Is A Monster Microstrategy Short Squeeze On The Cards?

Microstrategy has been on a roll recently. Not content to benefit from the company's vast bitcoin holdings, CEO Michael Saylor has been borrowing hundreds of millions more dollars (at incredibly low rates) to buy further bitcoins. Microstrategy's holdings are now closing in on 210,000 BTC, or 1% of all bitcoins that will ever exist.

This approach has done wonders for MSTR's share price, which has doubled inside of three weeks and shows no sign of stopping. Moreover, Microstrategy is now large enough to be included in the S&P 500, which may further turbocharge its growth.

There’s Nothing Micro About Microstrategy’s Strategy

It’s easy to see Microstrategy as a simple proxy for bitcoin exposure, but the truth is a little more interesting than that.

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Short Sellers Pile On

But not everyone is a believer. There are traders who aren't convinced MSTR's growth is sustainable. They believe a correction is long overdue, as it so often is when a stock soars so rapidly, and they are looking to short sell it with the hope of profiting from its decline.

A significant weight of traders are now short MSTR. In other words, they have borrowed MSTR stock, sold it, and are looking to buy back lower and pocket the difference.

If they are wrong—if the market goes the other way—then MSTR could be the beneficiary of a massive short squeeze.

What Is A Short Squeeze?

A short squeeze occurs when investors who have borrowed a stock to sell it short face pressure to buy it back to cover their positions. If the stock price starts to rise unexpectedly, short sellers may rush to buy the stock, driving its price even higher. This upward pressure can force more short sellers to buy back the stock, further driving up prices in a self-reinforcing cycle. Short squeezes can lead to rapid and dramatic increases in stock prices, causing significant losses for short sellers and potentially triggering market volatility.

Right now, with MSTR at fresh highs, this is a real risk for shorts. Given the amount of money that would need to be deployed back into the market to cover those short positions, the effect could be an explosive move higher.

The problem for short sellers is that there is no fundamental reason for MSTR to fall at this point, unless bitcoin also corrects. A bet on MSTR is a bet on bitcoin.

As impressively as MSTR has performed in recent weeks, it might be due another huge leg up.

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