What happened

Elon Musk updated his Twitter profile to include the bitcoin hashtag early Friday morning. And when Musk does something like this, he has the power to influence the market. The price of bitcoin spiked following his profile update. And as we'll see, he's not the only prominent figure giving the popular cryptocurrency a boost today.

As of 11:15 a.m., bitcoin was around $37,400 per token, up 17.7% over the previous 24-hour period, according to digital currency news site CoinDesk. And stocks that mine and hold bitcoin were soaring as well.

  • Shares of Marathon Patent Group (NASDAQ:MARA) were up 11%.
  • Shares of Riot Blockchain (NASDAQ:RIOT) were up 11%.
  • Shares of Bit Digital (NASDAQ:BTBT) were up 9%.
  • Shares of Grayscale Bitcoin Trust (OTC:GBTC) were up 10%.
  • And shares of MicroStrategy (NASDAQ:MSTR) were up 18%.

Even a cryptocurrency called Dogecoin was in the news. It's up roughly 225% over the past 24 hours and is now in the top 10 largest cryptocurrencies by market capitalization. While I'd normally ignore Dogecoin (considering it was created as a joke), I believe it's relevant to what's going today, as we'll see in a moment. 

Stacks of golden coins display the bitcoin symbol.

Image source: Getty Images.

So what

First, today's story should be framed with the broader context of what's going on in the market. GameStop is in the middle of an epic short squeeze, caused by abnormally high short interest, and catalyzed by a group of retail investors buying shares in concert. GameStop, and a group of other stocks with a lot of short interest, have skyrocketed during this past week as a result.

But then yesterday, brokerages like Robinhood and others started limiting how many shares of GameStop could be purchased (for a while you couldn't buy any at all). It appears some of these retail investors, in frustration, then turned to cryptocurrencies, an asset class that's perceived to be impervious to unwanted control and oversight. The parabolic rise of Dogecoin corresponds with the decision by brokerages to limit trading on certain stocks.

A visibly frustrated stock trader places his hands on his head while looking at his computer.

Image source: Getty Images.

Therefore, it would seem that a herd of retail investors was already looking for alternative trades. Initially, it was Dogecoin. But their appetite for alternatives was then served an unexpected entree when Musk appeared to throw support behind bitcoin. And it wasn't just Musk. Even Ray Dalio, the famous billionaire behind the Bridgewater Associates hedge fund, marveled at the invention of bitcoin yesterday.

On Bridgewater's website last night, Dalio sought to clarify his position on bitcoin because he believes the media is mischaracterizing his intent. In the article, he regularly asserted that he's not a bitcoin expert and therefore isn't giving advice. But his team is exploring the balance of supply and demand and what that could mean for the future value of bitcoin tokens.

This sequence of events is impacting the price of bitcoin today. And it directly affects the share prices of MicroStrategy, Marathon, and Grayscale Bitcoin Trust. All three hold bitcoin tokens (Grayscale holds them exclusively). For its part, MicroStrategy holds 70,784 bitcoin tokens. And Marathon just bought 4,813 tokens that it plans to hold. When bitcoin gains 17%, as it has today, then the value of these companies' holdings rises by the same amount.

How much the rising price of bitcoin benefits bitcoin-mining companies is less straightforward. Marathon, Riot Blockchain, and Bit Digital are all unique companies. Each has its particular mining capacity, ongoing expenses, and decisions from management that potentially create or destroy shareholder value. That said, investors seem content to continue bidding these up regardless of the individual business fundamentals, so long as bitcoin is going up.

MSTR Chart

Three-month returns for bitcoin, bitcoin stocks, and the S&P 500. MSTR data by YCharts.

Now what

Don't rush out to buy bitcoin and bitcoin stocks (not even Dogecoin) based solely on this week's events. Keep in mind how quickly today's narrative developed. Just as quickly, the narrative could spin the opposite way, sending these assets tumbling. Every day the financial news cycle drives a hamster wheel of volatility. Be careful not to take long-term action on short-term news.

Long term, stocks go up and down based on demand, and businesses executing on their long-term vision tend to be those in-demand stocks. For that reason, it's important to never lose sight of what's going on with the business. 

Yesterday, MicroStrategy reported fourth-quarter results. This is material news for shareholders. Full-year revenue was down 1%, which isn't good. However, subscription billings for the company's software were up 41% year over year. That's significant, and it's something CFO Phong Le believes investors should be watching. In the conference call, Le said subscription billings were the "top operational priority" for 2021, distinguishing this from the impact bitcoin will also have on the stock in the coming year.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.