I made a thread yesterday about this article from zerohedge:
And I said it was fascinating. Let me try to explain how different this is compared to some of the other massive shorts we have seen in the recent past.
What's a Short
In the stonk world a short is when you borrow a share from an owner, sell it in the market, and then plan to buy it back later and return that share to the owner. You pay interest for the loan of the share and hopefully you buy it back at a lower price than you sold it for. So instead of having the goal of buy low, sell high you are trying to sell high, buy low.
Meme Stonks
You've probably heard about $GME and $AMC. If you're a little more in the weeds you might also know about $HTZ and $BBBY.
These were all companies that are/were having massive business problems, and the hedge funds came in and shorted them to oblivion. Some retail investors came by and noticed that these short positions could not be covered. There aren't enough shares in existence to make these numbers work out.
This can happen two ways:
1, the legal way - the shares I sold short yesterday are now in the hands of new owners, and I borrow from that new person to sell again even though it's the same share that was already sold.
2, the illegal way - the brokerages and hedge funds are just making up shares and selling them short. This is the so-called naked short.
What's actually happening with the meme stonks is probably a bit of both.
Short Squeezes
Super-high levels of shorts are interesting because they can create what is called a short squeeze.
Just like everyone else, these hedge funds don't like taking huge losses. So when there are so many shorts in a stonk and the price is pushed high enough that some of those positions are now in loss (remember: sell high, buy low), they will buy shares on the market to close their position. That pushes the price higher from that buying and now more shorts are in trouble. This cycle can continue and create enormous spikes in price.
That's what all the redditors on r/wallstreetbets are betting on. And it does happen... sorta
The problem they are running into is that the brokers, FINRA, the SEC, and the hedge funds are all on the short side and the retail investors are on the long side. We have seen for the past couple years that there basically is no step the big boys won't take to not have the market implode on an infinite short squeeze. So the retail buyers will keep hodling and the mother of all shorts will always be tomorrow.
Silvergate is Different
But the situation with Silvergate is different. It has a huge short interest. It's where crypto exchanges do a lot of transactions.
But the important way in which it is different is who is on the long side. It's not just retail redditors. Ken Griffin and his fund Citadel are 5.5% owners of $SI. These are the same guys who are on the short side of $GME.
Susquehanna, another huge hedge fund, owns 7.5%.
Blackrock owns 7.2%.
Anson Funds owns another 3.5%.
So where all the pros are on the side of crushing $GME and $AMC, a lot of those same people are on the side of keeping $SI healthy and working.
For sure, the cyrpto business has been hit hard. Silvergate recently announced a bunch of layoffs. But we are way more likely to see explosive price action to the upside with this cast of characters than we are to see $SI crumble and die.
