Bitcoin Rally Over? Short sellers pile into MicroStrategy

Bitcoin's steep rise is fueling a rally in cryptocurrency-related stocks, but some investors believe the bull run will eventually end, and they're putting billions of dollars into short sales, Bloomberg reports. Total short interest in crypto-related stocks has risen to $11 billion, according to a report released by analyst firm S3 Partners on Saturday (local time). The surge in positions betting that crypto-related stocks will fall, with more than 80% of those bets on MicroStrategy and Coinbase.

Bitcoin's 65% gain since the start of the year has sent crypto stocks soaring. The unrealized losses of those holding short positions have reached $6 billion, and yet these short investors are doubling down on their bets. "Short sellers of crypto stocks are either waiting for a correction after the Bitcoin rally or increasing their short positions as a hedge against actual Bitcoin holdings," Ihor Dusaniwsky, Director of Strategy at S3, explained in the report.

In particular, traders have been increasing their short positions in MicroStrategy over the past 30 days. MicroStrategy is now one of the most shorted stocks in the U.S. market, matching the short interest in Nvidia, Microsoft, Apple, and others. "The expanding short position could put crypto-related stocks under short-term selling pressure," S3 said in its report, but it expects the impact to be limited as "stocks like MicroStrategy and Coinbase have risen in price and there are fewer shares available for shorting."

If the short sellers' bets are wrong, these investors could be in for more pain down the road. "Most short sellers are now bracing for a short squeeze, in which short sellers are forced to buy back shares to close out losing positions," Bloomberg reported, "which could send shares higher and make the process more painful for traders." So far this year, MicroStrategy is up nearly 200% and Coinbase is up 60%.