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Shorting crypto stocks has resulted in “substantial” paper gains, but it’s becoming increasingly difficult to join the trend

Shorting cryptocurrency-related stocks has yielded “significant” mark-to-market gains this year, but those looking to participate in the action may have more trouble doing so in the future.

Short sellers in a basket of 15 crypto stocks including Coinbase Global Inc. COIN,
+5.18%,
MicroStrategy Inc. MSTR,
+4.67%,
and crypto miners such as Marathon Digital Holdings Inc. MARA,
-1.01%,
have posted paper gains of 126% year-to-date through Tuesday’s meeting, according to Ihor Dusanivsky, managing director of predictive analytics at S3 Partners.

In June alone, crypto shorts are up 42% and have posted paper gains of 16% based solely on Tuesday’s activity, which saw cryptocurrency stocks continue to suffer amid falling digital asset prices and a Coinbase layoff announcement.

See Also: Why Coinbase Is Laying 18% of Its Employees and What It Means for Crypto

bitcoin BTCUSD,
-5.72%,
The index, which fell 3.8% to an 18-month low on Wednesday morning, is down 33.1% in June and 54.1% this year.

Dusaniwsky noted that interest in crypto shorting has grown, citing $71 million in new short sales in less than two weeks of June.

“But because the pool of stock loans in these names is limited, potential short sellers may be late to the party due to the lack of significant ownership in the funds of the largest and most active stock lenders down the street,” he continued in a report. “While the negative price momentum in crypto stocks may not be over, the opportunity to short stocks for size may be over.”

Dusaniwsky pointed to 91% stock lending utilization among crypto names. “There are some stocks available to borrow to cover short sales,” he noted, but “shorting at scale will be difficult to execute and stock borrowing rates will be more expensive for both new and existing shorts.”

Read: Half of Bitcoin Holders on Coinbase Exchange Could Take a Loss, Says Mizuho

Stock lending trends mean that “short exposure to these stocks will not increase dramatically going forward,” he wrote, meaning that “shorting these stocks will become more expensive and take a larger share of the expected alpha.” As such, he expects continued declines in crypto stocks to be the result of longs, not shorts, selling their shares. Read more about the mechanics of short selling.

Should crypto stocks rally, Dusaniwsky expects “a flurry of buy-to-covers as short sellers seek to realize their significant gains.” He added: “[s]Hoard sellers should not be blamed for short-term price moves lower, but they could be an active participant in future rallies.”

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