Bitcoin (CRYPTO: BTC), the world’s most valuable cryptocurrency by market cap, hit its lowest price in more than a week on Wednesday. According to CoinDesk, the price has fallen by around 4% in the past 24 hours at the time of writing. The reason for Bitcoin’s fall is unclear. But when it falls, it affects many cryptocurrency stocks.
Among these, there are companies that mine Bitcoin. These included Marathon Digital Holdings (NASDAQ: MARA), Riot blockchain (NASDAQ: RIOT), and The9 Limited (NASDAQ: NCTY). These three stocks ended today’s session down 12%, 11% and 15%, respectively.
As a perspective, the price of Bitcoin has risen about eight times from where it was around the same time last year, and it has almost doubled so far in 2021. That’s a huge amount. appreciation of the price and, therefore, it is not surprising to sometimes see it cool down a bit. , as he did today.
The appreciation in the price of Bitcoin has steadily attracted mining activity. Cryptocurrency miners have dedicated computers for verifying transactions on blockchain networks. The more computing power a Bitcoin miner provides (called a hash rate), the more likely they are to first solve a complex math problem and get paid in Bitcoin for their services.
When paying in Bitcoin is more valuable (as it is now), miners have more of an incentive to mine as much as they can – the numbers make sense. This is why Riot Blockchain announced the acquisition of 42,000 Antminers S19j today. These new mining machines are almost double Riot Blockchain’s hash rate at 7.7 exa-hashes per second (EH / s) when operational.
Riot Blockchain’s announcement today 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 that of Riot Blockchain. But on Monday, the company planned to regularly roll out new mining machines and increase its hash rate to nearly 10.4 PE / s by the end of March 2022.
Likewise, The9 has made recent announcements to increase its hash rate. Its current rate is difficult to determine with precision; Over the past two months, the company has made announcements but has not updated how many mining machines are already operational. Having said that, there seems to be less than one EH / s currently, like Marathon Digital.
On March 19, The9 announced the acquisition of 24,000 Antminers, which will add nearly 2.2 EH / s to its hash rate. But these are not expected to be delivered until November, so it will take time to significantly 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 income by selling Bitcoin for cash at their discretion. Therefore, their earning potential decreases when Bitcoin is down. And that’s why these cryptocurrency stocks fell today.
Rightly or wrongly, the market seems to be more bullish about The9’s long-term prospects than Marathon Digital or Riot Blockchain. Maybe that’s because it does more than mine Bitcoin. For example, it also mines Filecoin and operates a video game business. Having said that, this company generated $ 96,000 in full year revenue in 2020. Yes, I said “thousand”. That’s meager income for a company with a market capitalization over $ 230 million.
From a price / sales perspective, I’m not sure any of these stock valuations make sense – they’re all expensive. But valuations aside, investors should keep two things in mind. First, these Bitcoin miners need the price of Bitcoin to continue to rise if they are to be long-term winners. But predicting the future price of cryptocurrencies is a different exercise from that of stocks. The question is: will demand for Bitcoin continue to exceed supply?
Second, if the price of Bitcoin continues to rise, expect the total network hash rate to continue to rise as miners continue to increase their computing power. This statistic can be tracked publicly on sites like Blockchain.com.
Marathon Digital, Riot Blockchain, and The9 will need to at least keep their hash rates at the same rate as the entire network if they are to continue generating the same Bitcoin payments.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.