Why Bitcoin Miner Shares Soared This Week

What happened

Cryptocurrencies rose sharply this week. According to data from S&P Global Market Intelligence, Bitcoin (BTC 7.27%) led the way, with a 22.2% gain from the stock market’s closing bell last Friday to the same time this Thursday.

During the same period, this price increase drove an even stronger rally in the shares of leading Bitcoin mining specialists:

MARA data from YCharts.

So what

Bitcoin and friends saw a couple of distinct jumps in the past week.

First, several banks with close ties to the crypto sector were shut down by California regulators late last week; this was followed by a federal promise to allow customers to access any funds they had deposited in the failing banks. The Federal Reserve’s billion-dollar guarantee that helps power the trading systems behind Bitcoin and other cryptocurrencies resulted in a surge in prices over the weekend.

Traders then put their roofs on and began to think about what the bank closures might mean for the wider US economy. On Tuesday morning, many investors agreed that the Federal Reserve’s inflation-fighting rate hikes had gone too far. Therefore, what at first looked like a threat to the entire crypto market should actually inspire the central bank to ease its anti-inflationary measures, allowing banks to breathe more freely with lower federal funds rates. It is seen as a positive development for Bitcoin, ahead of next week’s scheduled rate setting conference.

And as Bitcoin goes, so do the miners — although their stock price movements tend to amplify what the cryptocurrency’s chart is doing. These miners don’t just have a bunch of Bitcoin on their balance sheet; they also strive to create and buy more of the digital currency over time. This strategy increases value as Bitcoin prices rise, but also increases the risk associated with running their business.

Image source: Getty Images.

Bitcoin mining rigs are not cheap, and they draw an incredible amount of electrical power. Marathon Digital Holdings (MARA 7.62%), Cabin 8 Mining (COTTAGE 4.24%)and Riot Platforms (RIOT 5.38%) running their business with bottom-line margins deep in red-ink territory, keeping the lights on by taking on debt and selling more stock on the open market.

So these companies are relying on Bitcoin to gain value in the long run, while building out their crypto mining rigs as fast as they dare. But a few management mistakes or too harsh a crypto winter can puncture the entire business model and leave shareholders penniless.

This combination of long-term economic gains beyond Bitcoin’s price performance, plus the constant threat of financial collapse, adds up to massive volatility. So the miners outperformed Bitcoin in this week’s rise and they are doing well in 2023 overall. Bitcoin’s price is up 51% so far this year, while all three miners more than doubled in value.

What now

The price trends also play out on longer time scales. For example, Bitcoin is down 36% in 52 weeks, but Bitcoin miners have taken haircuts from 57% to 69% over the same time period. On a chart of the past year, the deep price drops and giant jumps of the past few weeks are just another small part of the larger trend line:

MARA data from YCharts.

It’s always fun to see your stocks and cryptocurrencies do well, but you also have to keep in mind the inflated risks. It may sound strange, but buying Bitcoin directly is a much safer and more conservative option than investing in any of the mining stocks. Be careful out there, dear investor.