What happened
Shares of several leading cryptocurrency stocks soared this week. Mining hardware makers Canaan (CAN -2.65%) and Ebang International (EBON 2.89%) peaked on Thursday at week-long gains of 36.9% and 25.3%, respectively. Digital currency miner The9 (NCTY -0.44%) joined the party with a 38.4% jump on Friday afternoon. All of these companies are extremely sensitive to token prices and general interest in Bitcoin (BTC 0.72%), and the leading cryptocurrency stabilized its pricing this week after a tumultuous May.
So what
Bitcoin started May with prices just below $60,000 per token. That hefty price tag was cut to roughly $35,000 per token by the end of last Friday. Tesla (TSLA -2.71%) CEO Elon Musk was backing down from his public Bitcoin support last month, arguing that the cryptocurrency is taking a heavy environmental toll due to coal-powered mining operations in China, and his words always carry a lot of weight with crypto enthusiasts.
Crypto traders were aching for stability and they got it this week. As of 2 p.m. EDT today, Bitcoin prices had gained 3% over the last seven days. Musk was approached by several leading cryptocurrency analysts and crypto-friendly business leaders, who pointed out that a lot of the crypto mining that goes on today is powered by alternative energy sources such as solar panels and hydropower.
Canaan also reported first-quarter results this week. Sales rose nearly fivefold year over year, landing at $61.5 million. The company showed an adjusted net profit of $21.9 million. That net margin works out to a healthy 36%, up from 56% in the year-ago period. Canaan is delivering more mining chips and systems than ever in this cryptocurrency bull market. Ebang investors took Canaan's solid results as a good sign for the mining hardware sector, and both stocks jumped in tandem on the news.
China-based The9 waded into the environmental debate on Friday when it made a concerted push into Canada. The9 is taking a controlling stake in Calgary-based mining infrastructure Montcrypto, pledging to build a 20 megawatt facility powered by locally sourced natural gas on a carbon-neutral basis. The company also invested in Manitoba-based Skychain Technologies, paving the way for a total Canadian mining capacity of 32 megawatts. The9 is "actively seeking" additional environmentally friendly mining opportunities in Canada and elsewhere.
Image source: Getty Images.
Now what
The environmental debate around Bitcoin and other tokens will continue, and so will the volatility of leading cryptocurrencies. Investing in companies close to the production side of the digital currency market can be a thrilling experience from time to time, but it can also be scary when the bull market runs out of rocket fuel. Stocks like Canaan, The9, and Ebang are highly speculative and I would not recommend betting the farm on any of them. Their promise of huge returns must be balanced against significant financial risks. There's a real risk that any or all of these companies might take a wrong turn with no real safety net, wiping out your investment.
A far safer way to approach this volatile sector is to invest in established companies that take an active interest in Bitcoin as a long-term store of value. Tesla is the most obvious choice here after investing $1.5 billion in Bitcoin out of $17 billion in total cash reserves. If Tesla's Bitcoin investment becomes worthless, there will still be plenty of cash left in its coffers.
