David Canellis

This is Cheatsheet, a primer on what’s happening in crypto today.



If dog coins were barking before, now they’re really biting.



Six of the eight best performing cryptocurrencies at the top end of the market are memecoins, and four of those are dog coins.



Pepe (<a href="https://blockworks.co/price/pepe">PEPE</a>) leads with 38% gains as of 5 am ET, followed by bonk (<a href="https://blockworks.co/price/bonk">BONK</a>), shiba inu (<a href="https://blockworks.co/price/shib">SHIB</a>), dogecoin (<a href="https://blockworks.co/price/doge">DOGE</a>), floki (<a href="https://blockworks.co/price/floki">FLOKI</a>) and <a href="https://blockworks.co/price/sats">SATS</a>, each up between 34% and 13% over 24 hours.



Fantom (<a href="https://blockworks.co/price/ftm">FTM</a>) and BitTorrent (<a href="https://blockworks.co/price/btt">BTT</a>) are somewhere in between. Bitcoin (<a href="https://blockworks.co/price/btc">BTC</a>) is meanwhile up 5.7% after inching back above $65,100 — less than 6% shy of its $69,044 all-time high.&nbsp;



Ether (<a href="https://blockworks.co/price/eth">ETH</a>) is ahead 3% and hovers at $3,500 flat. The ETH/BTC, which measures ether’s price in terms of bitcoin, has given up most of its gains last month and could soon turn negative for the year to date.



<h2 class="wp-block-heading">What’s happening on-chain</h2>



Bitcoin’s fledgling DeFi ecosystem is attracting serious capital — and degeneracy.&nbsp;



<ul class="wp-block-list">
<li>Flipped: Bitcoin DeFi now <a href="https://defillama.com/chains">ranks</a> above Solana, Polygon and Avalanche for total value locked (TVL).</li>



<li>Flooded: Bitcoin’s TVL, now $2.65 billion, has exploded by almost 800% over the past month as the crypto climbed by half.</li>



<li>Fandangled: Almost all of it is tied up in “staking events” for two unreleased layer-2 projects, Merlin’s Seal and B2 Buzz.</li>
</ul>



Interest in Bitcoin as a base layer for stuff other than BTC has bubbled since the NFT-like Ordinals took off last January. Merlin’s Seal and B2 Buzz are part of a crop of projects rushing to capitalize on that hype.&nbsp;



Unlike the crypto staked in liquidity pools and debt protocols like Orca and Maker, Bitcoin’s current big-two are popular with those chasing allocations of a token sale. Distributions are to be generally scaled to how much has been staked, echoing <a href="https://blockworks.co/news/blast-optimistic-rollup-launch">recently-launched Ethereum layer-2 Blast</a>.



Bitcoin has a number of adjacent protocols already live, including payments layer Lightning, Rootstock, Liquid, Stacks and DeFiChain. Wide differences in tokenomics, technology and terminology has led Bitcoin Magazine to <a href="https://bitcoinmagazine.com/press-releases/bitcoin-magazine-editorial-policy-on-bitcoin-layer-2s-l2s">define</a> what it considers an actual “Bitcoin protocol” moving forward, including the use of bitcoin as the native asset.



<figure class="wp-block-embed is-type-wp-embed is-provider-flourish wp-block-embed-flourish"><div class="wp-block-embed__wrapper">
<iframe loading="lazy" class="wp-embedded-content" sandbox="allow-scripts" security="restricted" title="Interactive or visual content" src="https://flo.uri.sh/visualisation/17017196/embed#?secret=husYkui1Kp" data-secret="husYkui1Kp" frameborder="0" scrolling="no" height="575" width="700"></iframe>
</div></figure>



Ether is still outperforming Nvidia stock over the past five years&nbsp;



Read more: <a href="https://blockworks.co/news/ordinals-impact-on-bitcoin-network">Ordinals are driving up Bitcoin fees — but that may be good for the network</a>



<ul class="wp-block-list">
<li>DEX volumes have cooled somewhat since last week: $6.5 billion over the past day, down 30% from last Wednesday’s near-yearly high of $9.45 billion.</li>



<li>Solana DEX Raydium flipped BSC’s PancakeSwap for daily volume after posting $799 million, second overall behind Uniswap.</li>



<li>Tether is only $300 million fresh supply away from becoming only <a href="https://blockworks.co/news/tether-almost-100b-club">the fifth cryptocurrency to ever reach</a> a $100 billion market cap.</li>
</ul>



<h2 class="wp-block-heading">Crypto business</h2>



Practically every crypto stock is set to open higher this week — except China-headquartered BIT Mining, which had slipped 3% pre-market as of 5 am ET.



<ul class="wp-block-list">
<li>Bhu-tane: Bitdeer (BTDR), the Bitmain spinoff operating bitcoin mines in Bhutan and the US, is on track to open 11% higher than Friday’s close.</li>



<li>Electric: CleanSpark (CLSK) continues to outperform, climbing 9.1% pre-market. Rival Riot is up less than 5%.</li>



<li>More like Macro: MicroStrategy (MSTR) has now eclipsed CLSK for year-to-date returns, now the number-one crypto stock this year with 85.5%.</li>
</ul>



MicroStrategy’s market value is no longer <a href="https://blockworks.co/news/microstrategy-bitcoin-valuation">mostly bitcoin</a>. The stock is currently worth $18.32 billion with $12.54 billion BTC on its balance sheet and liabilities worth $2.53 billion — meaning markets either value its software business as much as $9.4 billion, or they’re adding premium to its bitcoin-stacking strategy.



