crypto miner Hut 8 mining (HUT 11.90%), Riot Blockchain (REVOLT 10.72%)and bit farms (BITF 9.38%) burn today. As of 3:45 p.m. ET, these top cryptocurrency miners are up 13.3%, 10.9%, and 9.8%, respectively, since yesterday’s close.
Not surprisingly, these movements closely match it Bitcoin‘s (BTC 9.73%) Price action that has seen this token up 10.5% in the last 24 hours at 15:45 ET.
Bitcoin’s rally from this week’s lows, which has seen the world’s largest cryptocurrency by market cap slip back below $19,000 per token, is fueling interest in Bitcoin-related stocks. It appears that market sentiment is shifting toward risk-on as investors shrug off concerns about rate hikes and look forward to falling inflation and more accommodative monetary policy in the medium term.
Hut 8, Riot, and Bitfarms are all games with high leverage on the price of Bitcoin. Where the price of bitcoin goes generally determines the direction of the price movement of those stocks on any given day.
This relationship is relatively easy to understand. As bitcoin miners, these three companies receive their earnings in the form of bitcoin. Since dollar-denominated debt is used to fund operations, the price of bitcoin determines how liquid or solvent these companies are in day-to-day operations.
Additionally, the margins that bitcoin miners can earn are highly dependent on where spot bitcoin is traded. With rising electricity costs (which are the top variable expenses for bitcoin miners), higher bitcoin prices are needed to reach profitability of operations. Some recent reports suggest that bitcoin mining operations in the US have now become less profitable than selling electricity. Therefore, this recent surge in Bitcoin price could not have come at a better time for these companies.
The volatility with which bitcoin moves inherently affects bitcoin miners, often to a greater extent than the underlying digital currency itself. So the rush towards these three stocks is understandable as investors look for greater upside potential for them look for rallies.
However, the momentum works both ways. We’ve seen how hard bitcoin miners have been hit over the past year. Accordingly, many investors touting bitcoin’s long-term upside potential favor the idea that bitcoin miners may be less attractive than owning bitcoin itself. This is partly due to potential solvency issues should the price of bitcoin fall below a profitable one for an extended period of time level drop.
At the moment bitcoin mining trade is running. I expect more momentum traders to pile up. However, I don’t think this group of stocks is worth considering at this time given the outsized risks associated with short- to medium-term profitability and solvency.
Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.