Bitcoin's blockbuster surge has led to massive losses for short sellers of crypto-related stocks, totaling nearly $1.9 billion in mark-to-market losses today, according to data compiled by S3 Partners.
This downturn for short sellers accompanies Bitcoin's over 7% jump in late-day trading and an almost 12% rise from its recent low three days ago.
The total short interest in crypto-related stocks stands at $10.7 billion, with MicroStrategy Incorporated (NASDAQ:MSTR) and Coinbase Global Inc (NASDAQ:COIN) accounting for 84% of this short interest. Overall, the sector's short interest as a percentage of float is over three times larger than the U.S. average of 5.13%.
MicroStrategy, the world's largest corporate holder of Bitcoin, leads the downturn with $1.4 billion in mark-to-market losses. This amount contributes to the sector's $1.9 billion loss today and a $5.7 billion year-to-date loss, highlighting a -79.1% downturn for those betting against the software company. Despite these large losses, the sector remains a hotspot for short selling activity, given its crowded nature and high potential for squeezes.
The crowded scores, a measure of how densely packed short sellers are in a stock, averages at 57.34 for crypto stocks, considerably higher than the street average of 32.41. The squeeze scores, which indicate the potential for a short squeeze, average at 78.69, far surpassing the street average of 34.41. MicroStrategy, Coinbase, and Cleanspark Inc (NASDAQ:CLSK) are identified as the most susceptible to squeezes in the sector.
Despite Bitcoin's bullish run, the total short interest in the sector has increased by $3.67 billion to $10.71 billion in 2024. This indicates continued skepticism or strategic hedging by short sellers. However, the recent rally has triggered increased short selling, with the sector's total short interest climbing by an additional $4.50 billion in the last 30 days, mainly driven by heightened short selling in MicroStrategy.
Further gains in MicroStrategy's stock price could put pressure on short sellers, which at one point could force them to buy back shares to cover their losses. This scenario could drive the stock price even higher.