And while Bitcoin may be closer than ever to retesting 2021’s high, January’s “sell the news” event around the launch of bitcoin ETFs has dragged heavily on most mining stocks.



Only four bitcoin miners have outperformed the S&amp;P 500’s 7.9% returns so far this year: CLSK, Marathon (MARA), Core Scientific (CORZ) and Bitfarms (BITF).



Read more: <a href="https://blockworks.co/news/eia-drops-bitcoin-miner-survey">EIA to drop emergency bitcoin miner survey following court battle</a>



<ul class="wp-block-list">
<li>Liquidations worth $262.3 million have <a href="https://www.coinglass.com/LiquidationData">struck</a> crypto derivatives traders over the past day, 60% of it hitting short sellers.</li>



<li>On average, that’s $110,000 lost per minute on short bets, with BitMEX’s dogecoin market seeing the largest recent liquidation ($2.45 million).</li>



<li>Overall CEX open interest is again at all-time high, now $28.92 billion.</li>
</ul>



<h2 class="wp-block-heading">On the ground</h2>



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">BTC is now officially at an all-time high in EUR terms. <a href="https://t.co/58wdEanu5K">https://t.co/58wdEanu5K</a> <a href="https://t.co/kHup8rPpMx">pic.twitter.com/kHup8rPpMx</a>&mdash; mhonkasalo (@mhonkasalo) <a href="https://twitter.com/mhonkasalo/status/1764582701204402644?ref_src=twsrc%5Etfw">March 4, 2024</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div><figcaption class="wp-element-caption">European Counter-signal Bank</figcaption></figure>



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Congrats! <a href="https://t.co/aK2Ps3pG9h">https://t.co/aK2Ps3pG9h</a>&mdash; Mustafa Al-Bassam (@musalbas) <a href="https://twitter.com/musalbas/status/1764584134574305719?ref_src=twsrc%5Etfw">March 4, 2024</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div><figcaption class="wp-element-caption">This is what peak performance looks like</figcaption></figure>



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Blockchain network fees will eventually be treated the same way as server costs Paid for by apps on behalf of their users, invisible, a cost of doing business, not something anyone thinks about except backend devs&mdash; hayden.eth 🦄 (@haydenzadams) <a href="https://twitter.com/haydenzadams/status/1764403930824384663?ref_src=twsrc%5Etfw">March 3, 2024</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div><figcaption class="wp-element-caption">Devs do something (pay our fees)</figcaption></figure>



<hr class="wp-block-separator has-alpha-channel-opacity"/>



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Cheatsheet: Crypto short sellers losing $110K per minute

Sebastian Sinclair

Volatility across the crypto derivatives market leaped to fresh local highs this week following a surge led by major blue chip asset bitcoin (BTC).



A two-month period of relatively muted market activity had placed the world’s largest digital asset in relative stasis, trading within a $2,000 range. But on Monday, the market sprang to life, with a 14% rise in the asset’s price topping out at just above $35,000 on Tuesday.



That activity caused a flush of large leveraged short positions, creating a short squeeze — short sellers closing out their positions “en mass” — Bradley Duke, chief strategy officer at ETC Group told Blockworks.



“Only hindsight will be able to tell us if this rally actually has legs, but it feels like enthusiasm for bitcoin is starting to return,” he said.



Open interest for bitcoin futures initially tanked on the back of those liquidations, wiping roughly <a href="https://blockworks.co/news/bitcoin-dominance-34k">$1 billion</a> from the market. That has since retraced, indicating new contracts are being opened post-rally, according to Aditya Jalan, APAC trading manager at FalconX.



Interestingly, open interest in listed BTC options on <a href="https://www.deribit.com/statistics/BTC/options-data">Deribit</a> has increased to $13 billion and is now at the highest level in USD terms since the bull market of Q4 2021, Jalan said.&nbsp;



Blockworks was told by several analysts that options trading tends to attract a more professional audience compared to futures trading, leading to fewer retail investors participating in this segment of the crypto market.&nbsp;



Consequently, the incidence of liquidations and declines in open interest are less frequent in options trading compared to futures, crypto algorithmic trading firm Auros said.



Implied volatility over a 30-day period for bitcoin options contracts shows the rally has also pushed the value to its highest point since the end of June, at just above 59%, data from T3’s Bitcoin Volatility Index shows.



To put that into context, the index has only crossed over that level five times this year.



<h2 class="wp-block-heading">Contributing factors</h2>



According to Mark Connors, head of research at 3iQ, the recent volatility in the crypto derivatives market can be attributed to a combination of factors.&nbsp;



&#8220;Historically low cold coming into this week and favorable developments in spot BTC events combined to ignite a chase by some market makers to get longer gamma,&#8221; Connors said.&nbsp;



This means that changes in market sentiment occurred more quickly than market makers could adjust their hedges, leading to a shift in open interest across different derivatives vehicles, he said.



Connors emphasized these factors contributed to the surge in BTC price but were not the primary driver behind it.



&#8220;We do not think the options positions drove the spike to $35,000, rather they augmented the move somewhat,&#8221; he added.



