It didn’t go as expected. The rollout in El Salvador was snared by glitches. Global policymakers issued warnings about cryptocurrency volatility. And Coinbase Global Inc., the largest U.S. exchange for such tokens, said it may be sued by the Securities and Exchange Commission, signaling that regulators are poised to crack down on the industry.
That hit high-flying stocks tied to cryptocurrencies, leaving short-sellers smelling blood and increasing their wagers that the decline was only a preview of what’s to come.
“Shorting into a falling market tells us that there is commitment to a winning trade,” said Ihor Dusaniwskiy, managing director of predictive analytics at S3 Partners. “They are increasing their bets looking for share prices to decline even more.”
As Bitcoin-mining company Marathon Digital Holdings Inc. plunged on Tuesday, sending it toward an 18% loss this week, a gauge of short interest as a proportion of its free-share float calculated by S3 Partners LLC ticked higher, showing bears were increasing negative bets. Traders also increased wagers on further declines for MicroStrategy Inc., Riot Blockchain Inc. and Bit Digital Inc., all of which dropped 14% or more during the holiday-shortened week.
JJ Kinahan, chief market strategist at TD Ameritrade, said some of the retreat could reflect a give-back of gains seen in the runup to El Salvador’s adoption of Bitcoin as an official currency alongside the U.S. dollar.
“It could be a buy-the-rumor, sell-the-news situation. Now that the rollout has finally happened, a lot of people are saying, ‘What’s next?,” he said. “For those on Wall Street who don’t want to trade Bitcoin itself, a short position on stocks tied to Bitcoin is a way to express their bearish bets.”
Some of the moves were exacerbated by company-specific issues beyond the pullback in the volatile cryptocurrency. MicroStrategy’s chief financial and chief technology officers unloaded stock in August after exercising about 30% of the options they were awarded, SEC filings show. That sapped some confidence in the company’s strategy of borrowing heavily to buy Bitcoin, one that has effectively transformed it from a software maker into a leveraged cryptocurrency investment fund.
Coinbase’s shares dropped after the company said it received a Wells notice from the SEC, which threatened to bring an enforcement action if Coinbase follows through on a plan to allow customers to earn interest on their crypto holdings. The shares fell 11% through Friday, dropping each trading day for the week for the first time since May.
Bitcoin is highly volatile, and even with this week’s dip, it’s still up more than 50% from the low hit in late July. It has also proved resilient after other declines.
But some technical patterns signal that Bitcoin may struggle to bounce back much beyond its current level of around $45,700 on Friday.
Narrowing Bollinger bands — a popular technical indicator that highlights volatility — showed in late August that the Bitcoin rally was flagging and that the virtual currency faces a zone of resistance from $50,000 to $51,000, the range where it topped out earlier this month. A key threshold to watch is the middle line of the Bollinger study at about $46,700.
Ed Moya, senior market analyst at Oanda Corp., said the $44,000 to $45,000 zone is key for Bitcoin at the moment. If prices steadily rise beyond $47,000, the momentum might give the bulls an all-clear.
“Bitcoin seems poised to consolidate following the roller-coaster ride that happened earlier in the week,” Moya said in a note to clients. “Social media platforms are filled with retail traders remaining extremely bullish long-term but cautious over what prices will do next.”