Bitcoin Mining Shares Are Skyrocketing Higher Today

What happened

Bitcoin (BTC 7.07%) Mining stocks have been under fire for most of the past year, but they are exploding higher on Tuesday. Bitcoin itself is up 7.7% in the past 24 hours as investors flee to alternative assets following the collapse of two US banks important to the technology and cryptocurrency sectors.

Cipher Mining (CIFR 37.88%) jumped as much as 42.9% in early trade, Bit farms (BITF 12.20%) went up 15.9%, Cabin 8 Mining (COTTAGE 19.00%) rose 23.3% at its peak, and Canaan (CAN 11.50%) was up 13.2 percent. Shares rose 8.8%, 12.2%, 17.3% and 12.8% by noon ET.

So what

Mining companies and their suppliers have been heavily leveraged for the price of Bitcoin.

First, they generate income from Bitcoin, so if the price of Bitcoin falls, their income falls. Costs are also generally not variable, so margins rise and fall quickly with the price of Bitcoin. You can see this dynamic in the chart below.

Data from YCharts.

The hope is that rising Bitcoin prices will help profitability. But that’s not the only impact cryptocurrency has on business.

A few years ago, these companies started keeping more of the Bitcoin they mined on their balance sheet, giving them not only earnings exposure to Bitcoin, but also balance sheet exposure. Again, when the price rises, the balance sheet looks better.

What now

These stocks are up today, but investors considering buying need to be careful. Bitcoin has been falling for two years, as you can see above, and miners have not been profitable lately. This pop in Bitcoin may be nice, but it doesn’t change their cash flow challenges.

I also don’t see how Bitcoin answers any of the fundamental banking questions raised this past week. Sure, Bitcoin can be held in self-custody, unlike large amounts of cash. But it’s also extremely volatile, which companies don’t want either.

Then there is the point that Bitcoin cannot handle anywhere near 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 does not present a viable alternative to commercial banking.

I think the best move is to use today as a sales 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 gets worse.

Challenges in the banking industry may appear to be a good thing for Bitcoin because it was born out of 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 tough economy ahead, volatility could quickly turn the other way.