Shares in a broken cryptocurrency exchange
rose this week. Investors are likely witnessing a “short squeeze” that is pushing stocks higher – similar to
an impressive stock market rocket during the meme stock trading frenzy in early 2021.
Coinbase (ticker: COIN ) opened at $60.96 a share on Monday and was trading above $116 points early Thursday, a stunning 90% rally. The move up largely came from price action on Wednesday, when the stock jumped 20%, and Thursday, with the stock last climbing another 18%.
Like other companies exposed to digital assets, Coinbase’s stock has turned out to be one highly correlated with bitcoin fluctuations — and the gains seen in recent weeks have matched the rise in the price of
which rose almost 20% in July for his best month all year.
But Coinbase’s recent gains are now completely divorced from fundamentals, said Dan Dolev, an analyst at Mizuho Securities.
Wednesday’s rally happened “for no good reason,” Dolev said.
An analysis of the average daily volume on Coinbase’s network — about $1.8 billion — revealed little material change from July levels, Dolev added. There was no substantial or drastic change to dispute the “crypto winter” narrative. that the digital asset space is in continued decline.
Daily volumes are a key to the basics of Coinbase as the company largely makes its money from the trading fees it charges its clients, and a slowdown in trading volume this year has exacerbated pressure on the stock.
A continuation of the climb on Thursday makes sense, but only a little more. here’s some news to spur a jump in stocks.
An asset management giant
(BLK) and Coinbase are partnering to make crypto services accessible mutual institutional clients investorscovering trading, premium brokerage and custody solutions originally for Bitcoin.
This is good news, but not a huge deal. While the partnership is an exchange endorsement from one of Wall Street’s most influential players, it does not represent additional revenue as the services will only be available to existing Coinbase customers.
“Fundamentally, nothing has changed,” Dolev said.
That leaves technicals in the market that would push the stock higher. Enter the short squeeze.
Short positions are bets that a stock will fall and involve investors borrowing a stock and selling it with the intention of buying the stock back at a lower price. But this strategy can backfire if the stock moves up rather than down. Short traders may need to “cover their shorts,” which involves buying back shares at an unfavorably high price, taking a loss on their bets and adding buying pressure to an already bullish market.
On a massive scale, this phenomenon can create what is known as a “short squeeze,” which is when a significant volume of short covering causes a stock’s price to relentlessly rise. Short presses played an influential role in the “meme stock” frenzy of early 2021, when stocks like
) made wild moves intraday and posted triple digit gains for days.
Coinbase shares remain down more than 60% so far this year even after the recent rally, and may have been an attractive target for short sellers. In fact, 24% of Coinbase shares were sold short, which is much, much more than usual, according to Mizuho, which cited recent data from Bloomberg.
“I think what happened is there were a lot of people on the buy side betting against the stock — not so good,” Dolev said. “When you have a shiny title like that, it creates a very significant short squeeze, especially in an environment like this.” So that explains today’s move.”
Write to Jack Denton at firstname.lastname@example.org