Short sellers are targeting Bitcoin miners.

Short interest on the US Bitcoin mining sector reached $3 billion — up 21% in the last 30 days, according to financial data firm S3 Partners.

“The Bitcoin mining stock sector is very crowded on the short side relative to the US market,” Ihor Dusaniwsky, managing director at S3, told DL News.

The popularity of the trade made shorts “very squeezable,” he said, meaning that if short sellers are caught by an upwards move, they may quickly need to buy back their shares, sending prices higher.

But shorts are doing well for now. They’re up about 15% since the start of the year, pocketing about $350 million.

The most profitable shorts: Riot Platforms and Marathon Digital — two of the largest Bitcoin mining companies.

Bearish traders have made returns of 47% and 21%, respectively, off of these stocks.

‘Dysfunctional’

Activist investment firm Kerrisdale Capital released a sceptical report on miner Riot Platforms on June 5, sending the shares lower.

“Bitcoin mining is easily among the worst business models for a public company we have ever encountered,” Kerrisdale wrote.

”Riot’s business model is dysfunctional, characterised by seemingly endless capital spending, lack of operating leverage, unpredictable revenue, poor returns, and negative cash flow.”

Among Kerrisdale’s criticisms: Riot has diluted its shares 18% in the first four months of the year — and increased its shares six-fold since 2020.

This stock issuance has allowed the firm to finance its mining operations without dipping into its Bitcoin holdings, now worth north of $600 million, according to Kerrisdale.

But that has come at the expense of its shareholders, the short sellers said.

Kerrisdale said Riot had also failed to secure a tax abatement from regulators for a crucial facility in Corsicana, Texas — a sign the state, considered a mecca for miners, may be souring on the industry.

Riot’s shares have rebounded since the report, but are down some 35% this year.

“We disagree with the characterisation of the Bitcoin mining industry and of Riot, and the equally unsound conclusions reached in the Kerrisdale Capital report,” Riot told DL News.

“These errors will be demonstrated through the execution of our ambitious 2024 growth plans and resulting financial performance.”

Risky bets

Shorting cryptocurrencies — and stocks in general — is risky.

Whether or not Kerrisdale’s analysis is correct, mining stocks may simply follow Bitcoin if the top cryptocurrency surges to new all-time highs, as they did in 2021 and 2017.

“Interest in fundamental stock pickers has waned,” legendary short-seller Jim Chanos said in November.

Chanos closed his fund amid a bet against Coinbase, which is up 383% in the last 12 months.

MicroStrategy

Kerrisdale has also come out against MicroStrategy, saying in March that shares of the company with the largest Bitcoin holdings on its balance sheet are overvalued.

MicroStategy’s stock has tracked Bitcoin to gain almost 130% this year.

Kerrisdale said it is long Bitcoin — up 54% this year — to hedge its bet against Riot.

Tom Carreras is a markets correspondent for DL News. Got a tip about Bitcoin miners or short-sellers? Reach out at tcarreras@dlnews.com