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Coinbase short sellers have made $1.3bn in 2022 but is a COIN stock squeeze looming?

By Daniela Ešnerová

08:53, 7 November 2022

Coinbase (COIN) logo and bitcoin (BTC) coin
Coinbase (COIN) shares rallied after the company reported better-than-expected user numbers. – Photo: ShutterStock

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.”

US100

18,661.20 Price
+0.610% 1D Chg, %
Long position overnight fee -0.0262%
Short position overnight fee 0.0040%
Overnight fee time 21:00 (UTC)
Spread 7.0

DE40

18,744.60 Price
+0.070% 1D Chg, %
Long position overnight fee -0.0221%
Short position overnight fee -0.0001%
Overnight fee time 21:00 (UTC)
Spread 8.0

HK50

19,562.80 Price
-0.830% 1D Chg, %
Long position overnight fee -0.0225%
Short position overnight fee 0.0005%
Overnight fee time 21:00 (UTC)
Spread 30.0

US30

39,809.60 Price
-0.460% 1D Chg, %
Long position overnight fee -0.0262%
Short position overnight fee 0.0040%
Overnight fee time 21:00 (UTC)
Spread 2.2

“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

Shorting data in stocks in the financial and data exchanges sector.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. 

Markets in this article

COIN
Coinbase Global Inc (Extended Hours)
224.69 USD
16.4 +7.920%
SCHW
Charles Schwab
78.75 USD
-0.1 -0.130%
US100
US Tech 100
18661.2 USD
113.3 +0.610%

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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