The rising tide of Bitcoin (BTCUSD) prices has lifted stock prices for Bitcoin mining companies.
There were no cryptocurrency mining outfits listed on the stock market during the 2017 bull run in Bitcoin prices. This time around, the situation is different. In the past month alone, stock prices for bitcoin mining companies Riot Blockchain, Inc. (RIOT) and Marathon Patent Group, Inc. (MARA) have shot up by 145% and 332%, respectively. China-based Canaan Inc. (CAN) has witnessed a 91% appreciation in its price during the same time period.
- Stock prices for Bitcoin mining companies have risen along with the increase in Bitcoin prices.
- The close coupling between Bitcoin price and mining companies cannot mask bad financials and management.
Why Did Prices for Bitcoin Mining Companies Increase?
Since Bitcoin and cryptocurrencies are a new asset class, the valuations for these companies are a function of the assets' demand in the marketplace rather than their business fundamentals. A higher price translates to greater profit margins for these companies.
Although Bitcoin proponents claim that anyone can mine it, the cryptocurrency's mining ecosystem is dominated by industrial outfits. This is primarily due to the considerable equipment and electricity costs associated with the activity. The difficulty level, which varies with time, of the algorithm used to award Bitcoin also inflates power consumption figures. Below a certain price threshold, Bitcoin mining becomes an unsustainable operation for individual miners and small mining farms during lean times in the cryptocurrency's wild price swings.
Cryptocurrency mining companies bring down their fixed costs by purchasing equipment in bulk and operating at scale to save on electricity costs. These tactics enable them to weather losses during price slumps. The opposite is also the case – i.e., profits for bitcoin mining operations increase as the price of Bitcoin (and other cryptocurrencies) rises.
In March last year, when a global pandemic shutdown was announced, Riot Blockchain and Marathon Patent Group were penny stocks. Since then, Bitcoin has emerged as a hedge against macroeconomic instability, and institutional investors have come calling. As Bitcoin's value skyrocketed, the stock prices for Riot and Marathon have shot up by an astounding 2,627% and 2,670%, respectively, since March. Not surprisingly, the companies announced further investments in mining equipment and expansion of their operations during their latest earnings calls.
Are Bitcoin Mining Companies a Buy?
The flipside to the existing price dynamic for Bitcoin mining companies is that valuations collapse when Bitcoin price craters. For example, Marathon Patent and Riot Blockchain reported losses and their stock prices flatlined through most of 2019 as Bitcoin struggled to break out of a coma in its prices.
The close coupling between Bitcoin price and stock valuations for crypto mining firms, however, doesn't mask bad financials or management. For example, investors sold off Canaan's stock last quarter amid a rising Bitcoin price trajectory after the company reported quarterly losses and inventory write-downs.
There's also the fact that Bitcoin, the most lucrative of all cryptocurrencies, has a capped supply of 21 million. Miners will have to shift to alternate revenue sources, such as transactions on Bitcoin's blockchain, to sustain their profits.