At the same time, BlackRock&#8217;s proposed iShares Bitcoin ETF, carrying the ticker IBTC, <a href="https://blockworks.co/news/blackrock-ibtc-dtcc-etf">reappeared</a> on the Depository Trust and Clearing Corporation website after <a href="https://blockworks.co/news/blackrock-ibtc-bitcoin-etf">disappearing</a> early on Tuesday.



The initial listing on the Depository website was attributed by <a href="https://blockworks.co/news/bitcoin-etf-price-rally">analysts</a> as a catalyst for continued bullish fervor surrounding a potential greenlight of a US bitcoin ETF in the year ahead.



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Bitcoin volatility explodes, reflecting ‘short squeeze,’ bullish options bets

As hedge funds increase bearish bets on US equities, with S&amp;P 500 futures short positions at a roughly 12-year high, experts are pondering the potential impacts on the crypto market.



The S&amp;P 500 COT Index, which represents the difference in net positions between large non-commercial speculators and large commercial hedgers, is now at its lowest point since Sept. 19, 2011.



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="2048" height="1018" src="https://blockworks-co.imgix.net/wp-content/uploads/2023/05/sp500-cot-index.jpg?w=1024&amp;h=1024" alt="" class="wp-image-54542" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2023/05/sp500-cot-index.jpg?w=2048 2048w, https://blockworks-co.imgix.net/wp-content/uploads/2023/05/sp500-cot-index.jpg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2023/05/sp500-cot-index.jpg?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2023/05/sp500-cot-index.jpg?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2023/05/sp500-cot-index.jpg?w=1536 1536w, https://blockworks-co.imgix.net/wp-content/uploads/2023/05/sp500-cot-index.jpg?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2023/05/sp500-cot-index.jpg?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2023/05/sp500-cot-index.jpg?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2023/05/sp500-cot-index.jpg?w=80 80w" sizes="auto, (max-width: 2048px) 100vw, 2048px" /></figure>



A decrease in the index suggests large non-commercial speculators, including hedge funds, have become more bearish about the US stock market compared to large commercial hedgers. This shift in sentiment could indicate a negative outlook or increased uncertainty in the market.



It also opens up an opportunity, according to Ruslan Lienkha, chief of markets at YouHodler: A build-up of short bets in traditional equities could bode well for risk assets, including crypto.



“Due to the fact that there is now an increased correlation between the dynamics of American indices, gold and bitcoin, closing short positions on the S&amp;P500 may also trigger a short squeeze reaction, which will also significantly support the prices of bitcoin,” Lienkha told Blockworks.



A short squeeze occurs when a rapid increase in an asset&#8217;s price forces short sellers to close their positions, causing the price to rise even further due to increased buyer demand.



Bitcoin (<a href="https://blockworks.co/price/btc" target="_blank" rel="noreferrer noopener">BTC</a>) remains little changed over a 24-hour period near $29,100 though its performance for the year is up more than 75% alongside Ether’s (<a href="https://blockworks.co/price/eth" target="_blank" rel="noreferrer noopener">ETH</a>) 58%. The S&amp;P 500, by contrast, is up roughly 6% over the same period.



Price action can can be driven by short squeezes or investors getting more constructive and &#8220;taking a swing,&#8221; Owen Lau, executive director at Oppenheimer, told Blockworks.



&#8220;Additionally, the banking crisis makes people think about alternatives and where they can put money into,&#8221; he said.



Markus Thielen, head of research at Matrixport, agrees stating a short squeeze in stocks could push bitcoin higher, especially as <a href="https://blockworks.co/news/macro-in-bitcoin-favor">corporate buybacks are slated to resume</a> next week in the wake of the US corporate earnings season.



Though not all market participants are on the same page.



Brian Fu, co-founder of zkLend, an L2 money-market protocol built on StarkNet, notes that the overall likelihood of a short squeeze is low. The co-founder points to economic fundamentals that have yet to improve, as well as persistently high <a href="https://blockworks.co/tag/inflation" target="_blank" rel="noreferrer noopener">inflation</a>.



“Most other digital assets are being seen closer to traditional equities, with increasing correlation to general market sentiments. Therefore, it is more likely to be [a] downside scenario for these other digital assets,” Fu said.



Even so, there remains a silver lining, Fu suggests. Bitcoin and other key tokens with large market caps could benefit from the diversion of funds from traditional equities markets. Though sentiment remains cautious overall, Fu said.



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Hedge Funds Betting Against S&P 500: Good News for Bitcoin and Crypto?

Silvergate stock collapsed 30% in after-hours trading on Wednesday after it said it would delay filing its annual report with the Securities and Exchange Commission (SEC).



The bank, which services multiple top players in the crypto industry including Circle and Kraken, told the SEC that while it would seek to file its 2022 10-K “as soon as possible,” it did not expect to do so before the extension deadline date of March 16.



Silvergate also acknowledged that it expects inquiries from the Department of Justice, Congress and the SEC due to the digital assets side of its business. It cited difficulties arising from volatility across the crypto sector during Q4 2022, which have bled over to 2023. 



Silvergate also counted FTX as a customer of its &#8220;exchange network,&#8221; which enables round-the-clock fiat transfers, as opposed to the US&#8217; Automated Clearing House, which only processes payments at certain business hours.



