What happened
Shares of cryptocurrency stocks and cryptocurrencies themselves came roaring back to life on Thursday. Both had seen steady declines over the last several days. Marathon Patent Group (MARA 0.05%) did have company-specific news today. And MicroStrategy (MSTR +1.88%) reported earnings after the market closed. But today's stock moves seem catalyzed by something else.
Here's how much these cryptocurrency stocks soared today:
- Shares of Marathon Patent Group were up 12%.
- Shares of Riot Blockchain (RIOT +1.94%) were up 11%.
- Shares of Bit Digital (BTBT 0.59%) were up 21%.
- Shares of MicroStrategy were up 7%.
- Shares of Canaan (CAN 0.83%) were up 12%.
- Shares of Future FinTech Group (FTFT 0.79%) were up almost 15%.
- And as of 4 p.m. EST, the price of bitcoin was up 3.6% over the previous 24-hour period, according to CoinDesk (and closer to 10% higher from 24-hour lows). Other cryptocurrencies were also rising.
What's going on, and what should investors do?
Image source: Getty Images.
So what
Previously, I noted how the trading volumes for these cryptocurrency stocks had fallen as the GameStop short squeeze sparked a mania in the market. These previous darlings lost their luster as traders went searching for stocks that, like GameStop, had a lot of short interest. As trading volume rose with those stocks, volume fell with these cryptocurrency stocks.
I don't think it's a coincidence that the price of bitcoin and shares of cryptocurrency stocks started rising right as brokerages like Robinhood started restricting trades on GameStop stock and others. The way I see it, traders are going to speculate on something. As they lose the ability to play the GameStop-and-company trade, they're turning back to stocks that have been good trades over the last three months. Just look at the returns (even after recent declines):
Chart displays three-month returns. MARA data by YCharts.
For this reason, it seems likely to me that traders are returning to these stocks. After all, Robinhood and other brokerages aren't restricting these cryptocurrency trades. The return of the traders helped these stocks come roaring back to life today. That said, the price of bitcoin is up today, which has an added benefit.
Just as a reminder, companies like MicroStrategy, and now Marathon, hold bitcoin tokens on their balance sheets. So when bitcoin goes up, so does the paper value of these digital assets.
Companies like Riot Blockchain, Bit Digital, and Marathon mine bitcoin. As its price rises, their revenue potential does, too. But it comes with a catch. These companies typically have to buy more equipment as mining gets more competitive, which is why this is good for Canaan. Its business is cyclical, but as mining equipment comes back in high demand with the higher price of bitcoin, the company has a chance to return to growth.
Of these companies, the one with the least direct relationship to bitcoin is Future FinTech, but there is some connection. This company is pursuing blockchain technology (although it was previously a fruit juice company). Specifically, it recently secured a patent that allows bitcoin to be an accepted form of payment online. To an extent, it's reasonable to assume that the more bitcoin rises, it's possible that it could be used more often as a form of payment. That's why Future FinTech is up today along with the price of bitcoin.
Image source: Getty Images.
Now what
As much as ever before, I believe investors need to be fixated on the business fundamentals of the companies they own. There's so much noise right now that sound judgment is easily clouded. Trading volumes will swing. Bitcoin will be volatile. But we're investing in businesses for the long term. And every now and then we get updates into how those are doing. That's where mental energy should be spent.
Like for example, today Marathon announced it has given a grant to bitcoin developer Jonas Schnelli to develop applications for the bitcoin blockchain network. That's not immediately material for the company; it's long-term business prospects will still boil down to mining bitcoin, reducing energy costs, selling bitcoin at opportune moments, and being an adept capital allocator. But the Schnelli grant is worth exploring if you're a shareholder. Will this increase bitcoin's adoption? Will it have a good return on investment for Marathon?
Then there's MicroStrategy. It reported fourth-quarter earnings after the close, and revenue was down 1.7% year over year. It's just the latest lackluster quarter for the company. Investors hadn't given MicroStrategy much thought until it purchased 70,784 bitcoin tokens in recent months (and the value has roughly doubled since then, by the way). But in the fourth-quarter press release, management said that its unique bitcoin strategy is making it a thought leader and generating interest in its technology products. Could bitcoin actually cause MicroStrategy to start winning new business? It's worth monitoring in quarters to come.
The point is, day by day, there will always be something to distract long-term investors from the things that really matter. Part of growth for an investor is learning to tune out things that are here today but gone tomorrow.
