- Coinbase stock is up more than 200% this year. Traders who recently shorted Coinbase have had a brutal year.
- Regulatory woes have not hit the shares, as it tracked Bitcoin higher amid positive crypto sentiment.
Short sellers face billions in paper losses as Coinbase shares ripped this week. Shares in the exchange are up over 34% since Monday, bringing its year-to-date gains to 215%.
Coinbase shorts are down $1.3 billion so far in July, on paper, or mark-to-market, Ihor Dusaniwsky, managing director at S3 Partners, told DL News. Year-to-date losses are above $2.85 billion for shorts.
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Short sellers were forced to “begrudgingly” cover some of their exposure as mark-to-market losses pile up, Dusaniwsky said.
It’s “becoming a momentum versus value battlefield,” he noted. Investors with a long-term outlook are pushing Coinbase higher, while short sellers are “white knuckling their grip on their short shares.”
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Short interest — the number of shares of a stock that have been sold short by investors — counts for around 20% of Coinbase’s total stock, according to S3 Partners data.
Bearish traders have gradually reduced their positions as Coinbase shares rose.
A short squeeze and happens when short sellers are forced to close their positions by buying back the underlying stock.
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“Coinbase short sellers are still looking at crypto regulatory risk and possible margin erosion if major financial institutions enter the market to drive down Coinbase’s elevated stock price,” Dusaniwsky added.
S3 Partners expects short covering to continue, but there are only so many losses a portfolio or risk manager will tolerate before that inevitable “tap on the shoulder to look for greener pastures elsewhere.”
Coinbase was buoyed by a ruling in Ripple’s case with the SEC this week, spurring the stock to its biggest rally since its stock market debut.
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“New developments in the Ripple case led market participants to extrapolate positive implications for the broader crypto ecosystem,” David Duong, head of institutional research at Coinbase, said on Friday.
Duong urged “defensive positioning” heading into the third quarter, based on the macro environment.
Shares in the exchange remain well below all-time highs above $345. The firm debuted in April 2021 at $342 a share, falling throughout that summer before reaching all-time highs in line with Bitcoin in November 2021.