Blasted by Bitcoin: $6B Worth of Shorts Vaporized in 2021

The High Cost of Betting Against Crypto Stocks: Short Sellers Lose $6 Billion

Short sellers in the crypto industry have suffered significant losses this year, losing at least $6 billion while trying to bet against publicly-traded crypto firms. The primary reason for these losses is Bitcoin’s remarkable rally since the beginning of the year.

According to a recent report from research firm S3 Partners, traders who bet against crypto companies like Coinbase, MicroStrategy, and Marathon Digital are now facing on-paper losses of $6.05 billion. Most of these losses have occurred in the last three months.

After Bitcoin dropped to a quarterly low of $25,133 on September 11, short sellers increased their exposure, believing that the sector was overbought. However, to their surprise, Bitcoin staged a 77% rally, reaching a new yearly high of $44,481 on December 5. This sudden upside move resulted in losses of approximately $2.65 billion for short sellers.

The losses for short sellers in crypto-related stocks this year. Source: S3 Partners

“Buying-to-cover” in heavily shorted crypto stocks such as Coinbase, MicroStrategy, Marathon Digital Holdings, and Riot Platforms has contributed to pushing stock prices higher, along with the long buying that has been driving up prices since the end of October, according to Ihor Dusaniwsky, the managing director of predictive analysis at S3.

Bitcoin’s impressive 161% rally this year has been a significant driver for the share prices of crypto firms. Coinbase and MicroStrategy, for example, have grown by 312% and 285% respectively within the same time period. This surge in Bitcoin’s price has buoyed the value of publicly traded crypto companies.

At the time of writing, Bitcoin is trading at $43,964, with its recent rally being attributed to growing anticipation of a potential spot Bitcoin ETF approval in January.

Among the short sellers, Coinbase has been the most unsuccessful trade, with the company’s nearly 290% rally resulting in losses of over $3.5 billion. MicroStrategy follows closely behind, with short sellers losing more than $1.7 billion due to the company’s growth. Despite these mounting losses, some short sellers have continued to add to their positions, betting that the current rally will soon come to an end. Since Bitcoin’s mid-September bounce, $697 million in new short positions have been added.

It is evident that short sellers in the crypto industry have faced significant challenges this year, with Bitcoin’s remarkable rally proving to be a major obstacle. As the market continues to evolve, it remains to be seen how short sellers will adapt and strategize to navigate these volatile conditions.

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