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What happened
Cryptocurrency stocks had a great start to the day on Thursday as Bitcoin (CRYPTO:BTC) and other digital currencies jumped sharply early in the day. With the rise in crypto prices, it’s no surprise that crypto stocks increased as well.
BIT Mining (NYSE:BTCM) led the way today and was up 33.9% at its high, while SOS Ltd (NYSE:SOS) rose up to 17.1%, and Bit Digital (NASDAQ:BTBT) was up 12.5%. The stocks fell sharply off their highs but were still up 23.3%, 16.6%, and 4.2%, respectively, at the close.
Image source: Getty Images.
So what
After hitting lows near $37,000 overnight, Bitcoin rose to over $40,000 early in the day on Thursday. That was the cause of the early pop in trading for cryptocurrency stocks. As I’m writing this, Bitcoin has fallen back to about $39,000, which is why these stocks have fallen back.
Beyond the price of crypto, BIT Mining announced this week that it plans to build a 100 megawatt (MW) crypto-mining data center in Kazakhstan. This follows an announcement last week that it will invest in a crypto-mining data center in Texas. These moves could be a way to escape some of the restrictions the Chinese government is putting on cryptocurrencies.
One of the biggest risks for cryptocurrency miners is that their assets will lose value because of government restrictions like the ones China recently implemented. So the fact that companies are diversifying where they have data centers and are even discussing adding more renewable power sources should be seen as a positive for the industry. And with some stability coming back to crypto prices, the market is diving back into mining stocks.
Now what
Cryptocurrency miners will move with underlying cryptocurrencies like Bitcoin, so the volatility in the market will likely continue to push stocks sharply higher or lower each day. For long-term investors, this volatility is part of the crypto business and should be seen as a risk of owning the stocks.
Investors should also keep in mind that miners might be even more volatile than cryptocurrencies long term, just like traditional mining companies are more volatile than commodities. This is because of the operating leverage that’s inherent in the crypto mining business.
We should also keep an eye on how crypto mining diversifies in the long term. Most of the world’s crypto mining is currently in China, and if that continues, it’s a big risk. But if mining is spread around the world, it could reduce government-related risk.
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.
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