What happened
The price of bitcoin blasted past $20,000 for the first time ever on Wednesday, and it has continued climbing. As of 12:30 p.m. EST, bitcoin was around $20,600.
Bitcoin's 7% move was reflected in surges for other cryptocurrencies. For example, Ether (the native token for the Ethereum blockchain) is up 6% over the past 24 hours, according to CoinDesk. Likewise, Ripple is up 9% over the last 24 hours.
When bitcoin moves, it also pulls cryptocurrency-related stocks higher, as well. Consider the following jumps:
- MicroStrategy (MSTR +5.62%) stock was up 7%.
- Marathon Patent Group (MARA 0.97%) stock was up 17%.
- Canaan (CAN 0.66%) stock was up 8%, but had been 15% higher earlier in the session.
- Xunlei Limited (XNET 7.71%) stock was up 3% but had been 18% higher earlier in the session.
- Riot Blockchain (RIOT +2.67%) stock was up 9%.
- Grayscale Bitcoin Trust (GBTC +3.91%) stock was up 10%.
How does the price of bitcoin affect these companies? And what do these big moves mean for investors?
Image source: Getty Images.
So what
These companies all benefit from the rising price of bitcoin in different ways. Some companies hold bitcoin. Others mine bitcoin -- which is the process of unlocking a new supply of bitcoin tokens. And some sell hardware so other companies can mine bitcoin. Obviously, these businesses all have very different value propositions.
Companies that hold bitcoin are the best candidates to rise and fall with bitcoin's price. For example, MicroStrategy has cash on hand for working capital, but everything else is held in bitcoin reserves. As of Dec. 4, the company held 40,824 bitcoins. Its average price per bitcoin is around $11,600, so it's already seen an almost 80% return.
This quick appreciation is motivating MicroStrategy to buy more. In fact, it just issued $635 million in convertible notes for the express purpose of buying more bitcoin.
Another company that should move with bitcoin is Grayscale Bitcoin Trust. Even though it trades over the counter (OTC), it calls itself the first public exchange traded fund (ETF) for cryptocurrency that reports to the Securities and Exchange Commission (SEC). As a bitcoin ETF, it holds bitcoin, logically meaning its price goes up and down with the cryptocurrency.
Moving to mining, Marathon Patent Group generates revenue directly from mining operations. Similarly, 99% of Riot Blockchain's revenue comes from mining.
Mining cryptocurrencies is expensive; the companies have to invest in facilities, computing power, and electricity for running computers and air conditioning to keep equipment from overheating. Bitcoin prices haven't kept up with mining costs in recent years, meaning both Marathon and Riot Blockchain have recorded massive operating losses in 2020 -- $4.9 million and $18.5 million, respectively.
Prices current as of 12/15/2020 and do not reflect their big upward move on 12/16/2020. Bitcoin Price data by YCharts.
With the rising value of bitcoin and other cryptocurrencies, perhaps miners like Marathon Patent Group and Riot Blockchain can start turning some profits in 2021, which would be an encouraging development for shareholders.
Finally, we come to companies that could benefit indirectly from the rising price of bitcoin. Canaan manufactures equipment that can be used to mine bitcoin. As the price rises, it could inspire more mining activity, leading to increased sales for the company. However, it's important to note that this isn't a foregone conclusion. Miners are just as likely to purchase mining equipment from other companies.
For its part, Xunlei Limited operates a Blockchain-as-a-Service (BaaS) business. Blockchain is the promising technology that bitcoin lives on. Of all the moves today, this one is the biggest head-scratcher. Perhaps investors see the rising price of cryptocurrencies as validation of blockchain technology, giving investors hope for the future prospects of BaaS.
Image source: Getty Images.
Now what
I'm not surprised to see bitcoin blasting higher. My thesis goes something like this: Bitcoin has a limited supply of tokens. Demand is growing from investors buying and holding, but also from corporate entities like MicroStrategy choosing to use and hold tokens. As bitcoin demand surges, limited supply could cause its value to increase steadily over time.
However, bitcoin and other cryptocurrencies are very risky investments. They differ from stocks in a very important way. Stocks have intrinsic value; cryptocurrencies do not. If demand for any of these tokens drops to zero, then so will their values. By contrast, stocks represent a piece a a real-world business, meaning they have value.
Of all these bitcoin-related stocks, MicroStrategy is the most investable, in my opinion, because it has a business outside of bitcoin. The company has been in business for over 30 years and generates real revenue and cash flow.
The only difference between MicroStrategy and comparable technology companies is it's just holding bitcoin instead of excess cash. If bitcoin goes up, it'll prove to be a good strategy. Of course, if bitcoin plummets, this will destroy long-term shareholder value.
