Why This Report Matters
Crypto equities are entering a potentially decisive moment. Weak earnings, elevated short interest, expiring lock-ups, and shifting regulatory signals are colliding at a time when positioning appears increasingly asymmetric. While headline fundamentals remain mixed, options markets, insider behavior, and short positioning suggest that the next move may be driven less by earnings themselves and more by how crowded the trade has become.
Hedge funds were aggressive short sellers of Coinbase during the last Bitcoin bear market, but they made a critical mistake near the cycle’s end. Even as Bitcoin began to recover and Coinbase shares rallied sharply, short interest continued to rise, a late bearish push that ultimately proved costly.
Today, despite its liquidity, competitive pressures, and still sizeable market capitalization, Coinbase is not the primary short target within crypto equities. Instead, hedge funds have concentrated their bearish positioning elsewhere. There is another crypto stock where short interest has built up meaningfully, and with several catalysts approaching, those “sharks” may need to reassess quickly, especially if the tide begins to turn against them.
Coinbase (LHS) vs. % of the shares shorted by Hedge Funds (RHS)
Main argument
Coinbase reported weaker-than-expected quarterly earnings as trading volumes declined meaningfully in Q4 2025. Volumes have remained subdued into Q1, and more than 90% of the 34 analysts covering the stock appear to have been overly optimistic, with average price targets still roughly 57% above the current share price, levels that likely require downward revisions. Yet despite this negative backdrop, the stock rallied following the earnings release.
One explanation is that much of the Bitcoin bear market may already be priced in. At the same time, Coinbase’s short sell ratio has risen from 3.7% to 9.0% in recent months, suggesting that bearish positioning had built up into the print. The short sell ratio reflects the percentage of publicly traded shares that have been borrowed and sold short, serving as a gauge of bearish sentiment. It is possible that traders used the weak earnings as an opportunity to cover short positions, contributing to the post-earnings rebound.
A similar dynamic played out in January 2023, when the prior Bitcoin bear market was well advanced. At that time, Coinbase’s short sell ratio surged to 29% before gradually declining as Bitcoin transitioned into its next bull cycle. Compared to that period of aggressive hedge fund shorting, today’s 9% level is relatively modest, though still roughly double the short interest seen in Robinhood (4.4%).
Bitcoin (LHS) vs. various short sell ratios (RHS, %)
More notable positioning can be observed elsewhere. Galaxy Digital’s short sell ratio stands at 12.4%, but Circle’s ratio is even more striking at 17.8%, meaning nearly one in five shares outstanding has been borrowed and sold short by hedge funds. This elevated short interest is particularly interesting ahead of Circle’s February 25, 2026, earnings announcement, especially given that the stock has fallen sharply from its June 2025 high of $299, when optimism around the GENIUS Act was building, to approximately $62 today. News that the White House is pressuring banks to agree on stablecoin rewards and advance the crypto market structure bill could have positive implications for Circle. This is especially important at short exposure appears very crowded while the stock has started to move sideways.
Circle (LHS) vs. Circle’s Short Sell ratio (RHS) -a lot of new shorts recently
The standard six-month IPO lock-up period has now expired (December 2025), meaning the mechanical post-IPO selling overhang should largely be behind the stock. Since listing, management has sold approximately $77 million in shares, with the majority of that distribution occurring at materially higher prices in mid-2025.
USDC trading volume does not directly generate revenue like an exchange earns from transaction fees. Still, higher trading activity may temporarily increase demand for USDC or signal stronger ecosystem engagement, but it does not meaningfully impact Circle’s earnings unless it translates into sustained expansion of USDC's outstanding supply. Circle’s core revenue is driven by the size of the circulating USDC balance and the yield earned on its reserve assets, not by transactional velocity.
Circle (LHS) vs. USDC trading volumes (RHS, $ billions)
Circle’s earnings are primarily driven by the size of the USDC supply and prevailing short-term interest rates, as the company earns yield on its reserve assets rather than on trading volumes. With a USDC market cap of roughly $74 billion, every 25 basis point move in short-term rates changes Circle’s annual gross interest income by approximately $185 million (net revenue by roughly $90 million), making the company highly sensitive to Federal Reserve policy.
Circle (LHS) vs. USDC market cap (RHS, $ billions)
Both USDC trading volumes and overall USDC market capitalization have recently increased, which could help stabilize the stock, particularly if much of the anticipated shift toward a more dovish Fed leadership and lower interest rates in 2026 has already been priced in by the market.
The options market is currently pricing in an implied move of approximately ±12% following earnings, with implied volatility elevated in the 98–102% range. While volatility appears expensive on a standalone basis, positioning within the options market is skewed to the upside. Call demand is materially stronger than put demand, with notable open interest concentrations at the $64, $67, and $70 strike levels. This setup creates the potential for upside momentum if the stock (last $62) trades through those strikes, as positioning dynamics could amplify gains.
From a technical perspective, the stock appears to be testing the upper boundary of a descending triangle formation. A decisive break higher could shift short-term momentum meaningfully.
Circle (LHS)
Conclusion
Considering the significant correction from the intraday peak of $299 to current levels near the low $60s, combined with the recent increase in USDC trading volumes and market capitalization, (potentially/eventually) improving regulatory visibility around crypto market structure legislation, and an elevated short interest ratio, the probability of a rebound appears meaningful if hedge funds use the earnings event on February 25th to cover short positions.
Even if the broader outlook for Bitcoin remains cautious, crypto equities could begin to outperform on a relative basis. As the bear market progresses, hedge funds may increasingly judge that incremental downside is becoming more limited, encouraging selective short covering in high-beta names such as Circle.
While the current Bitcoin bear market may not yet be fully over, some hedge funds that have ridden the trend from roughly $200 to $60 may choose to use the liquidity around a weak quarterly print to reduce exposure. Elevated short interest increases the likelihood that earnings serve as a positioning catalyst rather than a purely fundamental event. For that reason, next Wednesday’s February 25 earnings release could mark another attempt to establish a durable floor in the stock.
Therefore, hedge funds must carefully assess whether squeezing the final percentage points of downside is worth the risk of being caught in a reversal. This dynamic is particularly important given that Circle’s short interest has risen sharply from 10.8%, when the stock was trading around $72, to 17.8% today, as the share price has fallen to $62. That suggests a significant portion of recently established short positions may already be under pressure if the stock stabilizes or rebounds after the earnings announcement.
A similar pattern unfolded after the FTX collapse, when aggressive late-stage shorting in Coinbase ultimately forced rapid covering as the stock recovered. At that time, Coinbase’s short interest rose from 18% to 29% even as Bitcoin had already begun to rebound and Coinbase shares had rallied roughly 80% by January 2023. That final wave of aggressive shorting ultimately proved both late and costly. Once shorts began to unwind, the buying pressure acted like a compressed force, driving shares sharply higher as positions were squeezed.
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