Coinbase short sellers have made $1.3bn in 2022 but is a COIN stock squeeze looming?
08:53, 7 November 2022
Coinbase (COIN) short sellers have made $1.3bn in 2022 so far from betting against the stock, S3 Partners figures show.
But traders took to closing their short positions after the world’s biggest listed cryptocurrency reported better-than-expected user numbers, sending the share price up, Ihor Dusaniwsky, managing director at the financial data and analytics firm S3 Partners, tells Capital.com.
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Coinbase (COIN) share price
From 2021 market entrant to profitable short trade
“Shorting COIN has been a profitable trade in 2022 with short sellers up $1.30bn in year-to-date mark-to-market profits, up +82.8% on an average short interest of $1.57bn,” Dusaniwsky tells Capital.com.
Coinbase listed on Nasdaq to great fanfare in April 2021 during the crypto market bull run, with some analysts predicting the company could soon hit a $100bn valuation.
But not everyone was on board.
Famous US hedge manager Jim Chanos, most known for predicting the demise of Enron before its 2001 bankruptcy, was not impressed with the stock.
Earlier this year, Chanos revealed that he and his team “couldn't get [their] heads around [COIN's] valuation [at the IPO]” and “set it aside.” But they revisited the stock during the December 2021/January 2022 Nasdaq market rout.
Nasdaq (US100) chart price
“And what really struck me was how much they were overearning,” Chanos said earlier this year. This was a company that earned $2 per share in 2020, which was not a bad year for crypto. They then earned $17 or $16 [per share] last year and, of course, they are going to lose money this year.”
He added that he was further struck by “the amount of revenue relative to the assets under Coinbase umbrella.”
“At one point, it got as high as 4%. It's now well below that, but 4% annually on your client's assets is a stunningly large number,” Chanos said. “Charles Schwab (SCHW) earns a fraction of that - sort of 25 [basis points.] In the most recent quarter, Coinbase was still well over 100 bps,” he added.
COIN is currently the second-most shorted stock in the financial exchanges and data platforms category, S3 Partners' data show (see the table below).
Financial and data exchanges short interest
Coinbase (COIN) has the second-highest short interest in its sector. -- Photo: S3 Partners.During the crypto winter of 2022, COIN revenues and share price was hit. And so were its peers. In June, S3 research showed that crypto-linked stocks was the most profitable sector to short in 2022.
But traders betting against COIN have now been closing their positions: “COIN short sellers were actively trimming their exposure as COIN’s stock price fell below its recent $62-63/share price floor,” Dusaniwsky explains.
“Shorts are starting to realize some of their unrealized profits they earned in 2022 – signaling that they are seeing a price floor and a possible run-up in stock price from these levels and are looking to pocket some of their profits before they disappear in a stock price rally,” he says.
‘Hanging on a slim profit in November’
As shorting COIN is becoming less profitable, short-sellers are catching up. COIN shorts ‘were down -$54 million in mark-to-market losses in October, down -2.8% on an average short interest of $1.89 billion,’ S3 Partners’ data show.
Last week, Coinbase Q3 results which showed the platform provider managed to cut its losses from the previous quarter by half, sending the share price up, in an unpleasant move for short-sellers, but they still managed to be in profit for the month: “Shorts are hanging on to a slim profit so far in November, up +$26m in month-to-date mark-to-market profits, up +1.5% on an average short interest of $1.70bn even as today’s +8.2% stock price move so far this morning is generating -$122m in mark-to-market losses,” Dusaniwsky says.
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