3's Managing Director, Ihor Dusaniwsky, claimed MicroStrategy (MSTR) and Coinbase (COIN) have the highest "squeeze score," according to the research.
"These crypto related stocks are extremely crowded and very squeezable relative to the U.S. market, with an average Crowded score of 57.34 versus the street average of 32.41 and an average Squeeze score of 78.69 versus the street average of 34.41," the study noted. "MSTR, COIN and CLSK are the most squeezable names in the sector."
In the research, Dusaniwsky said MicroStrategy and Coinbase account for 84% of the $10.7 billion short interest in crypto equities. The survey said that crypto short interest is over three times bigger than average U.S. stock short interest. Other crypto-linked equities with substantial short interest include bitcoin miners Marathon Digital (MARA), Riot Platforms (RIOT), and CleanSpark.
Some traders may be hedging their long bitcoin {{BTC}} position by shorting related stocks. Market participants cited "long bitcoin and short miners" as a reason mining stocks underperformed bitcoin.
As bitcoin reached an all-time high, crypto stocks like MicroStrategy and Coinbase defied the pessimistic argument and gained significantly this year. MSTR is up 179%, COIN 52%, and bitcoin 64% this year. Bearish bets have suffered from bitcoin and crypto stock rallies. S3 reports that crypto stock short sellers have lost $4 billion month-to-date, led by MicroStrategy.
If a sector is overcrowded with short sellers, a shorted stock's share price can rise, causing investors to cover their shorts and cause significant losses. Short sellers were devastated by GameStop (GME) and Tesla (TSLA) short squeezes in recent years.
The S3 report reiterated the advice against doubling back on crowded trades. Crypto stock short sellers have been selling into a surging market, either looking for a pullback or hedging against Bitcoin holdings. The more unprofitable sector shorts like MSTR, COIN, and CLSK might pressure risk trades, the research added.
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