What happened
The price of popular cryptocurrency Bitcoin (BTC 3.01%) has risen dramatically in recent months and this morning it hit a new all-time high. According to CoinDesk, it hit $51,735.38 per token around 5:30 a.m. EST today. It's a continuation of an impressive 2021 rally, fueled by increasing acceptance of the cryptocurrency by Wall Street.
The rising price of Bitcoin is also sparking booming interest in Bitcoin mining, which is why a lot of stocks were up today. Here are just a few movers as of noon EST:
- Shares of Ebang International Holdings (EBON 3.92%) were up as much as 43% early in the trading session but were still trading 13% higher as of this writing.
- Shares of Riot Blockchain (RIOT 5.48%) were still up 12% but had been up 21%.
- Shares of The9 Limited (NCTY +1.58%) was only up 1% but had been trading 16% higher.
- Shares of Canaan (CAN 2.51%) were actually down slightly, erasing a 13% early gain.
Today, there's new evidence of Bitcoin's increasing acceptance on Wall Street. There's also fresh evidence that a Bitcoin-mining boom is under way. Here's what's going on and what investors can expect moving forward.
Image source: Getty Images.
So what
In recent weeks, we've seen companies like Tesla warm up to the idea of holding Bitcoin tokens in lieu of cash. And we've seen financial institutions like Mastercard and Bank of New York Mellon commit to increasingly supporting cryptocurrency transactions. This could all be early signs of a broad trend of Bitcoin's acceptance by Wall Street. But one of the earliest and most enthusiastic adopters is MicroStrategy (MSTR 1.82%).
MicroStrategy spent over $1 billion buying Bitcoin tokens in 2020. And yesterday, it announced it's going back for a lot more. Initially, it was going to issue convertible notes for $600 million to fund additional Bitcoin purchases. Today, it announced that the offering has increased to $900 million. MicroStrategy stock is down sharply on this news -- around 5% today as of this writing.
Here's the thing: Demand from MicroStrategy alone is capable of outpacing Bitcoin's supply in the near term. At a current Bitcoin price around $51,000, the company could buy over 17,000 additional tokens for $900 million. However, according to multiple estimates, only around 900 new Bitcoin tokens are mined per day. Therefore, near-term demand from MicroStrategy is roughly 20 times Bitcoin's new daily supply. And in general economic terms, when demand is greater than supply, prices go up.
Image source: Getty Images.
This doesn't account for additional Bitcoin supply from holders who decide to sell. But it also doesn't account for additional demand from sources other than MicroStrategy. What happens if Wall Street increasingly accepts the practice of holding Bitcoin and major public companies start buying? The thought is tantalizing, and it's why so many companies are jumping into Bitcoin mining.
Today, Ebang announced that it's getting into Bitcoin mining. The company manufactures equipment for mining, recently launched operations for mining Litecoin and Dogecoin, and it has plans for launching a cryptocurrency exchange in the near future. However, it believes there's an additional opportunity in Bitcoin mining.
The9 also recently announced it's going to mine Bitcoin and Filecoin, diversifying away from its struggling video game operations. Moreover, Bitcoin mining pure-plays like Riot Blockchain have been beefing up their mining operations. All of this means that companies are buying up a ton of mining equipment, which is good for companies like Canaan. Canaan has already announced it will be running at capacity in 2021.
Six-month returns for these cryptocurrency stocks, Bitcoin, and the S&P 500. Bitcoin Price data by YCharts
Now what
If Bitcoin is truly reaching a new stage of adoption -- acceptance by Wall Street -- then the price of Bitcoin could go higher still. In recognition of this possibility, more companies are either starting to mine Bitcoin or are increasing their mining power. But here's where this gets a little tricky.
The amount of Bitcoin received for mining is proportional to the percentage of power each company brings to the Bitcoin blockchain network. This is measured with a metric called the hash rate. According to Blockchain.com, the total hash rate of the Bitcoin network has increased significantly in recent months -- currently around 154 million tera-hashes per second (TH/s). Unless Bitcoin mining companies increase their hash rate faster than the total hash rate, then they'll actually receive less Bitcoin for the same work.
With the price of Bitcoin rising, perhaps it doesn't matter. Then again, this space is getting more competitive, which could spell trouble down the line. Furthermore, manufacturers of mining equipment like Ebang and Canaan might be enjoying increased sales now. But this industry ebbs and flows. That's why the more diversified a business is, the safer it is as a long-term investment.
This article represents the opinion of the writer(s), 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.