Silvergate was sideswiped by FTX&#8217;s collapse in November, which rattled customer confidence and led to an $8.1 billion withdrawal wave. The company&#8217;s fourth-quarter earnings report, unveiled in January, revealed a <a href="https://blockworks.co/news/silvergate-stock-surges-20-despite-1b-quarterly-earnings-loss" target="_blank" rel="noreferrer noopener">$1 billion</a> loss. It also <a href="https://blockworks.co/news/huobi-layoffs-another-week-of-cuts" target="_blank" rel="noreferrer noopener sponsored nofollow">slashed its workforce by 40%</a> last month.



“Shareholders are focusing on the weakening capital position as depositors are fleeing,” Markus Thielen, head of research and strategy at Matrixport told Blockworks.



The bank continues to sell off securities to match withdrawal requests, Thielen added. “This is hurting the bank’s capital ratios that will restrict its loan book.” The world’s largest asset manager, <a href="https://blockworks.co/news/state-street-and-blackrock-boost-silvergate-stake-what-is-the-stock-doing" target="_blank" rel="noreferrer noopener">BlackRock</a>, boosted its stake in the company to 7.2% in February.



On Thursday, Coinbase announced that it would cease transfers to and from Silvergate &#8220;out of an abundance of caution.&#8221;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">At Coinbase all client funds continue to be safe, accessible &amp; available. In light of recent developments &amp; out of an abundance of caution, Coinbase is no longer accepting or initiating payments to or from Silvergate.&mdash; Coinbase (@coinbase) <a href="https://twitter.com/coinbase/status/1631284093378756611?ref_src=twsrc%5Etfw">March 2, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



More than 70% of the float has been shorted, per Seeking Alpha, leading to some <a href="https://blockworks.co/news/silvergate-short-squeeze-crypto-bank" target="_blank" rel="noreferrer noopener">speculation of a potential short squeeze</a>. Although, the likelihood of such an event has now been diminished thanks to its recent collapse.



Silvergate stock is now down more than 94% from its all-time high of $239 recorded in Nov. 2022, just as bitcoin set its own above $69,000.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



This story was updated on March 2, at 8:38 am ET with Coinbase&#8217;s announcement.



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Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



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Silvergate Shorts On Track: Stock Tanks On Delayed SEC Filing

Crypto bank Silvergate (SI) has attracted a ton of short sellers over the past few months, opening up possibility of a short squeeze that could drag its share price upward.



Silvergate stock, which had surged 1,000% across late 2020 and 2021 as crypto markets ripped through their bull market, has sunk nearly 84% over the past year and 65% since the FTX scandal first broke.



SI’s short interest — which measures how much of its outstanding shares are tied to short sales — is now 72.80%, per Seeking Alpha.&nbsp;



That makes Silvergate one of the most shorted stock on US markets, if not the most. It has far more than meme stock Bed Bath and Beyond (47.91%), bitcoin miner Marathon (41.53%), meat substitute startup Beyond Meat (36.88%) and direct rival Signature Bank (36.13%).



About 18 months ago, Silvergate didn’t even <a href="https://seekingalpha.com/article/4438327-the-most-heavily-shorted-stocks-and-our-picks-july-2021" target="_blank" rel="noreferrer noopener">make</a> the top 50.



But such astronomically high short interest suggests the possibility of a squeeze — short sellers could face pressure to buy back shares to cover their shorts if the price rises significantly from here. Essentially, that would mean their bearish bets backfired.



The most famous short squeeze of recent history would be GameStop. A ragtag group of retail investors sought to bankrupt Melvin Capital and Citron Research, who’d heavily shorted the game retailer (GameStop&#8217;s short interest reached 140% during peak short squeeze in Jan. 2021).



Melvin <a href="https://markets.businessinsider.com/news/funds/melvin-capital-shut-down-after-losing-billions-gamestop-short-squeeze-2022-5" target="_blank" rel="noreferrer noopener">eventually</a> closed down, having lost billions after being forced to buy back heavily inflated shares to close its shorts. Citron <a href="https://www.cnbc.com/2021/01/29/citron-research-short-seller-caught-up-in-gamestop-squeeze-pivoting-to-finding-long-opportunities.html" target="_blank" rel="noreferrer noopener">said</a> it would stop publishing short reports to focus on disclosing long theses moving forward.



“When some people think of a short squeeze they immediately think of the GameStop lunacy, but that isn&#8217;t necessarily a good representation of heavy short interest situations because it was the result of massive coordinated buying pressure,” UFD Capital analysts wrote in a recent <a href="https://seekingalpha.com/article/4579803-silvergate-capital-stock-considerable-risk-and-short-squeeze-potential" target="_blank" rel="noreferrer noopener">report</a>.&nbsp;



Short squeezes can be far more boring, they explained, in that the short thesis could simply become less compelling relative to the realities of opening shorts (opportunity cost and borrowing fees).&nbsp;



“Not everyone can cover at once, which can lead to a modest short squeeze. This is what could happen if Silvergate can demonstrate that their business is fundamentally sound,” UFD Capital said.



One way this can happen is if the company, in this case Silvergate, improves their fundamentals.



<h3 class="wp-block-heading">Bear case spurs short squeeze for Silvergate</h3>



As one of the only US banks that can freely move fiat to crypto exchanges, Silvergate supports a raft of companies in the space, including Circle, Coinbase, Binance US and Kraken, via its internal payment rails known as the Silvergate Exchange Network (SEN).&nbsp;



SEN is intended to help such firms process funds round-the-clock, rather than rely on the US’ Automated Clearing House, only available during certain business hours.



