The stock market's rally briefly petered out at midday on Tuesday, as investors seemed to think twice before pushing major market benchmarks too much further into record territory. The Nasdaq Composite (^IXIC 0.00%) was down very slightly as of noon EST after being up as much as half a percent earlier in the trading session.
One emerging trend on the Nasdaq and other stock exchanges has been a rise in interest in cryptocurrency stocks. With the price of Bitcoin (BTC -1.17%) briefly topping $50,000, many Nasdaq-listed stocks in the sector posted extremely sharp gains. Here's more about them and what's driving interest in their underlying businesses.
A big rise for Bitcoin-related stocks
Across the Bitcoin space, several stocks of companies involved in cryptocurrency operations did well. Riot Blockchain (RIOT -2.66%) picked up 15% at midday, while Marathon Patent Group (MARA -6.13%) rose 11%, and Bit Digital (BTBT -5.73%) added 7%.
What all three of these companies have in common is that they're involved in Bitcoin mining. Each has built up an impressive array of computer equipment that seeks to perform the calculations necessary to unlock the next block of Bitcoin. It costs money to mine Bitcoin and other cryptocurrencies, but when the price of Bitcoin rises, the potential profit from success increases.
Riot, Marathon, and Bit Digital were all close to becoming profitable when they reported their third-quarter financial results. With Bitcoin prices having skyrocketed, it's entirely possible that their fourth-quarter results will be even more favorable. If that happens, it could fuel another wave higher in the speculative moves of these cryptocurrency mining stocks.
Scared of a downturn?
What was particularly interesting, though, was that shares of MicroStrategy (MSTR -5.39%) fell 5%. The company has been aggressive in tapping cryptocurrency markets for holding available capital on its balance sheet, and it took another step forward that will further increase its leverage to Bitcoin prices.
MicroStrategy filed documents to sell another $600 million in convertible senior notes. The move follows up on similar debt-raising activity recently, and the company said it will use the proceeds to add to its stake of roughly 71,000 Bitcoin tokens as of its most recent disclosure.
With Bitcoin prices surging, the bet has thus far paid off well for MicroStrategy. The risk, of course, is that if Bitcoin falls back, it could produce significant losses that might affect MicroStrategy's ability to repay its debt.
However, the company has incorporated some alternatives for repaying bondholders under certain conditions, potentially being able to use MicroStrategy stock. Moreover, MicroStrategy might hope that its own stock price will rise high enough to encourage bondholders to convert their debt to stock, avoiding the need to liquidate cryptocurrency in the future to repay them in cash.
Be careful with Bitcoin
The cryptocurrency markets behave differently from stock markets, and even the volatility on the Nasdaq pales in comparison to the soaring and plunging prices of Bitcoin and other crypto tokens. Investors need to exercise caution before diversifying their investment exposure into cryptocurrency.
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.