What happened
Bitcoin was rising again on Tuesday. As of 4:15 p.m. EST, bitcoin was up 8% over the previous 24 hours and had briefly surpassed $34,000 per token earlier in the afternoon, according to CoinDesk. Its daily high of $34,221 was within 1% of its all-time high, which was hit over this past weekend.
Most days when bitcoin is up, cryptocurrency stocks track higher, as well. There's some fundamental basis for this (as we'll see in a moment). But other factors impact stock prices, as well. Indeed, crypto stocks showed no real correlation to the price of bitcoin today. Some were up, some were down, and some traded sideways.
- Going up today were shares of bitcoin mining companies like Marathon Patent Group (MARA 9.78%) and Riot Blockchain (RIOT 10.13%), up 23% and 12%, respectively.
- Down a little were shares of bitcoin mining company Bit Digital (BTBT 2.59%), along with shares of Canaan (CAN -18.25%), a company that manufactures equipment for mining bitcoin. These both fell a mere 5%.
- Finally, Ebang International Holdings (EBON -11.04%) is another company manufacturing bitcoin mining hardware, and its stock was down a painful 13%.
Image source: Getty Images.
So what
Bitcoin miners run the bitcoin blockchain network and are paid in bitcoin. These companies pay for workers, computers, real estate, and electricity in fiat money. Therefore, they have to sell their bitcoin tokens to non-miners who want to own bitcoin. Therefore, revenue potential for Marathon, Bit Digital, and Riot Blockchain is subject to the market price of bitcoin. As it rises, so does the revenue potential for these companies.
This explains why investors get excited about bitcoin mining when the price of the cryptocurrency goes up. But what about hardware companies like Ebang and Canaan? Sales for these two companies were largely down in 2020. But as bitcoin mining becomes more profitable, there's greater potential for a new bitcoin mining craze, which could cause sales to rise again for Ebang and Canaan.
When bitcoin goes up, it's good for these stocks. But this is only generally speaking. Investors should not just trade in and out of these stocks based solely on the price of bitcoin.
Image source: Getty Images.
Now what
Trading solely based on the price of bitcoin is a bad idea because in the short term, anything can happen with stocks. Consider that these are all small-cap stocks and are easily manipulated.
Sure, you could get lucky on a day trade. For example, anyone trading in and out of Bit Digital recently is clearly happy, considering it's nearly tripled over the past five trading days alone. However, these stocks could easily become the target of a famous short-seller. Given how easily these can be manipulated, these stocks would likely plummet on a development like that -- at least in the short term.
More importantly, these are all real-life businesses that could, at any time, report things unique to their companies. Sometimes it's good news; sometimes it's bad news.
For example, yesterday the price of bitcoin was mostly rising, whereas Marathon stock was mostly falling. It spiked at the open and finished up for the day. But it steadily declined from early session highs. This is likely because of its announced capital raise of $200 million to help purchase additional equipment from Bitmain, increasing its mining capability. That's good.
However, because of this, the company's share count is rising at an alarming pace, eroding shareholder value. Currently, Marathon has almost 75 million shares outstanding. For perspective, it had less than 8.7 million on March 31, 2020.
Considering how overvalued these stocks appear to be, you can't blame Marathon for taking advantage of its high stock price. Indeed, $200 million from selling its stock is lightyears beyond what its business is capable of generating in revenue right now. In fact, I wouldn't be surprised if all of these companies announce more dilutive moves in the near future. If any do make such an announcement, their stock will likely fall, regardless of what the price of bitcoin happens to be doing that day.
These are just a couple of reasons why eyeing short-term gains can be a dangerous game when it comes to stocks. It's hard to predict. However, in the long term, stocks strongly correlate with business fundamentals like revenue and profits, which is much easier for average investors like you and me to envision.
