What happened
It was a bad week for investors in popular cryptocurrency Bitcoin (BTC -4.09%). On Aug. 14, the price per token briefly eclipsed $48,000, but it's been on a downward trend since. As of this writing, Bitcoin is around $46,400, according to CoinDesk.
However, there are Bitcoin stocks that were even bigger busts this week. This includes technology company MicroStrategy (MSTR -5.45%), which was down 7% for the week, as of the market's close on Thursday. Bitcoin mining stocks have faired even worse, with shares of Riot Blockchain (RIOT 0.25%), Ebang International (EBON -2.38%), and Bit Digital (BTBT 0.90%) down 10%, 11%, and 11%, respectively.
Image source: Getty Images.
So what
MicroStrategy was the only company of this group with an eye-catching headline this week. More specifically, the company's CEO Michael Saylor made headlines when he said Bitcoin will be a $100-trillion asset someday. Saylor has made this assertion in the past, but he reportedly reiterated this on Aug. 18 during a webcast entitled "Can Bitcoin Join Gold at the Alternative Asset Table?"
Of course, that's a bold statement from Saylor. According to CoinMarketCap, Bitcoin's market capitalization is currently around $875 billion. To reach $100 trillion, it would need to go up around 114 times in value from where it is now.
To Saylor's credit, it appears to be more than just empty talk on his part. His company MicroStrategy famously became an acquirer and holder of Bitcoins late last year, choosing the cryptocurrency over cash. As of late July, it held more than 105,000 Bitcoins, currently valued at almost $5 billion.
For perspective, the market cap for MicroStrategy is only $6.6 billion. For better or for worse, this stock's performance is directly tied to that of Bitcoin.
However, the moves tend to be more pronounced. When Bitcoin is up, MicroStrategy is often up more. The reverse is also true, as this week illustrates. A mere 3% drop for Bitcoin resulted in a 7% drop for MicroStrategy. It hardly matters what MicroStrategy's business is doing.
To a certain extent, the same thing applies to Riot Blockchain, Ebang, and Bit Digital -- except here, the business is Bitcoin. These three companies acquire Bitcoins through a process called mining. Therefore, these are doubly tied to Bitcoin's price movements.
Not only does it affect the value of the Bitcoin on their balance sheets, but it also affects the economics of the business. Therefore, expect all of these stocks to swing with Bitcoin's unpredictable movements.
Image source: Getty Images.
Now what
Which way are shares of MicroStrategy, Riot Blockchain, Ebang, and Bit Digital headed? To answer that, investors need to consider two things.
The first is Bitcoin itself. Nothing is guaranteed, but there is a potential catalyst that could send tokens higher this year and beyond. Bitcoin's network is set for an upgrade called Taproot later this year that will enable new features, potentially driving further adoption of the cryptocurrency. If you're interested in these four stocks, then you should look into Taproot (and other potential catalysts) to see if this will drive the price of Bitcoin higher.
Think of Bitcoin as the general trend. It's always important to look at this before investing in any stock. But more than general trends, investors should remember that stocks are real companies. When you buy shares, you're betting on the ability of a business to grow and create shareholder value. But not all companies are equally capable.
Take Ebang for example. As a China-based cryptocurrency miner, it's struggling right now in light of China's ban on mining. Management had said the government's crackdown wouldn't affect its business -- and to be fair, the company also supplies equipment for mining Bitcoin. Therefore, it could theoretically still sell equipment without mining the cryptocurrency. However, management's comments were in May and it hasn't updated its investor relation's website since.
Bit Digital also mines Bitcoin in China. However, in July, management said the company was transitioning operations to North America. That's good.
But earlier this week, management filed with the Securities and Exchange Commission (SEC), taking authorized shares from 140 million to 340 million. In other words, if the company chooses, it could more than double its share count, diluting current shareholder value. Considering Bit Digital might need some cash to grow its mining business, this is a risk facing shareholders today.
Therefore, of these three, Riot Blockchain seems like one of the best candidates for creating shareholder value over the long term. However, Bitcoin mining is still a tough, competitive business and may not be the best way to invest in the space. Fortunately, there are a lot of great options with cryptocurrency stocks, so investors can certainly afford to be choosy.