Silvergate also serviced FTX, leading to fears of contagion and an influx of withdrawals (Silvergate initially hinted at more than $1 billion kept on FTX at the time of its demise, funds now apparently stuck in bankruptcy proceedings).



At the end of last year, Silvergate managed $3.8 billion in customer deposits, down from $11.9 billion in the third quarter. Its customers had grown concerned about the bank&#8217;s ability to continue facilitating operations without disruption.&nbsp;



To fulfil withdrawals and generate liquidity, the bank was forced to sell assets at an unfavorable time, according to its fourth-quarter earnings report, resulting in a <a href="https://blockworks.co/news/silvergate-stock-surges-20-despite-1b-quarterly-earnings-loss">loss of $1 billion</a>. It also <a href="https://www.businesswire.com/news/home/20230120005474/en/Silvergate-Provides-Statement-on-Limited-Exposure-to-Genesis" target="_blank" rel="noreferrer noopener">reported</a> a loss to bankrupt crypto lender Genesis amounting to $2.5 million, although those funds are small compared to its balance sheet overall.



<figure class="wp-block-embed is-type-wp-embed is-provider-flourish wp-block-embed-flourish"><div class="wp-block-embed__wrapper">
<iframe loading="lazy" class="wp-embedded-content" sandbox="allow-scripts" security="restricted" title="Interactive or visual content" src="https://flo.uri.sh/visualisation/12815381/embed#?secret=0xnevmPsm4" data-secret="0xnevmPsm4" frameborder="0" scrolling="no" height="575" width="700"></iframe>
</div><figcaption class="wp-element-caption">A short squeeze on Silvergate could be dampened by its low days-to-cover ratio</figcaption></figure>



The US Department of Justice is now <a href="https://www.bloomberg.com/news/articles/2023-02-02/silvergate-faces-doj-fraud-probe-over-ftx-and-alameda-dealings" target="_blank" rel="noreferrer noopener">reportedly</a> probing Silvergate to see if it assisted FTX and Alameda Research in fraudulent activities, such as lending and commingling user funds. Its client Paxos is also coming under increased <a href="https://blockworks.co/news/paxos-to-cease-minting-new-busd-and-end-relationship-with-binance" target="_blank" rel="noreferrer noopener">scrutiny</a> from US regulators over its Binance-branded stablecoin.



All these concerns, tied with <a href="https://www.businesswire.com/news/home/20230111006013/en/Second-Class-Action-Filed-Against-Silvergate-Capital-SI-Contact-Robbins-LLP-for-Information-Regarding-the-Class-Actions-Against-Silvergate-Capital-Corporation" target="_blank" rel="noreferrer noopener">multiple</a> class action <a href="https://www.courtlistener.com/docket/66813826/1/keane-v-silvergate-bank/" target="_blank" rel="noreferrer noopener">lawsuits</a>, have impacted the business’ attractiveness to both customers and investors, leading to a large sell-off in the stock and increased short sales.&nbsp;



The family office of legendary trader George Soros, for one, recently <a href="https://www.bloomberg.com/news/articles/2023-02-14/soros-fund-management-discloses-bet-against-silvergate-shares" target="_blank" rel="noreferrer noopener">disclosed</a> holding put options on 100,000 SI shares worth $1.74 million as of the end of December. Their status and expiry dates remain unknown.



<h3 class="wp-block-heading">Bitcoin buoys Silvergate bull case</h3>



Silvergate has clearly had it rough. But its correlation with recovering crypto markets has pushed its share price up 30% over the past month.



And while high short interest exists, market data indicates those shorts would be quick to cover if a squeeze formulates.



A stock’s “days-to-cover” ratio estimates the number of days it would take for all short sellers to acquire enough shares to return to their lenders. The figure is based on the average daily trading volume of the stock and open short interest.



High days-to-cover ratio, typically over five days, suggests increased potential for a significant short squeeze.&nbsp;



SI’s days-to-cover is currently 2.17 days, according Seeking Alpha data. So, any potential short squeeze would be relatively short-lived, reducing potential upside for squeezers.



Nelson Alves, investment analyst, told Blockworks that he wasn’t completely convinced that Silvergate will undergo a short squeeze any time soon.



“Do I think that Silvergate is going to turn around from its current stock rout? Yes. Do I think it will be due to an incoming short squeeze. It might happen, but not very likely,” Alves said.



He agreed that the amount of short positions is huge relative to the float — and when Silvergate stock goes green, upward movements would be exacerbated by such high short interest. But Alves again highlighted Silvergate&#8217;s small days-to-cover ratio compared to prominent recent short squeezes.



<figure class="wp-block-embed is-type-wp-embed is-provider-flourish wp-block-embed-flourish"><div class="wp-block-embed__wrapper">
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</div></figure>



“Not saying that a short squeeze can’t happen (in some instances, volume might dry up), just that it is not hard for shorts to solve the problem. If you compare it to the meme stocks, you’ll see that when those squeezes happened, it took several days for shorts to cover,” Alves said.



Meanwhile, <a href="https://seekingalpha.com/author/mike-zaccardi-cfa-cmt" target="_blank" rel="noreferrer noopener">Mike Zaccardi</a>, CFA, CMT and Seeking Alpha analyst, reckons a Silvergate short squeeze is on the table considering bitcoin price action has been rather constructive. This suggests the “pain trade” for Silvergate could be to the upside.



