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Why Bitcoin Mining Stocks Plunged on Wednesday

By Travis Hoium – Jan 5, 2022 at 5:35PM

Key Points

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When Bitcoin drops the miners go with it.

What happened 

Shares of crypto miners took a nosedive during trading on Wednesday as the price of Bitcoin (BTC -2.48%) plummeted. At 4:15 p.m. ET, Bitcoin was down 4.95% in the last 24 hours, but it's down 6.2% since early this morning. 

The impact on miners was swift. Riot Blockchain (RIOT -10.70%) fell as much as 13.1% today, Marathon Digital (MARA -12.29%) dropped 14.4%, and Hut 8 Mining (HUT -12.50%) fell 12.8%. The stocks closed the day down 12.1%, 13.2%, and 12.3%, respectively. 

Digital representation of Bitcoin made of 1 and 0.

Image source: Getty Images.

So what 

The drop in Bitcoin can be a double whammy for Bitcoin miners. First, they make their revenue in Bitcoin as compensation for providing mining services to the network. So when Bitcoin goes down, their revenue goes down as well without any real offset to their costs. Given the high levels of fixed cost associated with mining, we could see net income drop dramatically if the current Bitcoin trend continues. 

Many of these companies have also chosen to hold Bitcoin on their balance sheets, which makes the drop in Bitcoin even worse. As of the end of the third quarter of 2021, Riot holds 3,995 bitcoins, Marathon has 7,035 bitcoins, and Hut 8 has over 5,000 bitcoins in reserve. In just the last few hours alone, these companies have lost over $50 million just in the value of the Bitcoin on their balance sheets. 

Miners aren't just going to see a negative impact on the income statement if Bitcoin continues to drop; they'll see their balance sheets get crushed as well, and that should be a concern for investors. 

Now what 

In some ways, this move should be seen as short term. Bitcoin miners will rise and fall with the price of Bitcoin, so if the value of the cryptocurrency bounces back in the next few days we will likely see stocks recover as well. 

But I would worry that the best days are over for Bitcoin and its miners. Bitcoin has proven not to be much of a hedge for inflation, and other cryptocurrencies are building utility and attracting users at a rapid rate. 

We are also going to see the Federal Reserve reduce its stimulus policies in 2022, which likely helped drive the crypto rally in 2020 and 2021. That could put pressure on Bitcoin as less money is flowing through the system. 

If you're bullish on Bitcoin then it's an asset you can invest in directly, but today is a reminder that miners are effectively a leveraged bet on Bitcoin. When it falls they will fall even harder, and that's exactly what we are seeing in the market today. 

Travis Hoium has no position in any of the stocks mentioned. The Motley Fool owns and recommends Bitcoin. The Motley Fool has a disclosure policy.

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