Short Selling

Short Sellers Are Targeting Crypto Stocks As We Start 2023

2022 was a disappointing year for crypto stocks. With the price of Bitcoin falling significantly last year, the share prices of crypto-related companies such as Coinbase, Marathon Digital Holdings, and Riot Blockchain tanked. Coinbase, for example, saw its share price fall more than 80%. 

Is the outlook for crypto stocks set to improve in 2023? Hedge funds don’t seem to think so. Right now, they're shorting crypto stocks aggressively, which suggests that they see further downside on the horizon. 

Here’s a look at the short interest on some of the biggest crypto stocks as we start 2023. 

Coinbase 

Let’s start with Coinbase (COIN:US), which operates one of the world’s largest crypto exchanges. 

Coinbase stock has been impacted negatively by a number of factors recently. Falling revenues (revenue for 2022 is expected to decline more than 50% year on year), broker downgrades, an investigation into crypto firms by the Federal Trade Commission, and the collapse of FTX have all contributed to the fall. Currently, the stock is around 90% off its highs. 

Short interest data suggests that short sellers see further downside, however. At present, 44.08 million Coinbase shares are on loan (around $1.47 billion worth of stock), which represents around 27.7% of the free float. Utilization – a measure of demand from short sellers – is 100% while the cost to borrow stock is 4.9%. 

It’s worth noting that Coinbase stock spiked earlier this week after the company reached a $100 million settlement agreement with New York regulators over compliance failures. This doesn’t seem to have impacted the short sellers’ views though. Since the settlement news, short-interest levels have remained steady.  

Silvergate Capital 

Next up is Silvergate Capital (SI:US). It’s the parent company of Silvergate Bank, which mostly deals in cryptocurrency transactions. 

Silvergate stock has experienced a dramatic collapse recently. Earlier this week, the stock fell more than 40% after the company announced that crypto-related deposits plummeted in Q4 as customers withdrew funds after the collapse of FTX. 

Now, hedge funds will have cleaned up here. In the days before the huge share price fall, short interest was around 34%. 

It seems the short sellers are not finished with the stock though. Currently, 11.8 million Silvergate shares are on loan (worth approx. $148 million), representing about 37% of the free float. Utilization is 100% while the cost to borrow stock is 2.77%. 

Marathon Digital Holdings 

Moving on to crypto miners, we have Marathon Digital Holdings (MARA:US). It’s building one of the largest Bitcoin mining operations in North America. 

Marathon Digital stock has taken a huge hit since late 2021. Currently, it’s trading at around $3.91, a long way below its 2021 high of $76. As a result of the share price fall here, the company’s market cap has fallen below $500 million. 

The short sellers expect the stock to go lower, however. At present, approximately 59.23 million Marathon Digital shares are on loan (worth a total of around $231 million), which represents around 53% of the free float. Utilization is 100% while the cost to borrow is a high 13.0%. These figures clearly indicate that the short sellers expect the stock’s downward trajectory to continue.

Lower revenues, rising losses, a large debt pile, operational setbacks, and the high price of electricity at present are likely to be some of the reasons hedge funds are going short here right now. 

Riot Blockchain

Another crypto miner that is being targeted by the hedge funds as we start 2023 is Riot Blockchain (RIOT:US). It’s a well-known miner that has operations in both Texas and New York.

We covered Riot Blockchain back in July 2022. At the time, the company’s short interest was around 47%. We viewed this as a red flag. Since then, the stock has fallen by about 30% meaning the short sellers have generated substantial profits. 

They are not done yet though. At present, around 69.7 million RIOT shares are on loan (approx. $294 million worth of stock), which represents about 42% of the free float. Utilization is 100% while the cost to borrow is 6.7%. These figures indicate that the short sellers expect the stock to continue falling.  

It’s worth noting that Wall Street analysts expect Riot to post a net loss of $387 million for 2022 versus a net loss of $8 million in 2021. 

MicroStrategy

Finally, we have MicroStrategy (MSTR:US). It’s an American technology company that invested a significant amount of money in Bitcoin. 

This is another stock that we have covered in the recent past. Back in July last year, we noted that short interest was approximately 49%. At the time, we said that caution was warranted towards the stock given its high level of short interest.

Since then, MicroStrategy shares have fallen from around $225 to nearly $156 – a decline of around 30%. So, the short sellers have done well here. 

They are still targeting the stock today, however. Currently, 4.45 million MSTR shares are on loan (worth a total of around $700 million), representing approximately 47.5% of the free float. Utilization is 74% while the cost to borrow is 48.4%. 

Short Sellers Are Informed Investors 

It’s worth pointing out that short sellers don’t always get it right. 

However, research shows that in general, short sellers are informed investors that are skilled at processing information. It also shows that heavily-shorted stocks tend to underperform those that are less shorted. 

Therefore, we think caution is warranted towards these crypto stocks in the near term. 

Want to delve deeper? Contact us today to find out more about 2iQ’s data and analytics offering, including our comprehensive short squeeze model.

Recent Articles