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Silvergate’s short seller and when it pays to listen to FUD

If they’d had social media at the siege of Troy, Cassandra’s prophecies might have gone viral.

Short sellers who hope to profit from a fall in a share price are stock market Cassandras.

In Greek mythology the gods blessed the Trojan princess with the gift of foresight. Their curse was that no-one would believe her.

Short sellers are sometimes proved right, however. One of them, Marc Cohodes, was interviewed by our editor in chief Trista Kelley.

NOW READ: Silvergate short seller says he’s betting against Signature: ‘Binance is next’

Cohodes bet on the fall of Silvergate, bankers to the crypto exchange FTX, which collapsed in November.

On March 8, the day our interview was published, Silvergate’s holding company announced that it will wind down operations and voluntarily liquidate the bank.

‘No-one seems to mind people making money on the way up’

Cohodes retweeted the interview to his 200,000 followers.

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“Viral is a strong word,” Trista says, “but for a tiny newsroom like us, it went viral. It is one of our most viral stories.”

An experienced financial reporter who worked for Dow Jones, Bloomberg and Insider, Trista says there is a “shoot-the-messenger type of mentality when it comes to negative news about stocks.”

Short sellers “are the canaries in the coal mine. Somewhat unfairly they are seen as the garbage men or the vultures in the market.”

NOW READ: Hedge fund short seller says Silvergate crash may be a sign of the bottom

She stops short of praising short sellers, saying “I’m not going to say that they’re all squeaky clean, but they put their money where their mouth is” and take much greater risks than other investors.

An investor who buys stock in the hope that it will rise stands at worst to lose the initial outlay. Betting on a fall in the value is a far riskier strategy that can cost much more than the amount at stake.

“No-one seems to mind people making money on the way up,” Trista notes.

“But if you say, ‘I think the stock will go down because I don’t believe in the fundamentals, or I do not believe the executives are telling the truth, or I don’t believe that the business model is very robust,’ all of a sudden the knives come out for those people.”

Market experience and careful, informed analysis sometimes count for nothing, however. All markets are unpredictable, but crypto can be chaotic.

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Trista recalls the so called meme-stock craze during the Covid pandemic, when young, often first-time investors piled into their favourite stocks including gaming retailer GameStop and cinema chain AMC Entertainment.

“Some big hedge funds were shorting GameStop. The short interest was sky high. All of a sudden an army of retail investors go in and buy the stock, and that hurt one hedge fund [Melvin Capital] so bad that it later went under. It had nothing to do with the underlying health of the asset.”

“Crypto is full of that. Short sellers have to contend with that sort of hype,” she adds.

Cohodes won’t touch crypto – he said he has never risked even one dollar on any cryptocurrency. But he said that he believes Signature and Binance are vulnerable.

“It can sometimes pay off to listen to these very bearish Cassandra types,” Trista says.

Watch this space.

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