Why Crypto Miners Hut 8, Riot Blockchain and Bitfarms are on the rise today

What happened

Crypto miners Cabin 8 Mining (COTTAGE 11.90%), Riot Blockchain (RIOT 10.72%)and Bit farms (BITF 9.38%) is on fire today. As of 3:45 PM ET, these top cryptocurrency miners were up 13.3%, 10.9%, and 9.8%, respectively, since yesterday’s close.

Not surprisingly, these movements closely match Bitcoin‘s (BTC 9.72%) price action, which has seen this token rocket 10.5% in the last 24 hours as of 3:45 PM ET.

Bitcoin’s rally from this week’s lows, which saw the world’s largest cryptocurrency by market capitalization sink back below $19,000 per token, is driving interest in Bitcoin-related stocks. Market-related sentiment appears to be shifting towards risk-taking, as investors shrug off interest rate hike concerns and look forward to falling inflation and more accommodative monetary policy over the medium term.

So what

Hut 8, Riot and Bitfarms are all games with a high influence on the price of Bitcoin. Where the price of Bitcoin goes generally determines the direction of the price action of these stocks on any given day.

This relationship is relatively easy to understand. As Bitcoin miners, these three companies receive their income in the form of Bitcoin. With dollar-denominated debt used to fund operations, the price of Bitcoin determines how liquid or solvent these companies are on a daily basis.

Additionally, the margins Bitcoin miners are able to make depend a lot on where spot Bitcoin trades. Given rising electricity costs (which are the main variable expenses for Bitcoin miners), higher Bitcoin prices are necessary to achieve profitability in operations. Some recent reports suggest that Bitcoin mining in the US has now become less profitable than selling electricity. Thus, this recent increase in the price of Bitcoin could not have come at a better time for these companies.

What now

The volatility with which Bitcoin moves inherently affects Bitcoin miners, often to a greater degree than the underlying digital currency itself. Therefore, as investors look for greater upside to the rally, the rush to these three stocks is understandable.

That said, momentum works both ways. We’ve seen how hard Bitcoin miners have been hit over the past year. Accordingly, many investors who highlight the long-term upside potential of Bitcoin advocate the idea that Bitcoin miners may be less attractive than owning Bitcoin itself. This is partly due to potential solvency problems, should the price of Bitcoin fall below a profitable level over an extended period.

For now, the Bitcoin mining trade is on. I expect to see more momentum traders pile in. That said, this group of stocks is not one I think is worth considering right now, given the major risks associated with profitability and solvency in the near to medium term.