What happened
Crypto miners Hut 8 Mining (HUT), Riot Blockchain (RIOT 0.25%), and Bitfarms (BITF -2.37%) are on fire today. As of 3:45 p.m. ET, these top cryptocurrency miners surged 13.3%, 10.9%, and 9.8%, respectively, since yesterday's close.
Unsurprisingly, these moves closely align with Bitcoin's (BTC -4.07%) price action, which has seen this token rocket 10.5% over the past 24 hours as of 3:45 p.m. ET.
Bitcoin's rally off of this week's lows, which saw the world's largest cryptocurrency by market capitalization sink to below $19,000 per token once again, is driving interest in Bitcoin-related stocks. It appears market-related sentiment is shifting toward risk taking, as investors brush off concerns around interest rate hikes and look forward to declining inflation and more accommodating monetary policy over the medium term.
So what
Hut 8, Riot, and Bitfarms are all high-leverage plays on the price of Bitcoin. Where the price of Bitcoin goes generally determines the direction of the price action of these stocks on any given day.
This relationship is relatively simple to understand. As Bitcoin miners, these three companies receive their revenue in the form of Bitcoin. With dollar-denominated debt used to fund operations, the price of Bitcoin determines how liquid or solvent these companies are on a day-to-day basis.
Additionally, the margins Bitcoin miners are able to achieve depend a great deal on where spot Bitcoin trades. Given rising electricity costs (which are the key variable expenses for Bitcoin miners), higher Bitcoin prices are needed to achieve profitability on operations. Some recent reports suggest that Bitcoin mining operations in the U.S. have now become less profitable than selling electricity. Thus, this recent boost in the price of Bitcoin couldn't have come at a better time for these companies.
Now what
The volatility with which Bitcoin moves inherently impacts Bitcoin miners, often to a greater degree than the underlying digital currency itself. Thus, as investors look for greater upside to rallies, the rush toward these three stocks is understandable.
That said, momentum works in both directions. We've seen how hard hit Bitcoin miners have been over the past year. Accordingly, many investors who tout the long-term upside potential of Bitcoin advocate the idea that Bitcoin miners may be less attractive than owning Bitcoin itself. That's partly because of potential solvency issues, should the price of Bitcoin decline below a profitable level for an extended period of time.
For now, the Bitcoin mining trade is on. I expect to see more momentum traders pile in. That said, this group of stocks is not one I think is worth considering right now, given the outsized risks tied to profitability and solvency over the near to medium term.
