What happened
Bitcoin (CRYPTO:BTC), the world’s most valuable cryptocurrency by market cap, hit its lowest price in over a week on Wednesday. According to CoinDesk, the price is down roughly 4% over the past 24 hours as of this writing. The reason for Bitcoin’s drop isn’t clear. But when it falls, it affects many cryptocurrency stocks.
Among those are companies that mine Bitcoin. These include Marathon Digital Holdings (NASDAQ:MARA), Riot Blockchain (NASDAQ:RIOT), and The9 Limited (NASDAQ:NCTY). These three stocks finished today’s session down 12%, 11%, and 15%, respectively.
Image source: Getty Images.
So what
For perspective, the price of Bitcoin is up roughly eight times from where it was this time last year, and it has almost doubled so far in 2021. That’s tremendous price appreciation and, therefore, it’s not surprising to see it occasionally cool off a little, like it did today.
Bitcoin’s price appreciation has steadily attracted mining activity. Cryptocurrency miners have computers dedicated to verifying transactions on blockchain networks. The more computing power (called hash rate) a Bitcoin miner provides, the greater the miner’s odds of solving a complex math problem first and being paid in Bitcoin for its services.
When the Bitcoin payout is more valuable (as it is right now), miners have greater incentive to mine as much as they can — the numbers make sense. That’s why Riot Blockchain announced it’s acquiring 42,000 S19j Antminers today. These new mining machines will almost double Riot Blockchain’s hash rate to 7.7 exa-hashes per second (EH/s) when they’re operational.
Image source: Getty Images.
Today’s announcement from Riot Blockchain mirrors that of other Bitcoin miners in recent days. For example, Marathon Digital’s current hash rate is less than one EH/s, a fraction of Riot Blockchain’s. But on Monday, the company laid out plans to steadily deploy new mining machines and bring its hash rate to almost 10.4 EH/s by the end of March 2022.
Likewise, The9 has made recent announcements to increase its hash rate. Its current rate is hard to nail down precisely; in the past two months, the company has made announcements but hasn’t updated how many mining machines are already operational. That said, it appears to be less than one EH/s currently, like Marathon Digital.
On March 19, The9 said it will be acquiring 24,000 Antminers, which will add almost 2.2 EH/s to its hash rate. But these aren’t scheduled to be delivered until November, so it will take time to meaningfully improve the company’s business results.
In summary, Marathon Digital, Riot Blockchain, and The9 contribute to Bitcoin’s total hash rate and are paid in Bitcoin in return. These then generate revenue by selling Bitcoin for cash at their discretion. Therefore, their revenue potential goes down when Bitcoin is down. And that’s why these cryptocurrency stocks fell today.
Year-to-date returns for these cryptocurrency stocks, Bitcoin, and the S&P 500. MARA data by YCharts
Now what
Right or wrong, the market seems to be more optimistic about the long-term prospects of The9 than Marathon Digital or Riot Blockchain. Perhaps that’s because it does more than just mine Bitcoin. For example, it also mines Filecoin and operates a video game business. That said, this company generated $96,000 in full-year revenue in 2020. Yes, I said “thousand.” That’s meager revenue for a company with a market capitalization over $230 million.
From a price-to-sales ratio perspective, I’m not sure any of these stock valuations make sense — they’re all pricey. But valuations aside, investors need to keep two things in mind. First, these Bitcoin miners need the price of Bitcoin to keep going up if they’re going to be long-term winners. But predicting the future price of cryptocurrencies is a different exercise than predicting stocks. The question is: Will demand for Bitcoin continue to outpace supply?
Second, if the price of Bitcoin keeps going up, expect the total hash rate of the network to keep climbing as miners continue increasing their computing power. This statistic can be tracked publicly on sites like Blockchain.com.
Marathon Digital, Riot Blockchain, and The9 will have to at least keep their hash rates growing at the same pace of the overall network if they’re going to keep generating the same Bitcoin payouts.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.