Why Bitcoin Mining Shares Appeared Today
What happened
Cryptocurrency prices rose sharply on Thursday, led by the market leader, Bitcoin (BTC 5.80%). Not surprisingly, it helped push Bitcoin mining stocks up as well.
Shares of Cabin 8 Mining (COTTAGE 15.94%) jumped as much as 18.1% in trading on Thursday, Riot Blockchain (RIOT 16.56%) received as much as 16.8%, and Bitfarmer (BITF 13.68%) climbed as much as 13.7%. These shares ended the day up 15.9%, 16.6% and 13.7% respectively.
So what
Bitcoin was traded 6.8% higher compared to the previous 24 hours at the close of trading on Thursday. As miners generate their income in the form of Bitcoin, an increase in price should help both their income and their margins.
To increase its influence in this industry, miners keep a large portion of the tokens they extract on the balance sheet instead of immediately converting them into cash. This can be a challenge when the price of Bitcoin falls, but when it rises, it has a stronger impact on their stock prices.
It helped that the market was up overall on Thursday, with S&P 500 increases 1.5% and Nasdaq Composite climbing 2.3%. The prices of Bitcoin and volatile stocks such as miners have generally been strongly correlated with stock market movements in the past, so improved sentiment on Wall Street provides an upgrade to cryptocurrencies.
What now
Those considering investing in crypto miners need to recognize the leveraged positions these companies are in. They have a lot of upside if the price of Bitcoin rises, but there is also a very real risk that these companies will lose money and potentially become insolvent if Bitcoin falls. too far. There have been recent reports of graphics cards being sold on the secondary market because some miners no longer view the business as profitable.
Listed Bitcoin miners may have a long-term approach to the business and will not close overnight, but the risk remains the same.
The crypto market has been extremely volatile in recent weeks with a number of lending protocols facing liquidity crises of the “run on the bank” type. This has led to some platforms freezing cryptocurrencies, and some companies have gone bankrupt. The liquidation of these cryptocurrency positions has caused token prices to fluctuate wildly. On Thursday, the turn went up.
I am still concerned that we have not seen the worst of this liquidity crisis in cryptocurrencies, and I fear that more hidden risks will be found beneath the surface. I certainly do not buy shares of Bitcoin miners now given their volatility, because they can get serious financial problems if Bitcoin falls further. I plan to watch from the sidelines and let this chaos play out.
