Crypto mining stocks were on an absolute tear on Wednesday as the value of Bitcoin (BTC -2.25%) jumped 5.9% and its market cap topped $1 trillion again.
Hut 8 (HUT -0.56%) jumped as much as 19.5%, CleanSpark (CLSK -1.59%) was up 18.8%, Marathon Digital (MARA 2.21%) rose 15.6%, and Riot Platforms (RIOT -1.49%) gained 11.9% in morning trading. At 10 a.m. ET today, shares of those mining companies were up 17.8%, 10%, 11.6%, and 10.6%, respectively.
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The Bitcoin pop
Bitcoin's upward momentum can't seem to stop. Expectations for higher interest rates haven't hurt the cryptocurrency, and the industry is picking up steam.
The latest evidence is the iShares Bitcoin Trust topping at 100,000 bitcoins under management, or about $5.2 billion in value.
There is also speculation that the halving event expected for mid-April will cause another bounce in Bitcoin's value. Sometimes these events can be a case of "buy the rumor, sell the news," but we're still in the rumor phase for the next halving.
Miners win all around
Mining stocks are up for two reasons around today's move. The rising price of Bitcoin makes their businesses more profitable because the input costs of mining (rigs, electricity, and the like) don't rise, but the revenue side of their income statements will increase, which creates operating leverage.
And most of these companies are also very leveraged to the crypto because they hold it on their balance sheets. When the price of Bitcoin rises, their balance sheets also improve.
This kind of leverage means that days like today are possible, where mining stocks are up significantly more than Bitcoin. But it also means today's gains can be undone with a move lower tomorrow.
What's the future of Bitcoin?
The moves in Bitcoin today and over the last few months haven't been based on any underlying improvement in the utility for the token. Instead, they have been driven by the flow of funds into Bitcoin from speculators anticipating exchange-traded funds (ETFs) and then the ETFs going live on the market.
Given the recent money coming into the crypto market, it's very possible this momentum could continue for some time. What I think investors should be cautious about is when the momentum trading is over.
Bitcoin still holds its place as the "digital gold" in the crypto market, but there's far more innovation and development happening on smaller, faster blockchains. And ultimately that's what could be disruptive to Bitcoin.
If we see more ETFs approved for digital currencies other than Bitcoin, it could also change the momentum into this being a broader crypto rally, where more investors can get involved and have options that extend beyond the currency with the biggest market cap.
Investors need to understand the upside and the downside risks. For now, the market is rewarding Bitcoin, miners, and their investors with sharply higher valuations.