What happened
The stock market closed at 2 p.m. EST on Dec. 24 and didn't reopen until 9:30 a.m. Dec. 28. During that time, the balance sheet for technology company MicroStrategy (MSTR 2.38%) increased in value by almost $300 million, thanks to bitcoin's meteoric rise over the Christmas weekend. No wonder MicroStrategy stock is soaring today. As of 2:30 p.m. EST, the stock was up 16%.
Other bitcoin-related stocks are also soaring today, but not all of these moves are as logical as that of MicroStrategy. Indeed, hype seems to be growing around bitcoin, underlining the need for investors to be discerning and selective with their investments.
Image source: Getty Images.
So what
MicroStrategy is a technology company, but CEO Michael J. Saylor recently decided to convert all excess cash (not needed for running the business right now) into bitcoin. The company even issued debt to have more investable cash. So far it's used more than $1.1 billion and it now holds around 70,470 bitcoin tokens at an average price of $15,964. For perspective, bitcoin reached all-time highs over $28,000 during this past weekend. So far, Saylor's bold move is paying off big time.
The market capitalization for MicroStrategy is around $3.4 billion with today's upward move. Therefore, the stock's market cap gains today are roughly in line with the increased value on the balance sheet. With this perspective, MicroStrategy stock's move today appears completely rational.
Bitcoin has been hot over the last three months, greatly outpacing the S&P 500. Bitcoin Price data by YCharts
That's not the case for all bitcoin-related stocks. Consider bitcoin-mining company Bit Digital (BTBT 0.36%). As of 2:30 p.m. EST, the stock was up almost 100% for the day. This move is a head-scratcher. Like MicroStrategy, Bit Digital benefits from the higher price of bitcoin. However, the size of Bit Digital stock's jump seems excessive.
Here's why: Miners essentially provide the computing power for the blockchain technology that makes bitcoin work, and they're compensated for their efforts in bitcoin. However, they accrue expenses in the real world for which they need cash, not bitcoin. Therefore, miners earn bitcoin but have to sell it to pay the bills.
Last week, Bit Digital provided fiscal 2020 results. As of Nov. 30, the company only held 122 bitcoins. Assuming the company still holds this many tokens, the company's value over the Christmas weekend increased by less than $0.5 million. By contrast, it's added over $200 million in market cap today.
Of course, that's not to say bitcoin miners shouldn't be going up at least some today. In theory, as the price of bitcoin rises, they'll be compensated more for doing the same work -- good for revenue and profit margins. Accordingly, other bitcoin-mining stocks are increasing today by a more reasonable amount. As of 2:30 p.m. EST, Marathon Patent Group (MARA +8.33%) stock was up 16%, Riot Blockchain (RIOT +2.07%) stock was up 22%, and CleanSpark (CLSK +2.03%) stock was up 15%. These moves are far more reasonable than Bit Digital's.
Image source: Getty Images.
Now what
In summary, it appears all stocks that have something to do with bitcoin went up today because the price of bitcoin continues to rise. However, not all the moves are proportional. Some, like MicroStrategy, make sense. Others, like Bit Digital, seem overdone.
Critics will no doubt point out that Bit Digital is undervalued relative to its peers. For example, one way to value stocks is the price-to-sales ratio. According to Yahoo! Finance, Marathon and Riot Blockchain are trading at 406 times sales and 135 times sales respectively. By contrast, Bit Digital trades at only 38 times sales.
In my opinion, this merely points out how overvalued stocks like Marathon and Riot Blockchain are; it doesn't show how undervalued Bit Digital is.
Don't get me wrong. I believe the price of bitcoin could head higher in 2021. Bitcoin supply was cut in half earlier in 2020 during a periodic event called the "bitcoin halving." Furthermore, institutional demand from companies like MicroStrategy has surged. Low supply with high demand can lead to higher prices, and it's partly why I bought a little bitcoin.
However, that doesn't mean bitcoin or any of these bitcoin-related stocks aren't risky -- they are. Predicting the future price of bitcoin is anything but certain, making all of these businesses hard to envision three to five years from now. That's a big deal, because investing implies a long-term time horizon.
In conclusion, although there are plenty of flashy tickers out there and some (like Bit Digital) can even double in a single day, I remain resolute in my belief investors should identify quality businesses that can compound shareholder returns for years, buy their stocks, and hold until something changes.
