Short Sellers Profit on SEC Complaint Against Coinbase

Jim Chanos asks: “What is the bull case for $COIN now?”

Illustration by II

Illustration by II

For months, short sellers have been railing against Coinbase Global, but it took the Securities and Exchange Commission’s complaint against the cryptocurrency trading platform Tuesday to finally knock the stock down — and give the shorts something to crow about.

Coinbase short sellers gained $276 million in intraday mark-to-market profits as the stock fell about 13 percent, S3 Partners’ Ihor Dusaniwsky told Institutional Investor. Investors have now shorted roughly $2 billion in Coinbase shares, which comes to about 21 percent of the float, he added.

“We expect short selling in [Coinbase] to be reinvigorated with the disclosure of the SEC lawsuit,” Dusaniwsky said.

Short sellers are taking a victory lap. “Three months ago, we told you that Coinbase was going to get walloped by the SEC,” tweeted James Block, an investor who has become well known for his Dirty Bubble Media newsletter, which called out problems at FTX ahead of its failure, along with those at Signature before it was seized by the FDIC. “Maybe y’all shoulda listened.”

On March 23, Block had posted a lengthy analysis of Coinbase, arguing not only that its financial situation was precarious but also that “its entire business model is at risk of annihilation at the hands of regulators.” (Coinbase had disclosed on March 22 that it received a Wells Notice from the SEC, which indicated that the regulator was preparing to take action against it.)


Short seller Jim Chanos also weighed in on Tuesday, asking on Twitter: “What is the bull case for $COIN now? Before today’s SEC action, Street estimates were for ‘Adjusted EPS’ losses for at least the next five years. And $COIN shares are still at almost 3x TBV [tangible book value].”

That said, this year’s rebound in crypto means that the Coinbase short sellers are still down for the year. Dusaniswky said year-to-date mark-to-market losses are now at $779 million, or a 35.4 percent decline on an average short position of $2.20 billion. (The stock is up 44 percent year to date, but is down 85 percent since its IPO in April 2021.) As of March 31, prominent hedge fund investors on the long side included Tiger Global, Coatue, Renaissance Technologies, and Two Sigma, according to their 13F filings with the SEC. (Crypto bull Cathie Wood’s Ark Investment is Coinbase’s second biggest investor, after Vanguard.)

The SEC’s action against Coinbase — which claimed the exchange was operating as an unregistered brokerage because the crypto assets it was selling were securities — came a day after the SEC sued Binance, the world’s biggest cryptocurrency trading exchange. The lawsuit against privately-owned Binance also included fraud charges, as well as charges for offering unregistered securities and failing to register with the SEC. The SEC also accused Binance of engaging in wash trading, a form of market manipulation that’s illegal in the U.S., that occurs when an investor simultaneously buys and sells the same financial asset to create artificial activity in the marketplace and push the price up.

The two SEC lawsuits have given crypto critics something to cheer about in a year that has defied their predictions. The SEC’s Binance action wiped about $100 billion off the price of Bitcoin, though the cryptocurrency bounced back somewhat Tuesday and is now trading around $26,000 — putting it up about 60 percent this year.

So far June has been a profitable month for Coinbase shorts, which are up almost $400 million, or about 18 percent for the month, Dusaniwsky said. “But limited stock borrow supply may dampen the size of increased short selling in the name, especially if this new demand drives up stock borrow rates,” he said.

“We are seeing 95 percent of available stock borrows already taken down, we have seen short covering, so supply is getting larger,” he added. “There are under 2 million shares left to borrow to support new short selling.”

In response to the the SEC complaint against Coinbase, CEO Brian Armstrong tweeted, “We’re proud to represent the industry in court to finally get some clarity around crypto rules.” Armstrong disagrees with the SEC’s long-stated belief that most crypto tokens are securities, making them subject to SEC enforcement.

Block took the opposite view, telling II that “it seems like the SEC is standing on pretty solid ground. And if the SEC is right, Coinbase will likely not survive.” In addition to the SEC complaint, on Tuesday ten states issued a show-cause order against Coinbase to cease and desist selling unregistered securities in their states.