What happened
Cryptocurrency stocks weren't feeling the love on Wednesday, with many of them trading lower during the session. The falling price of bitcoin likely played an outsize roll in this because most of these companies didn't report any company-specific news, but their stocks were down nonetheless. Here are some examples, as of 3:45 p.m. EST:
- Shares of Hut 8 Mining (HUTM.F +0.00%) were down 13%.
- CleanSpark (CLSK 5.54%) stock was down 7%.
- MicroStrategy (MSTR 3.67%) was down 6%.
- Grayscale Bitcoin Trust (GBTC +0.72%) was down 6%.
- The price of bitcoin is down 4.1% over the past 24 hours, according to CoinDesk.
Here's why each stock is down today and what investors should expect.
Image source: Getty Images.
So what
When it comes to the price of bitcoin, MicroStrategy stock and Grayscale Bitcoin Trust stock are strongly correlated. That's because each holds a large amount of bitcoin tokens. For Grayscale, the reason is simple: Holding bitcoin is the reason the fund exists in the first place. Its goal is to make it possible for individuals and hedge funds to invest in bitcoin, without the hassle of owning a bitcoin wallet or going through a cryptocurrency exchange. Shares of the trust can be purchased in a brokerage account like a regular stock.
Because Grayscale's net asset value is tied to the price of bitcoin, it logically goes up and down with bitcoin (although its moves are often irrationally more pronounced). The same goes for MicroStrategy. The company recently decided to hold bitcoin tokens on the balance sheet in lieu of excess cash; it held 70,470 of them as of Dec. 21. The value of those tokens is somewhere in the ballpark of $2.5 billion. Considering its market capitalization is only $5.2 billion, a disproportionate part of the stock is tied to bitcoin, meaning it will likely stay as volatile as cryptocurrencies for the foreseeable future.
This also goes for Hut 8. Although it mines bitcoin, it holds quite a bit more of it on its balance sheet than many of its bitcoin mining peers (2,851 bitcoin tokens as of its latest update earlier this month). Because it chooses to hang on to as much bitcoin as it can, its revenue is lower than it could be. But this way, the value on its balance sheet is going up faster as the price of bitcoin rises. This may be a good strategy, but it does peg this small-cap stock to the price of bitcoin.
Image source: Getty Images.
Turning to other bitcoin mining stocks, only CleanSpark had news to report today. Just a little more than a month ago, the company acquired a mining operation called ATL Data Centers. According to today's update, it's mined 56 bitcoin tokens since then. CleanSpark has sold 25 to generate revenue and continues to hold the other 31. Therefore, the company has generated mining revenue of over $1.6 million since the acquisition.
That's a big deal for CleanSpark. The company is primarily an energy technology company. For its fiscal 2020 (prior to generating revenue through bitcoin mining), it only had revenue of $10 million. So its acquisition has added quite a bit to its top line.
Image source: Getty Images.
Now what
While significantly increasing revenue could be seen as a good thing, the reality is many bitcoin-mining stocks are extremely overhyped. On days like today when bitcoin is down, it deflates some of that enthusiasm, and these overbought stocks fall hard. That's true of CleanSpark but also other companies like Marathon Patent Group and Riot Blockchain. Accordingly, Marathon stock plummeted today, and Riot Blockchain stock came crashing down.
Some might think that bitcoin is down today because Joe Biden was just inaugurated as president, and it's possible cryptocurrencies could face greater scrutiny under his administration. But I would contend that explanation likely isn't adequate. First of all, the U.S. doesn't control bitcoin -- large countries like Russia and China have a lot of adopters. Furthermore, Biden was elected weeks ago and the views of his cabinet-position nominees were known well before today.
The price of bitcoin is far more complicated to predict, in my opinion. At a basic level, if demand for bitcoin outpaces supply, than the price can go up. Predicting demand, therefore, is a key element to predicting price. I think it's possible for demand to go up. But I admit it's just an educated guess since demand is hard to foresee.
Because this is a complicated space, investors should remember that cryptocurrencies and the stocks associated with them are risky investments and probably shouldn't make up a significant part of a long-term portfolio.
