Why are so many sceptical investors shorting Bitcoin mining stocks?
Short interest targeting Bitcoin miners has soared a whopping 50% to $4.6 billion in the past 30 days, according to short selling research firm S3 Partners. That’s a 2024 high.
But Bitcoin was expected to soar should Donald Trump win the US presidential election, and sure enough it has surged 27% and posted an all-time high north of $89,000 since the crypto-friendly Republican claimed the White House on November 5.
And analysts are forecasting the leading cryptocurrency is destined to hit six digits as soon as this year.
Now short sellers in mining stocks are confronting the possibility of a short squeeze, Matthew Unterman, managing director at S3 Partners told DL News.
Short sellers make money by borrowing stock, then selling it in the market in the expectation that its price will go down. When the price declines, short sellers then buy the stock and return the shares, pocketing the difference.
Risky strategy
It’s a risky strategy — long investors typically lose only their initial investment, while short sellers can lose much more.
Sharp gains in stock prices can be catastrophic. A short squeeze happens when a stock’s price gains so much that short sellers are forced to buy the stock to stem the losses.
That triggers even further gains in the stock’s price.
In the ebb and flow of the markets, there are periods when mining stocks outpace Bitcoin and risk-tolerant investors sell those shares short to profit when the gap narrows.
Indeed, since Bitcoin’s last significant low on September 6, Riot is up 86%, Marathon Digital is up about 55%, and CleanSpark gained 73%. Bitcoin, meantime, is up 65% in that period.
In the past 24 hours, however, miners have fallen between 5% and 20%.
“There are a lot of forces in the market that prefer they don’t go up,” said crypto investor Mike Alfred on Thursday.
Long everything
Mining stocks, unlike, say, MicroStrategy, tend to have smaller market capitalisations, which means mammoth trades can have outsized influence on price swings.
That means there’s much more upside as investors in “wildly undervalued” mining stocks catch up to overall sentiment, Alfred said.
“Now you’re looking at your portfolio and thinking, ‘How can I add,” he said. “You want to be long everything.”
Many analysts attribute Bitcoin’s “euphoria zone” to institutional investors. ETF inflows have surged, propelling Bitcoin and Ethereum prices as providers pile in.
Retail, on the other hand, is missing.
“There’s no retail interest whatsoever,” said Alfred.
