What happened
Shares of cryptocurrency mining stocks were soaring on Monday. Among them were BIT Mining Limited (BTCM +2.04%), Bitfarms (BITF 9.21%), Riot Blockchain (RIOT 5.48%), and CleanSpark (CLSK 4.17%). As of 1:30 p.m. EDT, these stocks were up 16%, 13%, 11%, and 12% respectively.
There are probably two factors impacting these stocks today. First, the price of Bitcoin (BTC +0.19%) continued rising over the weekend and currently sits around $45,900 per bitcoin, according to CoinDesk. However, today, the U.S. Senate voted to advance legislation that could hurt these companies, which may be why these stocks pulled back slightly from their daily highs early this morning.
Image source: Getty Images.
So what
You've probably heard of the massive $1 trillion infrastructure spending bill that provides much-needed spending for America's roads and bridges, among other things. What investors might not know is the bill contains a tax provision for digital assets. To condense the issue, critics say the language is too vague and, as a result, could broaden the definition of a "broker" to include any party involved in any part of the cryptocurrency exchange process.
Coinbase Global and Square objected to the infrastructure bill amendment in a joint statement with other cryptocurrency players. According to the statement put out on Aug. 4, the proposal would have made Bitcoin mining companies and hardware manufactures fit the new description of broker, placing prohibitively high restrictions on these companies. Some senators had proposed amendments to the digital asset provision to address these concerns, which these companies supported. However, today, the Senate voted to advance the infrastructure bill without those amendments.
All of this said, investors in BIT Mining, Bitfarms, Riot Blockchain, and CleanSpark don't seem too worried about the digital asset provision of the infrastructure bill. While these stocks did pull back from early highs, the pullbacks were small. Overall it appears investors are simply celebrating Bitcoin's gains over the weekend and into today. These companies generate revenue from mining bitcoins and some even hold on to the bitcoins they mine. So it makes sense why investors are upbeat.
To be clear, none of these companies released news today. They also didn't file anything with the Securities and Exchange Commission. And there weren't any prominent analysts updating their outlook for the stocks. Therefore, investors should realize that today's gains were fueled by general optimism in the cryptocurrency space. These stocks aren't up because of a positive company-specific development.
Image source: Getty Images.
Now what
Here's another way to say what I just said: Shares of BIT Mining, Bitfarms, Riot Blockchain, and CleanSpark did not go up today because for something related to business fundamentals. But, for long-term investors, the business fundamentals are always the most important thing to monitor.
To get a handle on how these businesses are doing individually, shareholders will look forward to quarterly business updates. CleanSpark is scheduled to provide results for the third quarter of 2021 on Aug. 16. Coincidentally, Bitfarms will report results for its second quarter of 2021 at the same time as CleanSpark.
Riot Blockchain and BIT Mining haven't announced when their earnings reports will be. But investors should generally be looking at the same metrics with these companies when they do report. Bitcoin mining is competitive, requiring these companies to consistently increase their computing power. This is measured with a metric called "hash rate" and the overall hash rate of the Bitcoin network has plummeted in recent weeks because China banned mining operations.
The overall drop in the hash rate of Bitcoin is an opportunity for the players still in the game -- they can gain market share and mine more Bitcoin. Expect Bitcoin production to be up for all of these companies -- a drop could be a sign of trouble. Moreover, keep an eye on these companies' plans regarding future hash-rate growth. This will provide a good idea for ongoing capital requirements.
Getting a handle on a Bitcoin-mining company's specific capital needs is important since many, like Riot Blockchain, don't sell their mined bitcoins to generate cash. For that, many often turn to the public markets, sometimes diluting shareholder value. This underscores the need to invest in companies with strong balance sheets if you're going to buy a Bitcoin-mining stock.
