Shares of cryptocurrency companies Coinbase Global (COIN 5.68%), Marathon Digital (MARA 2.21%), and Riot Platforms (RIOT -1.49%) performed poorly during January as the cryptocurrency space took an unexpected breather. According to data provided by S&P Global Market Intelligence, these three stocks were down 26.3%, 24.5%, and 29.5%, respectively, during the month.
There are company-specific things that could be talked about regarding Coinbase, Marathon Digital, and Riot Platforms. However, looking at a stock chart of all three companies shows that the trio went up and went down as a group -- in other words, these three stocks were impacted by the same factors.
The main issue for these three companies was the price of cryptocurrency Bitcoin. The investing world eagerly awaited the approval of a Bitcoin exchange-traded fund (ETF). Conventional wisdom said that if a Bitcoin ETF were approved, this would create plenty of new demand for the cryptocurrency, sending the price higher.
In fact, Bitcoin ETFs were approved on Jan. 10. However, the price of Bitcoin ended up rising by less than 1% during January (and it dropped after the announcement) in a surprising twist. Since this failed to catalyze the price of Bitcoin as expected, the stock prices for Coinbase, Marathon Digital, and Riot Platforms all dropped.
Digging a little deeper to explain what happened
There's a little more to it than this, especially when it comes to Coinbase stock. The company is an exchange for buying and selling cryptocurrencies, and it generated $289 million in transaction revenue in the third quarter of 2023 alone. Of this, 37% was due to users trading Bitcoin.
Investors are concerned that the approval of a Bitcoin ETF will make it easier for investors to invest in Bitcoin through the stock market, eliminating the need for a cryptocurrency exchange such as Coinbase.
This is a prevalent fear, but it may not be a well-rounded perspective. While it's true that buying and selling Bitcoin is a big part of Coinbase's business, it has a path to profiting from Bitcoin ETFs as well. Financial institutions need a custody partner for their ETFs. And of the 11 ETFs approved by the Securities and Exchange Commission (SEC), eight chose Coinbase to be the custodian.
Coinbase also stands to benefit if the price of Bitcoin goes up because it would likely lead to higher trading volumes and consequently higher trading revenue. Marathon Digital and Riot Platforms would benefit from a higher price for Bitcoin as well because these two are Bitcoin mining companies, and both hold a substantial number of Bitcoins on their respective balance sheets.
As of Jan. 31, Marathon Digital held over 15,700 Bitcoins. For its part, Riot Platforms held over 7,600 bitcoins at the end of January.
What will Bitcoin do in February and beyond?
Marathon Digital and Riot Platforms are both aggressively increasing their respective mining power because 2024 is expected to be a big year for Bitcoin. The cryptocurrency is expected to have its halving event in April. When this happens, the payout to miners will be cut from 6.25 Bitcoins per block to 3.125 Bitcoins per block.
The Bitcoin halving happens about every four years and has happened three times before. Here are returns for Bitcoin in previous years with a halving event:
| Year | 2012 | 2016 | 2020 |
|---|---|---|---|
| Annual returns | 187% | 124% | 302% |
Data source: Bankrate. Table by author.
If history is any indication, Bitcoin could be in for a huge year in 2024. This is why Marathon Digital and Riot Platforms are trying to mine and hold more Bitcoin than ever.
While this is exciting, I should circle back to the discussion regarding Bitcoin ETFs. Conventional wisdom said this should have been a catalyst -- some analysts even predicted that Bitcoin would hit six figures as a result of approval. That obviously didn't pan out.
With the Bitcoin halving event, history and conventional wisdom both say it could send the price of Bitcoin soaring. However, as we've seen, the prevailing narrative isn't always right. So investors should always make sure they've accounted for what could go wrong with an investment thesis before buying anything.
