Short Sellers Jump on Crypto Stocks Despite Steep Cost of Wagers

(Bloomberg) — Short sellers have pounced on crypto-focused equities as the digital-assets space crumbles in the wake of FTX’s public implosion. They’re paying a steep price to place those wagers.

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

Traders banking on 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, according to S3’s analysis. Block and Coinbase alone saw about $27 million of new short selling combined. Total crypto short interest for these eight stocks is more than $4.5 billion.

MicroStrategy, meanwhile, has roughly 26% of its tradable float shorted, according to S3 data. For Silvergate Capital Corp., short interest as a percent of float exceeds 10%.

“Sam Bankman-Fried’s failed crypto exchange FTX.com and resulting bankruptcy has thrown crypto-currencies and the crypto industry into a volatile cycle of price movement,” Dusaniwsky and Unterman wrote in a note. “Shorting these crypto stocks has been a very profitable trade in 2022.”

Even before FTX’s demise, the crypto space had been roiled by a number of other implosions and scandals this year. But sentiment has deteriorated even more drastically after FTX’s undoing because the company was considered a stable presence within the industry. Bitcoin, the largest digital asset by market value — whose price moves often serve as a read on crypto-market sentiment — has sunk below $17,000, from nearly $69,000 just a year ago.

Crypto-focused stocks have suffered too. Shares of Coinbase and Silvergate have declined more than 80% this year, while those of MicroStrategy have dropped 70%. Wall Street analysts’ conviction in the shares is also ebbing. Coinbase, for example, has the lowest number of buy-equivalent ratings since August 2021, data compiled by Bloomberg show.

FTX is now in bankruptcy, with revelations of its inner workings during its last days slowly trickling out in a dramatic way through court filings. FTX’s Chapter 11 filing said that approximately 130 affiliated companies have commenced voluntary proceedings. And regulators are looking into FTX’s fallout as well.

Its descent into bankruptcy went from “‘Oh jeez, this is bad,’ to ‘Oh my god, this is horrible,’” said Art Hogan, chief market strategist at B. Riley Wealth.

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