What happened
Cryptocurrency mining stocks were up big on Tuesday, thanks to a price rebound among cryptocurrencies including Bitcoin (BTC -4.40%), and thanks to a hot stock market. As of 12:30 p.m. ET, the S&P 500 was up 2%, which is a big move for a single day. And Bitcoin is up 4% over the past 24 hours and up around 14% from its weekly low.
Cryptocurrency mining stocks up today include Canaan (CAN -5.83%), Marathon Digital Holdings (MARA -5.96%), and HIVE Blockchain Technologies (HIVE -6.14%), up 11%, 9%, and 9%, respectively.
Image source: Getty Images.
So what
There were several factors negatively impacting the price of Bitcoin over the past week. For example, cryptocurrency exchange BitMart was hacked on Saturday and the bad guys got away with between $150 million and $196 million in digital assets, according to CNBC. Whenever an exchange is hacked like this, it can spook investors in cryptocurrencies.
Besides Bitcoin, investors were recently reminded that there's a big need for discernment when it comes to cryptocurrencies. Trading platform Bitget is based in Singapore. But this week the Monetary Authority of Singapore reportedly suspended Bitget's license because it promoted an obscure cryptocurrency based on the popular music group BTS from South Korea.
These kinds of things can rattle confidence in the cryptocurrency market. But the stock market has been far more rattled of late, especially with stocks that are labeled as growth stocks. The ARK Innovation ETF, a popular exchange-traded fund (ETF) with a plethora of high-flying growth stocks, is down 35% from its 52-week high and down sharply over the past month as investors fret over surging coronavirus cases and institutional investors make year-end moves to lock in gains.
Whatever the exact reasons may be, both the stock market and the cryptocurrency market rebounded sharply on Tuesday, which was doubly helpful for stocks like Canaan, Marathon Digital, and HIVE Blockchain Technologies. To be clear, none of these companies had news today. Marathon Digital did have a filing with the Securities and Exchange Commission (SEC) yesterday. However, this was merely an official filing of previous press releases. So there wasn't anything materially moving these stocks today other than general market conditions.
Year-to-date returns for these cryptocurrency stocks, Bitcoin, and the S&P 500. CAN data by YCharts
Now what
Canaan manufactures hardware for mining Bitcoin and this is a good business to be in right now. Historically high profit margins for Bitcoin miners have sparked a spending frenzy as companies try to increase their mining capabilities to take advantage of these favorable economics. Strong demand was reflected in Canaan's third-quarter results, released on Nov. 16. Hashing power sold was up an impressive 128% year over year. However, Q3 revenue was up over 708% from the previous year, reflecting a higher price per mining unit.
As long as these favorable economics are in place, it's likely that Canaan's products will be in high demand. However, the other side of this equation is that mining companies like Marathon Digital and HIVE Blockchain Technologies are getting more competitive, attempting to increase their market share.
As of Dec. 1, Marathon Digital had a hash rate of 3.2 exa-hashes per second (EH/s), which was around 2% of the total hash rate of the Bitcoin network. But the company is rapidly adding power and expects to have 13.3 EH/s roughly six months from now.
However, companies like HIVE Blockchain Technologies aren't going to just sit there while Marathon Digital expands. For its part, HIVE Blockchain mines both Bitcoin and Ethereum and has 1.31 EH/s for mining the former. It expects to roughly double this by the summer of 2022. Of course, that won't keep up with Marathon Digital quadrupling its capacity.
As long as the price of Bitcoin continues to rise, the economics of mining cryptocurrencies should keep making sense, motivating companies to buy more mining hardware from providers like Canaan. That's good for now. However, investors will need to be sure to develop a balanced long-term perspective on this space, recognizing that prolonged pullbacks have happened in the past and can create tough operating environments for all of these companies.
