What happened
Bitcoin is the most popular cryptocurrency in the world and bitcoin mining operations keep the tokens flowing. Some miners have chosen to list their companies on the stock market, giving investors the opportunity to own a portion of these companies. And December 2020 is a month that bitcoin mining investors should remember for a while. Consider some of these forms (through December 23):
Those are some of the best month-to-date earnings investors will ever see. However, all of these stocks withdrew on Wednesday, and some even dropped by two-digit percentages. Why are bitcoin mining stocks so volatile and what should investors expect going forward?
Image source: Getty Images.
So what
HIVE Blockchain Technologies today provided a business update highlighting a general truth for bitcoin miners recently. The company mainly mines Ether, the native token of the Ethereum blockchain. But it also mines bitcoin. Since October 1, HIVE has mined more than 19,000 Ether and 140 bitcoin. Now consider what has happened with the price of bitcoin and Ether since October 1.
Bitcoin Price Data from YCharts
Over the past two months alone, the price of bitcoin has more than doubled, and Ether is up 80%. Each miner has a different cost recovery price for mining cryptocurrencies based on each company’s unique cost structure. However, the cost to mining bitcoin and Ether does not vary with ticket prices. Although HIVE did not provide funds in its business update, bitcoin miners have a higher chance of profit as cryptocurrency prices rise.
The chances for higher bitcoin profits have attracted the attention of stock traders, not investors. Long-term investors focus on business fundamentals and buy stocks with an investment horizon long enough to let a bullish thesis play out. In contrast, stock traders focus on stock chart patterns to buy and sell quickly, often during the same day.
Rising cryptocurrency prices are part of the reason these stocks have risen in December. But this is why I think traders have also played a role in driving bitcoin miners’ stocks higher over the past few months. Consider the trading volume for Amazon.com (one of the largest companies in the world) and contrasted with the volumes for Marathon, CleanSpark, HIVE, and Riot Blockchain:
MARA volume data from YCharts
The bitcoin miners are all small-cap stocks; their market caps are all less than $ 1 billion. Nevertheless, people buy and sell these more than mega-cap stocks. Consider that Riot Blockchain is currently trading hands almost 30 times faster than Amazon!
This almost guarantees that the vast majority of the shareholders in these bitcoin mining stocks are not in it for the long haul. They simply hope to make a quick profit by unloading shares on a bigger fool.
Regular people like you and me can avoid being that fool by using a better investment framework.
Image source: Getty Images.
What now
For me personally, only one method has worked to make money in the stock market: Buying stocks with businesses that grow revenue due to social trends, have high profit potential, and is managed by a leadership with a track record of success, and hold those stocks for them years. If my research was good, time allows these companies to create shareholder value, making my stock increase. There’s no need to fool someone the other side of a fast-paced trade.
To be clear, I don’t think bitcoin mining is a great business to invest in. The most important factor (bitcoin price) is beyond the control of the companies. Only in order for the bottom line to fall out on the price of bitcoin could each impeccably control its operation, resulting in large losses. But even in good times, miners have ongoing costs that threaten profitability.
Don’t get me wrong. I think symbolic values for bitcoin and Ether are higher in the coming years, which is why I bought some of each. However, I do not believe that these mining stocks are worthy of your hard-earned investment dollars. Your cash should be reserved for the very best companies in the world, and fortunately there are hundreds of other candidates to choose from.