Why Bitcoin Miner Stocks Soared This Week

What happened

Cryptocurrencies soared this week. According to data from S&P Global Market Intelligence, Bitcoin (BTC 7.50%) led the way, with a 22.2% price gain from the stock market’s closing bell last Friday to the same time this Thursday.

Over the same period, that price surge powered an even stronger updraft under the stocks of leading Bitcoin mining specialists:

MARA data by YCharts.

So what

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

First, several banks with close ties to the crypto sector were shut down by Californian 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 guarantee of billions of dollars that help power the trading systems behind Bitcoin and other cryptocurrencies resulted in a price surge over the weekend.

Then, traders put their thinking caps on and started pondering what the bank closures might mean for the American economy at large. By Tuesday morning, many investors agreed that the Federal Reserve’s inflation-fighting interest 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 lighten up its anti-inflation measures, and let banks breathe more freely with lower interest rates on federal funds. That’s seen as a positive development for Bitcoin, ahead of next week’s scheduled rate-setting conference.

And as Bitcoin goes, so do the miners — though their stock-price moves tend to amplify whatever the cryptocurrency’s chart is doing. These miners are not just holding a bunch of Bitcoin on their balance sheets; they also strive to make and buy more of the digital currency over time. This strategy adds to their value when Bitcoin prices are rising, but also increases the risk involved in running their businesses.

Image source: Getty Images.

Bitcoin mining rigs are not cheap, and they draw an incredible amount of electric power. Marathon Digital Holdings (MARA 7.62%), Hut 8 Mining (HUT 4.24%), and Riot Platforms (RIOT 5.38%) run their business operations 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 rely on Bitcoin gaining value in the long run, while also building out their crypto-mining rigs as fast as they dare. But a few management missteps or a too-harsh crypto winter could puncture the whole business model, leaving shareholders penniless.

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That combination of long-term financial gains above and beyond Bitcoin’s price development, plus the constant threat of financial collapse, adds up to massive volatility. So the miners outperformed Bitcoin in this week’s surge, and they’re doing great in 2023 overall. Bitcoin’s price is up 51% year to date, while all three of the miners above more than doubled in value.

Now what

The pricing trends play out on longer time scales, too. For example, Bitcoin is down by 36% in 52 weeks, but the Bitcoin miners have taken haircuts ranging from 57% to 69% over the same span. On a chart of the last year, the deep price drops and giant leaps of recent weeks are just another little divot in the larger trend line:

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MARA data by YCharts.

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