: Shorting crypto stocks has led to ‘substantial’ paper gains, but it’s getting harder to join in on the trend

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The short selling of cryptocurrency-related stocks has yielded “substantial” mark-to-market profits this year, but those looking to get in on the action may have more trouble doing so going forward.

Short sellers in a basket of 15 crypto stocks including Coinbase Global Inc.
COIN,
+3.74%
,
MicroStrategy Inc.
MSTR,
+7.86%
,
and crypto miners like Marathon Digital Holdings Inc.
MARA,
-1.71%
,
have racked up paper gains of 126% year to date through Tuesday’s session, according to Ihor Dusaniwsky, the managing director of predictive analytics at S3 Partners.

In June alone, crypto shorts are up 42%, and have notched paper profits of 16% just based on Tuesday’s activity, which saw cryptocurrency stocks come under further pressure amid falling prices for digital assets and a layoff announcement from Coinbase.

See also: Why Coinbase is laying off 18% of employees and what it means for crypto

Bitcoin
BTCUSD,
-3.16%
,
which dropped 3.8% in morning trading Wednesday toward an 18-month low, has tumbled 33.1% in June and plunged 54.1% this year.

Dusaniwsky noted that interest in crypto short selling has been growing, and he cited $71 million of new shorting in less than two weeks of June.

“But with the pool of stock borrows in these names limited, due to lack of sizable ownership in the funds of the largest and most active stock lenders on the street, prospective short sellers may be late to the party,” he continued in a report. “While the crypto stocks’ negative price momentum may not be over, the ability to short stock in size may be over.”

Dusaniwsky pointed to 91% stock-borrow utilization in crypto names. “There is some stock available to borrow to cover short sales,” he noted, but ” short sales in size will be difficult to execute and stock borrow rates will be getting more expensive for both new and existing short sales.”

Read: Half of bitcoin holders on Coinbase exchange may face losses, Mizuho says

Stock-borrow trends make it so “short exposure in these stocks will not increase dramatically in the future,” he wrote, meaning that “shorting these stocks will become more expensive and take a bigger bite out of expected alpha.” As such, he expects that continued drops in crypto stocks would be the result of longs, not shorts, selling their shares. Read more about the mechanics of short selling.

Should crypto stocks rally, Dusaniwsky anticipates “a flurry of buy-to-covers as short sellers look to realize their substantial profits.” He added that “[s]hort sellers should not be blamed for near term downward price moves, but they may be an active participant in future rallies.”

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