This is why cryptocurrency stocks were shattered today

What happened

Cryptocurrency stocks did not feel the love on Wednesday, with many trading lower during the session. The falling price of bitcoin probably played a big role in this because most of these companies had not reported any company-specific news, but their stocks were down nonetheless. Here are some examples, at 3:45 pm EST:

  • Shares of Hut 8 Mining (OTC: HUTM.F) down 13%.
  • Parc Glan (NASDAQ: CLSK) the stock was down 7%.
  • MicroStrategy (NASDAQ: MSTR) down 6%.
  • Grayscale Bitcoin Trust (OTC: GBTC) down 6%.
  • The price of bitcoin is down 4.1% over the last 24 hours, according to CoinDesk.

Here’s why all stocks are down today and what investors should expect.

A rising red arrow cuts near the top leading to the tip of the arrow pointing down.

Image source: Getty Images.

So what

When it comes to the price of bitcoin, there is a strong correlation between MicroStrategy stock and Bitcoin Trust Grayscale stock. That’s because they all hold a fair amount of bitcoin tokens. For Grayscale, the reason is simple: Holding bitcoin is the reason the fund exists in the first place. It aims to make it possible for individuals and hedge funds to invest in bitcoin, without the hassle of owning a bitcoin wallet or going through a cryptocurrency exchange. Shares of the trust can be purchased in a brokerage account as regular stock.

Because Grayscale’s net asset value is tied to the price of bitcoin, it logically goes up and down with bitcoin (though its movements are often more clearly irrational). The same goes for MicroStrategy. The company recently decided to hold bitcoin tokens on the balance sheet instead of excess cash; it held 70,470 of them on December 21. The value of those tickets is somewhere in the $ 2.5 billion ball park. Considering that its market capitalization is only $ 5.2 billion, a disproportionate portion of the stock is tied up with bitcoin, meaning it will likely remain as volatile as cryptocurrencies for the foreseeable future.

This is also true of Hut 8. Although it does bitcoin mining, it still has significantly more of it on its balance sheet than many of its bitcoin mining peers (2,851 bitcoin tokens as of its latest update earlier this month ). Because it chooses to hang onto as much bitcoin as it can, its revenue is lower than it could be. But in this way, the value on its balance sheet increases faster as the price of bitcoin rises. This may be a good strategy, but it pegs this small cap stock to the price of bitcoin.

A coin displaying a bitcoin symbol sits beside a pickup ax.

Image source: Getty Images.

Turning to other bitcoin mining stocks, only CleanSpark had news to report today. A little more than a month ago, the company acquired a mining operation called ATL Data Centers. According to today’s update, it has since mined 56 bitcoin tokens. CleanSpark has sold 25 to generate revenue and continues to hold the other 31. Thus, the company has generated mining revenue of over $ 1.6 million since its acquisition.

That’s a big deal for CleanSpark. The company is primarily an energy technology company. For its fiscal 2020 (before generating revenue through bitcoin mining), it had only $ 10 million in revenue. So its acquisition has added quite a bit to its top line.

Piles of physical golden coins display the bitcoin symbol.

Image source: Getty Images.

What now

While significantly increasing revenues might be considered a good thing, the reality is that many bitcoin mining stocks are overpriced. On days like today when bitcoin is down, it unleashes some of that enthusiasm, and these over-thought stocks are falling hard. That is true of CleanSpark but also other companies like Marathon Patent Group a Blockchain riot. Accordingly, Marathon stock plummeted today, and Riot Blockchain stock plummeted.

Some may think bitcoin is down today because Joe Biden has just been inaugurated as president, and it is possible that cryptocurrencies could face more scrutiny under his administration. But I would argue that the explanation is unlikely. First of all, the United States does not control bitcoin – large countries like Russia and China have many adopters. Further, Biden was elected weeks ago and the views of his cabinet nominees were known well before today.

The price of bitcoin is much more complicated to predict, in my opinion. At a basic level, if the demand for bitcoin outweighs the supply, than the price can rise. Predicting demand is, therefore, a key component of price forecasting. I think it is possible for demand to increase. But I admit it’s just an educated guess as demand is hard to predict.

Because this is a complex space, investors should remember that cryptocurrencies and the stocks associated with them are risky investments and should probably not be a significant part of a long-term portfolio.