Still, Silvergate’s short interest is “ridiculous,” so it “wouldn’t take much upward momentum to really scare the shorts,” he told Blockworks.



“Technically, I think the $25 level is key. A move to about that could bring about significant short covering. I see the next resistance near $50,” Zaccardi said. Silvergate shares last traded for $18.05.



Zaccardi conceded that he doesn’t see any corporate events for Silvergate that could be the catalyst, but noted that Option Research &amp; Technology Services shows an implied volatility of 191% for Silvergate.



“That’s a one-week expected move of 26% — crazy high.”



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Silvergate Short Squeeze Looks Inevitable — But How Likely Is It?

Shalini Nagarajan

<div id="highlights-block_62b57931f6d18" class="highlights">
 <ul>
 <li>After Bancor paused a key feature, wallets linked to Celsius and Nexo withdrew large positions</li>
 <li>The team exercised emergency powers to prevent “a small handful of large players” from causing catastrophe, Bancor’s Nate Hindman told Blockworks</li>
 </ul>
 
</div>



Bancor, a pioneer in Decentralized Finance, temporarily <a href="https://cms.blockworks.co/bancor-halts-impermanent-loss-safeguard-to-fight-off-hostile-antagonist/" target="_blank" rel="noreferrer noopener">halted</a> its popular impermanent loss (IL) insurance feature last weekend, raising concerns that the protocol isn’t truly “decentralized.”



Impermanent loss refers to the unrealized amount that occurs when you provide liquidity to a pool in the form of cryptocurrency, and the value of those tokens changes since you deposited them.



Ever since the automated market maker said it wants to give the protocol room to breathe, it has observed wallets linked to crypto lenders Celsius and Nexo remove liquidity from the system while taking a haircut.



Blockworks spoke to Bancor’s Head of Growth Nathaniel Hindman and Head of Research Mark Richardson to understand what they saw as “manipulative behavior” that made them safeguard the protocol. The pair identified two major factors: large short positions taken out against the protocol’s BNT token, while at the same time a surge in withdrawals and selling of the liquidity mining rewards, which are paid out in BNT by the protocol.



<h3 class="wp-block-heading">Large short positions</h3>



In a June 19 <a href="https://blog.bancor.network/market-conditions-update-june-19-2022-e5b857b39336" target="_blank" rel="noreferrer noopener">blog</a>, Bancor said it would temporarily pause IL for liquidity providers (LPs) due to an ongoing “attack” and a “hostile antagonist.” The attack, they believe, relates to wallets linked to Celsius’ attempt to exit large positions in the protocol. They found accounts on two exchanges, FTX and OKX, that held short interest worth $2.5 million in total against the platform’s BNT token.



“It’s not catastrophically large,” Richardson said in an interview. “But whoever is sustaining these positions is borrowing the maximum daily limit every day.” He assumed the rapid withdrawals were made to cover liquidations or debt.



“Because of the financial situation that they&#8217;re in, they are being a lot more reckless in the way that they&#8217;re managing their exit from the market,” he said.



Additionally, they believed someone spread misinformation on the message board 4chan about the way Bancor runs its protocol. That drove panic and led to a number of active withdrawals piling up, similar to a bank run, encouraging other people to follow — until a majority of the protocol’s Total Value Locked (TVL) was queued up to leave, according to the product architect.



Large withdrawals end up making BNT less liquid, which means the token is less able to absorb the selling pressure. But Bancor was built to deal with short interest, Hindman said — emphasizing that it wasn’t just this incident that led to the IL pause.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“It’s been this perfect storm of events.&#8221;</blockquote>



It&#8217;s not just the shorts,” he said. “It&#8217;s also having some of the largest centralized players in the industry utilizing our system, and then having them go insolvent at the same time and withdrawing and dumping large amounts of liquidity mining rewards.”



<h3 class="wp-block-heading">Bancor LP&#8217;s liquidity mining rewards &#8220;went on too long&#8220;</h3>



While decentralized exchanges like Uniswap don’t protect against impermanent loss, Bancor pitched such compensation as a unique selling point. LPs receive BNT tokens as rewards for committing their capital to Bancor pools. This was the “original sin” that caused headaches for the protocol, Hindman said.&nbsp;



“BNT liquidity mining rewards really went on too long,” he said, adding that large stacks have been accumulated in the hands of some people who are now rapidly dumping them, “putting this maximum strain on the system.”



So the combination of a market meltdown, substantial short positions and tons of BNT rewards being dumped simultaneously caused the team to intervene.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“We could see very easily that we weren&#8217;t going to be able to withstand that for much longer,” Richardson said.&nbsp;</blockquote>



There have been some <a href="https://twitter.com/cobie/status/1538671298129416192" target="_blank" rel="noreferrer noopener">concerns</a> that Bancor simply mints new BNT to compensate liquidity providers under its ILP mechanism.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Does Bancor &quot;impermanent loss protection&quot; just pay out newly minted BNT tokens in order to cover the loss if there wasnt enough made in fees&#8230;&#8230;???&mdash; Cobie (@cobie) <a href="https://twitter.com/cobie/status/1538671298129416192?ref_src=twsrc%5Etfw">June 19, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Hindman denied this by calling it a misconception. “Some of these criticisms have come from the biggest investors of some of our competitors and folks in the industry that just haven&#8217;t taken the time to understand this system,” he said.



