What happened
Bitcoin was rising again on Tuesday. As of 4:15 p.m. EST, bitcoin was up 8% over the previous 24 hours and had briefly surpassed $34,000 per token earlier in the afternoon, according to CoinDesk. Its daily high of $34,221 was within 1% of its all-time high, which was hit over this past weekend.
Most days when bitcoin is up, cryptocurrency stocks track higher, as well. There’s some fundamental basis for this (as we’ll see in a moment). But other factors impact stock prices, as well. Indeed, crypto stocks showed no real correlation to the price of bitcoin today. Some were up, some were down, and some traded sideways.
- Going up today were shares of bitcoin mining companies like Marathon Patent Group (NASDAQ:MARA) and Riot Blockchain (NASDAQ:RIOT), up 23% and 12%, respectively.
- Down a little were shares of bitcoin mining company Bit Digital (NASDAQ:BTBT), along with shares of Canaan (NASDAQ:CAN), a company that manufactures equipment for mining bitcoin. These both fell a mere 5%.
- Finally, Ebang International Holdings (NASDAQ:EBON) is another company manufacturing bitcoin mining hardware, and its stock was down a painful 13%.
Image source: Getty Images.
So what
Bitcoin miners run the bitcoin blockchain network and are paid in bitcoin. These companies pay for workers, computers, real estate, and electricity in fiat money. Therefore, they have to sell their bitcoin tokens to non-miners who want to own bitcoin. Therefore, revenue potential for Marathon, Bit Digital, and Riot Blockchain is subject to the market price of bitcoin. As it rises, so does the revenue potential for these companies.
This explains why investors get excited about bitcoin mining when the price of the cryptocurrency goes up. But what about hardware companies like Ebang and Canaan? Sales for these two companies were largely down in 2020. But as bitcoin mining becomes more profitable, there’s greater potential for a new bitcoin mining craze, which could cause sales to rise again for Ebang and Canaan.
When bitcoin goes up, it’s good for these stocks. But this is only generally speaking. Investors should not just trade in and out of these stocks based solely on the price of bitcoin.
Image source: Getty Images.
Now what
Trading solely based on the price of bitcoin is a bad idea because in the short term, anything can happen with stocks. Consider that these are all small-cap stocks and are easily manipulated.
Sure, you could get lucky on a day trade. For example, anyone trading in and out of Bit Digital recently is clearly happy, considering it’s nearly tripled over the past five trading days alone. However, these stocks could easily become the target of a famous short-seller. Given how easily these can be manipulated, these stocks would likely plummet on a development like that — at least in the short term.
More importantly, these are all real-life businesses that could, at any time, report things unique to their companies. Sometimes it’s good news;…
Read more:Cryptocurrency Stocks Trade in All Directions Today, Even as Bitcoin Climbs Above
