What happened

Shares of crypto stocks were following cryptocurrencies lower for the second day in a row as the values of digital tokens fell in response to a governmental crackdown on Bitcoin mining in China.

Among the stocks that dove in response to the news were Coinbase Global (COIN -6.46%), which was down 4.5% as of 10:17 a.m. EDT Tuesday; Riot Blockchain (RIOT -6.62%), which had lost 9%; Microstrategy (MSTR -5.33%), which had given up 11.9%, and Marathon Digital (MARA -8.78%), which had given up 11.4%. 

Major cryptocurrencies like Bitcoin (BTC -5.47%)Ethereum (ETH -9.77%), and Dogecoin (DOGE -14.71%) were also down substantially Tuesday morning, though they -- and the stocks above -- partially recovered from those declines later in the day.

The Bitcoin logo

Image source: Getty Images.

So what

China's government has intensified its crackdown on cryptocurrency mining, use, and trading. The country was the world's leader in Bitcoin mining, but its government views the digital currency as a threat. On Friday night, Vice Premier Liu He told a gathering of finance officials that the government would "clamp down on Bitcoin mining and trading activity" as part of a policy to encourage financial stability.

The Beijing government's distaste for the use of cryptocurrencies is longstanding, but its policy of pulling the plug on mining operations is something new. Some large miners said they would stop selling machines to companies in China in response to the evolving situation.

Not surprisingly, the new policy had ripple effects across the crypto sector -- as have past announcements from the Chinese government. Crypto stocks tend to follow the currencies as the industry generally rises and falls together.

Cryptocurrency broker Coinbase, the only publicly traded crypto-trading platform, slid on the news. Its IPO in April seemed to mark the peak of the crypto boom, but Coinbase stock is now down 50% from its opening-day peak. The value of the company isn't directly tied to the value of cryptocurrencies as Coinbase makes its money on transaction fees, but interest in using and trading crypto tends to correlate with the value of the digital tokens. More new investors are drawn to cryptocurrency when the asset class is rising as it was through the first few months of 2021 than are when it's falling as it has been recently.

Riot Blockchain is a cryptocurrency miner, and its stock price generally rises and falls with the price of Bitcoin. Riot performs all of its mining at a single facility in upstate New York, and has no plans to add new facilities, so it's not directly affected by Chinese policies on mining. However, any potential restrictions on crypto mining could scare investors away from stocks like Riot, and the falling price of Bitcoin has a direct impact on its business.

Marathon Digital, another cryptocurrency miner, also has no operations in China -- its fleet of nearly 13,000 mining machines is based in Montana. But it's still subject to the same geopolitical and regulatory concerns that are driving the crypto market, and falling Bitcoin prices will weigh on its business and its stock price.

MicroStrategy CEO Michael Saylor is one of the biggest Bitcoin bulls on social media, and the company has not only put its own cash on hand into the cryptocurrency, it has sold bonds and taken on debt specifically to buy still more Bitcoin. Just yesterday, the software company said it had bought 13,005 tokens for an average price of $37,617, and now holds more than 100,000 Bitcoins. If the price of the cryptocurrency falls, it will naturally continue to drag MicroStrategy's stock down with it.

Now what

Cryptocurrencies will remain volatile, and the news out of China could just be a fleeting challenge to the sector. Still, the cries of "buy the dip" that were heard during past crypto sell-offs seem more muted this time in the wake of the Coinbase IPO, when cryptomania among retail investors peaked.

With the U.S. now more or less fully reopened from its COVID-19 closures, some Americans who had taken up crypto investing during the worst of the pandemic may be returning to other forms of entertainment, especially as the tokens' prices keep falling.

Still, China's crackdown shouldn't shake the core argument for cryptocurrencies, which is that they can serve as alternatives to national fiat currencies. In fact, China's restrictive new policies could offer an opportunity for crypto bulls to demonstrate the resiliency of Bitcoin, though that doesn't appear to be happening at the moment.