He said Bancor operates similar to an insurance company, by offering the IL insurance in exchange for a percentage of trading fees on the network.



“Currently about 15% of trading fees are confiscated from liquidity provider earnings in order to fund the insurance, and that&#8217;s also on top of Bancor co-investing its BNT inside our own pools in order to generate protocol fees that offset this cost,” he said.



Minting of BNT is a last resort, only employed when the protocol fees, from trading activity, are not enough.



<h3 class="wp-block-heading">DAO emergency powers vs. centralized authority</h3>



Bancor said it had to activate its “emergency powers” in order to respond to the crisis, raising eyebrows about whether that goes against the fundamentals of a Decentralized Autonomous Organization. Technically, there isn’t supposed to be a centralized leadership group within a DAO.



But the Bancor team says they felt it necessary to assign emergency rights to certain people who can take decisions in a crisis. 



They were able to take the initiative because of a <a href="https://gov.bancor.network/t/bip21-dao-multisig-intervention-policy/3504">proposal</a> four months ago, which was ultimately voted on and ratified by the DAO. That granted emergency powers to the DAO’s <a href="https://docs.decentraland.org/decentraland/how-does-the-dao-work/">multi-sig</a> to implement such actions.



“In these early days of decentralized protocols, especially those that are as complex as Bancor, we think it&#8217;s only responsible that the DAO give emergency rights to a multi-sig,” Hindman said, referring to a multi-signature wallet that manages protocol upgrades and parameters, providing a measure of centralized control.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“We weren&#8217;t going to sit by and watch as a community what we think was a small handful of large players suck the system dry.”</blockquote>



Bancor is now working to propose stronger protections for its IL insurance system to the DAO, even as independent observers <a href="https://twitter.com/hasufl/status/1538778386285441025" target="_blank" rel="noreferrer noopener">question the viability</a> of the whole system.



“We understand that it&#8217;s certainly controversial, but we do think it was the right decision to make,” said Hindman.



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Bancor Uses ‘Emergency Powers’ to Fight ‘Hostile Antagonist’

<div id="highlights-block_62ab9431b5ebf" class="highlights">
 <ul>
 <li>Crypto contagion has spread into equities with digital asset exposure</li>
 <li>Short interest for multiple top crypto stocks has peaked this month</li>
 </ul>
 
</div>



Stock traders looking to profit from tumbling cryptocurrency prices took aim at major players in digital assets this week, with Coinbase and MicroStrategy among the hardest hit.



Short sellers Monday bet more than $631 million, cumulatively, on the continued descent of six top crypto stocks, accounting for 39% of their collective trade volume for the day.&nbsp;



Spot crypto markets shed 16% over the weekend, suggesting short sellers had eagerly awaited equity markets opening to capitalize on the chaos.



Top US crypto exchange Coinbase took most of the wrath, facing shorts of $393 million Monday — 74% above its yearly average, according to FINRA data compiled by Blockworks. FINRA tracks volume on both the NYSE and Nasdaq, but its data excludes private markets and could count short trades that don’t specifically convert to an open short.



The same day, Coinbase <a href="https://cms.blockworks.co/coinbase-cut-workforce-ceo-wary-of-potential-recession/" target="_blank" rel="noreferrer noopener">said</a> it would lay off almost one-fifth of staff: more than 1,000 employees. Chief executive Brian Armstrong cited a potential US recession. Coinbase shares have since fallen some 16% since Friday’s close.



Also on Monday, short sellers bet $124 million against MicroStrategy — the data intelligence firm run by bitcoin bull Michael Saylor.



MicroStrategy stock, on average, recorded $70 million in shorts daily over the past year, which means Monday saw 77% more MicroStrategy short selling than usual. The tech company’s shares are now down 25%.



MicroStrategy maintains the largest corporate bitcoin reserves of any public company, holding 129,218 BTC as of April, worth $2.7 billion today. The company’s market capitalization is just $1.8 billion.



New York-based Signature Bank saw an even bigger short surge. Through its crypto-specific Signet service, Signature <a href="https://seekingalpha.com/article/4512236-signature-bank-tumbles-with-crypto-mayhem-time-to-buy" target="_blank" rel="noreferrer noopener">oversees</a> $29 billion in crypto deposits (as of May), including $7 billion in stablecoins. Market participants including exchanges, miners, funds and fiat-backed stablecoins, such as Circle’s USD Coin (USDC) and TrueUSD, all bank with Signature.



Short sellers initiated around $53 million in bets against Signature Monday, 82% above its yearly average. The company’s shares went on to shed 20%.



