(Bloomberg) – Short sellers flocked to crypto-focused stocks as the digital asset space plummeted in the wake of the public FTX crash. You pay a high price to place these bets.
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According to data compiled by S3 Partners' Igor Dusanivsky and Matthew Unterman, cryptocurrency stocks trade at almost three times the average stock, even though short sellers pay almost 11 times the financial cost to bet against them.
According to S3 analysis, traders are looking for losses in several cryptocurrency stocks including Block Inc., Coinbase Global Inc., MicroStrategy Inc. and five other new shorts worth $55 million added in the week ended Friday. Block and Coinbase alone reported nearly $27 million in new short sales. The total cryptocurrency short interest rates for these eight stocks is over $4.5 billion.
Meanwhile, MicroStrategy's free float is down about 26%, according to S3. For Silvergate Capital Corp. short-term interest rates as the fluctuation rate exceeds 10%.
"The bankruptcy of Sam Bankman-Fried cryptocurrency FTX.com and its ensuing bankruptcy has placed cryptocurrencies and the cryptocurrency industry in a volatile price cycle," Dusaniwski and Unterman wrote in a note. "Shorting these cryptocurrency stocks has been a very profitable trade in 2022."
© Bloomberg Brief interest in cryptocurrency stocks |Even before FTX shut down this year, the crypto space was rocked by a slew of other outbreaks and scandals. But after FTX's liquidation, sentiment deteriorated as the company was seen as a stable presence in the industry. Bitcoin, the largest digital asset by market cap whose price action is often used as an indicator of cryptocurrency market sentiment, fell below $17,000 from around $69,000 a year ago.
Crypto-focused stocks also suffered. Coinbase and Silvergate shares are down more than 80% this year, while MicroStrategy shares are down 70%. Wall Street analysts' confidence in stocks has also fallen. For example, Coinbase has its lowest buy ratings since August 2021, according to data compiled by Bloomberg.
FTX is currently bankrupt and revelations about its internal affairs have been slowly seeping through the court cases over the past few days. FTX's Chapter 11 filing shows that approximately 130 affiliates have initiated voluntary proceedings. And regulators are also studying the impact of FTX.
Art Hogan, chief markets strategist at B. Riley Wealth, said his failure went from "oh my god, that's bad" to "oh my god, that's terrible."
"We've already seen that FTX has a lot of tentacles. FTX's mere mutual ownership of almost every cryptocurrency in the business means it will have more impact," he said. "So it's intuitive that many of these true cryptocurrency companies will attract a lot of short sellers."
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