For months, the hottest investment on Wall Street has been an asset you won't even find on Wall Street: Bitcoin (BTC -2.39%). This past Friday, Feb. 19, Bitcoin surged above $56,000 per token, pushing its market cap to north of $1 trillion for the first time.
For added context, the top-performing U.S. index since the bear-market bottom on March 23 is the tech-heavy Nasdaq Composite, which has doubled in value. Meanwhile, Bitcoin is up 777% over the same time frame.
Bitcoin has a basket of both old and new catalysts pushing its valuation into nosebleed territory. This includes the traditional argument that it will help fight the natural devaluation of fiat currencies as the global money supply increases. Further, more businesses than ever are accepting Bitcoin as a form of payment in the U.S. and globally.
More recently, the world's largest cryptocurrency has been riding the coattails of Tesla CEO Elon Musk, who's not been shy about supporting Bitcoin on Twitter. Tesla also recently acquired $1.5 billion worth of Bitcoin, which will be added to the company's balance sheet.
However, not all on Wall Street are on board the crypto train. There are currently three companies that could lose anywhere from 31% to 66% of their value if Wall Street's one-year price target estimates prove accurate. This list would probably be a lot longer if more Wall Street analysts issued price targets on cryptocurrency stocks.
MicroStrategy: Implied downside of 66%
The biggest drop of all is expected from enterprise intelligence company MicroStrategy (MSTR 9.07%). If Wall Street's consensus price target is correct, MicroStrategy will lose two-thirds of its value over the coming 12 months. For reference, shares are higher by 556% in the trailing-12-month period.
The euphoria surrounding MicroStrategy has to do with its CEO, Michael Saylor, treating his company like a Bitcoin tracking index. According to the company's fourth-quarter operating results, it acquired approximately 32,200 Bitcoin in Q4 for $700 million, and spent another $10 million to buy 314 tokens in January. With the price of Bitcoin appreciating, MicroStrategy's Bitcoin-heavy balance sheet has pushed its share price notably higher.
Furthermore, MicroStrategy completed an issue of $1.05 billion in convertible notes just days ago, with estimated proceeds of $1.03 billion, after expenses. It's expected to use this $1 billion to purchase additional Bitcoin. It should be noted that the company issued $650 million in debt a few months prior and used the funds from that capital raise to acquire Bitcoin.
Personally, I view this as a highly irresponsible move by Saylor and management. It's one thing to invest a portion of unneeded company cash into Bitcoin. It's another thing to issue close to $1.7 billion in convertible debt for the sole purpose of buying a highly volatile and unproven asset.
As for the company, its full-year sales have been declining steadily since 2015. MicroStrategy has seemingly abandoned innovation and is playing a dangerous game chasing Bitcoin with cash it doesn't have. I believe Wall Street's skepticism is warranted.
Marathon Patent Group: Implied downside of 31%
Another Bitcoin stock that Wall Street isn't too fond of is mining company Marathon Patent Group (MARA 6.26%). If Wall Street's consensus target is accurate, Marathon's share price could plummet by close to a third over the next year.
Cryptocurrency mining involves using high-powered computers to solve complex mathematical equations that validate a group of transactions (known as a block) as true. The reward for doing this on Bitcoin's blockchain is 6.25 tokens, currently valued at $350,000. Thus, one of the top selling points of owning Marathon Patent Group is that a higher price for Bitcoin will yield juicier block rewards. When at full operation in the first quarter of fiscal 2022, it'll have 103,060 miners.
The other catalyst is that Marathon Patent Group purchased 4,812.66 Bitcoin in late January for an aggregate price of $150 million. That works out to about $31,168 per token. With Bitcoin north of $56,000, Marathon's $150 million investment is now worth about $270 million.
The concern is that Bitcoin is highly volatile, and it's historically plunged into multiyear bear markets after blow-off tops like we're seeing now. That could put the company's Bitcoin holdings under pressure, and it would be a major negative to Marathon's mining operations.
Additionally, keeping in mind that Marathon's mining operations are still relatively nascent, the company only generated $1.7 million in sales through the first nine months of 2020, with operating losses practically doubling to $4.9 million. That's peanuts in revenue for a company sporting a $4.1 billion valuation.
Riot Blockchain: Implied downside of 61%
A final Bitcoin stock Wall Street believes you should avoid, at least based on its one-year consensus price target, is cryptocurrency mining company Riot Blockchain (RIOT 4.67%). Riot ended last week at $71.33 a share, but has a price target of only $28. For you math-phobes out there, that's an expected nosedive of 61%.
Similar to Marathon, the Riot Blockchain strategy is to acquire new mining equipment and gobble up Bitcoin block rewards. For example, in mid-February, the company announced the receipt and deployment of 2,002 S19 Pro Antminers. This upped its mining fleet to 11,542 Antminers.
But unlike Marathon, it's not made any investments in Bitcoin. In other words, Riot is completely dependent on the ebbs and flows of the world's most popular cryptocurrency. Rather than allowing innovation to drive results, management has to cross its fingers and hope that Bitcoin heads higher, which is a dicey proposition for the highly volatile digital currency.
Like most mining companies, Riot's operating results leave a lot to be desired. Through the first nine months of 2020, the company only generated $6.7 million in revenue and produced a $16.6 million net loss. That's identical to the amount of money it lost through nine months of the preceding year.
Based on a single Wall Street estimate, Riot is expected to generate $158.6 million in sales in 2021. That would represent a more than 1,400% increase from 2020. Even then, it would be valued at 30 times sales. That's insanely high for a company reliant on Bitcoin, not innovation.