<figure class="wp-block-image"><a href="https://lh3.googleusercontent.com/ZvW-6FF1BUE0KK8c-vaDHQWkR6sbf2TFD452xfVcrrAwd1hOKgIJHbA_NfCcouBWpjK2PQgrzf5EUcWDDRStLRKWuGIpYe0P0AmhPghmt336plyXhoR3Aqw2M4mefGtxrEC1duZQCGvRBMxUuQ"><img decoding="async" src="https://lh3.googleusercontent.com/ZvW-6FF1BUE0KK8c-vaDHQWkR6sbf2TFD452xfVcrrAwd1hOKgIJHbA_NfCcouBWpjK2PQgrzf5EUcWDDRStLRKWuGIpYe0P0AmhPghmt336plyXhoR3Aqw2M4mefGtxrEC1duZQCGvRBMxUuQ" alt=""/></a><figcaption>Short selling volume over the past year | Data source: FINRA via TradingView</figcaption></figure>



The mounting losses are despite the bank having “virtually zero credit risk” via its crypto operations, as its digital asset balance sheet is almost entirely deposits, according to a <a href="https://seekingalpha.com/article/4512236-signature-bank-tumbles-with-crypto-mayhem-time-to-buy" target="_blank" rel="noreferrer noopener">recent</a> analysis.&nbsp;



Rival Silvergate, on the other hand, on Monday only saw 14% more shorts than average, or roughly $24 million. Silvergate <a href="https://ir.silvergate.com/news/news-details/2022/Silvergate-Capital-Corporation-Announces-First-Quarter-2022-Results/default.aspx" target="_blank" rel="noreferrer noopener">oversaw</a> about $15.8 billion in assets under management as of March 31, the most recent available data — making the firm one of the largest crypto banks.&nbsp;



In February, the firm spent $182 million to acquire assets and technology once intended to power Meta’s failed stablecoin offering Diem. Silvergate also issued a $205 million bitcoin-backed <a href="https://www.businesswire.com/news/home/20220329005397/en/Silvergate-Bank-Issues-205-Million-Loan-to-MacroStrategy-Collateralized-by-Bitcoin" target="_blank" rel="noreferrer noopener">loan</a> to MicroStrategy in March. Its share price is also down 20% since Friday’s close.



Curiously, crypto mining stocks weren’t targeted to the same degree. US-listed outfits Marathon Digital and Riot Blockchain recorded $27 million and $10 million worth of shorts on Monday, respectively, both significantly under their yearly daily averages of $53 million and $67.5 million.&nbsp;



<h3 class="wp-block-heading">Short sellers could target crypto mining stocks next</h3>



Shorting specialists might not be focusing on top miners just yet, as those companies are, at least in theory, large enough to acquire fresh mining rigs and electricity sources relatively cheaply, bitcoin mining consultant Alejandro De La Torr told Blockworks.&nbsp;



It could put some public crypto miners in a better position than some of their smaller, unlisted counterparts, at least in the short term. Todd Esse, co-founder of bitcoin mining fund HashWorks, told Blockworks he expects shorters will target certain vulnerable mining stocks moving forward.



In any case, short interest — a measure of how many outstanding shares are attributable — for nearly all these stocks are now at yearly highs, according to data from finance and blockchain analytics startup quantX.



MicroStrategy&#8217;s short interest hit 30% in May (3.4 million shares of 11.30 million outstanding), but has since dropped slightly. Signature Bank shorts have surged: Its short interest is up 60% month over month, now at 2.57 million shares of almost 63 million outstanding.



“Pure bitcoin plays have slightly declined in short interest, whereas broader crypto plays have spiked this month,” quantX co-founder Oisin Maher said. The short interest in cryptoasset manager Voyager Digital’s US-listed equity, in particular, has exploded some 600% in June, while Galaxy Digital’s has been steadily growing all year.&nbsp;



<figure class="wp-block-image is-resized"><a href="https://lh6.googleusercontent.com/ko7Hp-Hp--Df_JFT8Kbn2XML73c3YN0Sr30S7I7bpjNCdFu0CACJmrsP7OSX53eVK45c-zjbfyez9YOBTtQ6c01hIsQwx15p2Q7kAGqDltq2EDk54WB7pCx5O1Bd5NcmDIlzWr3p7AEMKfEkXQ"><img loading="lazy" decoding="async" src="https://lh6.googleusercontent.com/ko7Hp-Hp--Df_JFT8Kbn2XML73c3YN0Sr30S7I7bpjNCdFu0CACJmrsP7OSX53eVK45c-zjbfyez9YOBTtQ6c01hIsQwx15p2Q7kAGqDltq2EDk54WB7pCx5O1Bd5NcmDIlzWr3p7AEMKfEkXQ" alt="" width="840" height="415"/></a><figcaption>Coinbase short interest over the past year | Source: quantX via Bloomberg Terminal</figcaption></figure>



Top crypto stocks have already booked more short volume in June than last September — when bitcoin was worth more than double its current price.&nbsp;



Still, FINRA data shows far more bets on crypto’s demise last month, which saw the Terra ecosystem implode and lending platform Celsius begin to falter.&nbsp;



Indeed, altogether in May, more than $11 billion worth of shorts were opened against Coinbase, MicroStrategy, Signature, Silvergate, Marathon and Riot — almost 70% levied at Coinbase.&nbsp;



Short sellers only logged more bets against these crypto stocks at one other time throughout the past year; October and November together saw more than $19 billion worth of shorts opened, when bitcoin was just retreating from its $69,000 record high.



The total value of all cryptocurrencies has tanked 65% since then — indicating there’s some very happy short sellers out there. Recent <a href="https://money.yahoo.com/crypto-stock-short-sellers-raked-in-4-billion-this-year-134004038.html" target="_blank" rel="noreferrer noopener">data</a> shows they&#8217;ve raked in almost $4 billion by shorting crypto stocks this year.



This article was updated at 5:07 am ET, Jun 17 to include reference to Silvergate&#8217;s loan to MicroStrategy.



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