Stocks in the crypto industry struggled this week, along with the broader markets, but even more so than actual cryptocurrencies like Bitcoin (BTC 1.91%), which isn't always the case.
For the week, shares of the bitcoin-mining company Riot Blockchain (RIOT -2.16%) traded nearly 8% down as of market close Thursday. Shares of the large cryptocurrency exchange Coinbase (COIN -1.71%) were down nearly 7%, and shares of BIT Mining (BTCM 2.28%) were down roughly 23%.
In general, cryptocurrencies and crypto stocks have struggled in the same way much of the broader market has. Investors are digesting and trying to navigate all of the uncertainty with high levels of inflation, all of the Federal Reserve's expected interest rate hikes, the Fed's expected reduction of its balance sheet, Russia's invasion of Ukraine, and the possibility of a recession. With all of these uncertainties, it's been hard for stocks and cryptocurrencies to gain any kind of momentum.
Although there is often a correlation between crypto stocks and cryptocurrencies, the current bifurcation seen this week is not a total shock, DataTrek Co-Founder Nicholas Colas told the Wall Street Journal. The way actual assets get valued vs. companies is different, he added.
Coinbase has seen its stock hit new lows this week as analysts slash its quarterly estimates and price target. J.P. Morgan Chase analyst Kenneth Worthington recently trimmed his price target for the stock from $296 per share to $258. That still implies significant upside from Coinbase's current share price of roughly $122.70. Worthington also cut his estimates for Coinbase's first-quarter earnings per share from a $0.12 loss to a $0.27 loss. Much of Coinbase's business is predicated on crypto trading volume, which we know came in weak in the first quarter of the year as investors lost enthusiasm.
"The crypto markets are in need of some excitement," in order to boost crypto prices and trading volume, Worthington said, according to Barrons.
As for crypto miners, they are a bit of "a different animal in a lot of ways," D.A. Davidson analyst Chris Brendler said, according to the Wall Street Journal. Their business involves operating lots of hardware, which can be pricey, in order to solve cryptographic puzzles as fast as humanly possible to mint new tokens. Investors may be concerned about how these miners will purchase new equipment.
Not long ago, a number of miners, including Riot, filed shelf registrations with the Securities and Exchange Commission to sell up to $500 million worth of shares. The shelf registration provides flexibility for these miners to sell shares, and the sales may not happen right away, but mining stocks have not performed well since this news came out.
Also, while it seems very unlikely, if Bitcoin were to ever switch from its current energy-intensive proof-of-work mining concept to proof-of-stake, that could be a big issue for crypto miners. In proof-of-stake, users stake their tokens of a specific cryptocurrency to become a validator on that network and approve transactions and create new tokens. A number of cryptocurrencies, including Ethereum, are moving to proof-of-stake. In New York, state lawmakers have also recently proposed a bill that would put a two-year moratorium on proof-of-work mining.
Given how beat down some of these Bitcoin mining stocks are, there may be upside, considering that at least some of the economic uncertainty has likely been priced in. But I do remain cautious about these equipment-heavy companies and the regulation they may face due to energy-efficiency issues.
I am more bullish on a company like Coinbase, which, although facing near-term pressure, could be a huge long-term beneficiary as crypto adoption and investing becomes more pervasive among Wall Street and retail investors.