What happened

Shares of The9 Limited (NCTY -9.33%) got crushed on Friday. The company told investors that it found someone to head up its new cryptocurrency division. And given how much this stock has run up on cryptocurrency hype, you'd think that would send this stock higher. But as of 3:30 p.m. EST, The9 stock was down 17%.

So what

Keep in mind that while The9 stock is down 17% today and down roughly 60% from highs earlier this month, it's still up almost 900% year to date. The surge started when the company announced it was going to start mining cryptocurrency in early January. Since then, it's announced the purchase of mining equipment for Bitcoin (BTC -1.81%) and Filecoin (FIL 7.48%). (Different cryptocurrencies often require different kinds of mining equipment, which is the case for Bitcoin and Filecoin.)

A red arrow crashes down through the floor as a businessman looks on.

Image source: Getty Images.

The price of Bitcoin has fallen sharply from all-time highs, as has Filecoin, which is partly why The9 stock is down so much from previous highs. And with the price of crypto still floundering, it's not surprising to see The9 stock down today as well.

Now what

The9 previously announced it was getting into electric vehicles, but last year it only generated revenue from video games. And its video game business is struggling. Investors, therefore, should hope that Cai ZhiFang, who will lead the cryptocurrency operation, is up to the challenge. He does have plenty of experience in the industry, so shareholders can be encouraged by that.

NCTY Chart

Year-to-date returns for The9 stock compared to the S&P 500. NCTY data by YCharts

However, a word of caution regarding valuation: The9 stock is actually far more pricey than it seems. Outlets like Yahoo! Finance base the company's market capitalization on just 10.4 million American depositary shares (ADS), which are the ones that trade on the U.S. stock exchange. But this is just a sliver of reality.

According to a Jan. 4 press release, The9 issued over 200 million warrants redeemable for one share of common stock each -- this is equivalent to almost 7 million ADS. Most of these warrants could be exercised at just $3.70 per ADS. The rest of the warrants can be exercised at $8 per ADS. Considering The9 stock trades around $35 per ADS as of this writing, the warrants were in the money long ago.

Therefore, it's possible for the owners of the warrants to exercise them and sell shares for a profit. For that reason, be aware that there could be a lot of sellers of The9 stock in the near term. For investors who are only buying stock in companies they believe in for the long term, near-term pressures aren't a problem. But for those looking to make a quick buck from cryptocurrency stocks as Bitcoin and other altcoins rise, this is a reminder to be careful. The short term is an unpredictable, and potentially volatile, time period.