What happened
Cryptocurrency prices headed sharply higher on Thursday, led by the market cap leader, Bitcoin (BTC +2.66%). Not surprisingly, that helped push Bitcoin mining stocks upward too.
Shares of Hut 8 Mining (HUT +0.00%) jumped by as much as 18.1% in trading Thursday, Riot Blockchain (RIOT 0.84%) gained as much as 16.8%, and Bitfarms (BITF +8.31%) climbed as much as 13.7%. Those stocks closed the day up by 15.9%, 16.6%, and 13.7%, respectively.
CRYPTO: BTC
Key Data Points
So what
Bitcoin was trading 6.8% higher over the prior 24 hours at the close of stock trading on Thursday. As miners generate their revenue in the form of Bitcoin, a rise in its price should help both their revenues and margins.
Adding to the leverage in this business, miners keep a large portion of the tokens they mine on their balance sheets rather than immediately converting them into cash. This can be a challenge when the price of Bitcoin falls, but when it rises, that has an amplified impact on their stock prices.
NASDAQ: HUT
Key Data Points
It helped that the market overall was up Thursday, with the S&P 500 rising 1.5% and the Nasdaq Composite climbing 2.3%. The prices of Bitcoin and volatile stocks like miners have typically been heavily correlated with the stock market's moves lately, so improved sentiment on Wall Street is providing an updraft to cryptocurrencies.
Now what
Those who are considering investing in crypto miners need to recognize the leveraged positions those businesses are in. They have a lot of upside if the price of Bitcoin rises, but there's also a very real risk that those companies will lose money and potentially become insolvent if Bitcoin falls too far. There have been reports recently of graphics cards being sold on the secondary market because some miners no longer see the business as being profitable.
Publicly traded Bitcoin miners may be taking a longer-term approach to the business and won't shut down overnight, but the risks are still the same.
The crypto market has been extremely volatile during the last few weeks with a number of lending protocols facing what amount to "run on the bank" style liquidity crises. This has led some platforms to freeze crypto withdrawals, and some companies have gone bankrupt. The liquidation of these cryptocurrency positions has caused token prices to swing wildly. On Thursday, the swing was upward.
I'm still concerned that we haven't seen the worst of this liquidity crisis in cryptocurrencies, and I fear that more hidden risks will be found under the surface. I'm certainly not buying shares of Bitcoin miners now given their volatility, because they could face serious financial problems if Bitcoin falls further. I plan to watch from the sidelines and let this chaos play out.
