What happened
Bitcoin (BTC -5.50%) mining stocks have been under fire for most of the past year, but they're exploding higher on Tuesday. Bitcoin itself is up 7.7% in the last 24 hours as investors flee to alternative assets after the collapse of two U.S. banks important to the tech and cryptocurrency sectors.
Cipher Mining (CIFR -7.92%) jumped as much as 42.9% in early trading, Bitfarms (BITF -5.29%) popped 15.9%, Hut 8 Mining (HUT) rose 23.3% at its peak, and Canaan (CAN -7.89%) was up 13.2%. The stocks were up 8.8%, 12.2%, 17.3%, and 12.8% at noon ET.
So what
Mining companies and their suppliers have become very leveraged to the price of Bitcoin.
First, they generate revenue from Bitcoin, so if the price of Bitcoin drops, their revenue falls. Costs are generally not variable either, so margins rise and fall rapidly with the price of Bitcoin. You can see this dynamic in the chart below.
Data by YCharts.
The hope is that rising Bitcoin prices will help profitability. But that's not the only impact the cryptocurrency has on the business.
A few years ago, these companies started holding more of the Bitcoin they mined on their balance sheets, giving them not only income statement exposure to Bitcoin but also balance sheet exposure. Again, as the price rises, the balance sheet looks better.
Now what
These stocks are up big today, but investors considering buying need to take caution. Bitcoin has been sliding for two years, as you can see above, and miners haven't been profitable recently. This pop in Bitcoin may be nice, but it doesn't change their cash flow challenges.
I also don't see how Bitcoin answers some of the fundamental banking questions that were raised over the past week. Sure, Bitcoin can be held in self-custody, unlike large amounts of cash. But it's also extremely volatile, which businesses don't want, either.
Then there's the point that Bitcoin can't handle anywhere close to the number of transactions needed to be a real store of value or alternative asset. So there may be buyers today, but they may disappear tomorrow if Bitcoin doesn't present a viable alternative to commercial banking.
I think the best move is to use today as a selling opportunity. These stocks have all risen rapidly in 2023, and that momentum may not last forever. As I mentioned earlier, financial performance isn't just bad. It's getting worse.
Challenges in the banking industry may seem to be a good thing for Bitcoin because it was born from the financial crisis, yet this is an asset class that has traded more in parallel with growth stocks than as a hedge against traditional assets. Growth stocks may be hot right now, but with a rough economy ahead, volatility may quickly turn in the other direction.
