What happened
Bitcoin is the most popular cryptocurrency in the world and bitcoin mining operations keep the tokens flowing. Some miners have chosen to list their companies on the stock market, allowing investors a chance to own a piece of these companies. And December 2020 is a month bitcoin mining investors should remember for a while. Just consider some of these returns (through Dec. 23):
- Marathon Patent Group (MARA -4.46%) stock is up 80%.
- CleanSpark (CLSK -5.60%) stock is up 117%.
- HIVE Blockchain Technologies (HIVE -1.98%) stock is up 104%.
- Riot Blockchain (RIOT -4.85%) stock is up 66%.
Those are some of the best one-month returns investors will ever see. However, all of these stocks pulled back on Wednesday, and some even dropped by double-digit percentages. Why are bitcoin mining stocks so volatile and what should investors expect going forward?
Image source: Getty Images.
So what
Today, HIVE Blockchain Technologies gave a business update that highlights a general truth for bitcoin miners lately. The company primarily mines Ether, the native token to the Ethereum blockchain. But it also mines bitcoin. Since Oct. 1, HIVE has mined more than 19,000 Ether and 140 bitcoin. Now consider what's happened with the price of bitcoin and Ether since Oct. 1.
Bitcoin Price data by YCharts
Over the last two months alone, the price of bitcoin has more than doubled, and Ether is up 80%. Every miner has a different break-even price for mining cryptocurrencies based on the unique cost structure of each company. However, the cost to mine bitcoin and Ether doesn't fluctuate with token prices. Although HIVE didn't provide financials in its business update, bitcoin miners have a higher chance at profits as cryptocurrency prices rise.
The chance at higher bitcoin profits has attracted the attention of stock traders, not investors. Long-term investors focus on business fundamentals and buy stocks with an investing horizon long enough to let a bullish thesis play out. By contrast, stock traders focus on stock chart patterns to buy and sell quickly, often during the same day.
Rising cryptocurrency prices are part of the reason these stocks have gone up in December. But here's why I believe traders have also played a role in driving bitcoin miner stocks higher over the last few months. Consider the trading volume for Amazon.com (one of the largest companies in the world) and contrast that with the volumes for Marathon, CleanSpark, HIVE, and Riot Blockchain:
MARA Volume data by YCharts
The bitcoin miners are all small-cap stocks; their market caps are all less than $1 billion. Nevertheless, people are buying and selling these more than mega-cap stocks. Consider Riot Blockchain is currently trading hands almost 30 times faster than Amazon!
This virtually guarantees the vast majority of shareholders in these bitcoin mining stocks aren't in it for the long haul. They're simply hoping to make a quick profit by offloading shares on a greater fool.
Regular people like you and me can avoid being that fool by using a better investing framework.
Image source: Getty Images.
Now what
For me personally, there's only one method that's worked to make money in the stock market: Buy stocks with businesses growing revenue because of societal trends, possessing high profit potential, and managed by leadership with a track record of success, and hold those stocks for years. If my research was good, time allows these companies to create shareholder value, making my stock go up. No need to fool someone on the other side of a quick trade.
To be clear, I don't think mining bitcoin is a great business to invest in. The most important factor (the price of bitcoin) is outside the companies' control. Each could impeccably manage their operation only to have the bottom fall out on the price of bitcoin, resulting in big losses. But even in good times, miners have ongoing costs that threaten profitability.
Don't get me wrong. I believe token values for bitcoin and Ether are headed higher in coming years, which is why I bought some of each. However, I don't believe these mining stocks are worthy of your hard-earned investing dollars. Your cash should be reserved for the very best companies in the world, and fortunately there are hundreds of other candidates to choose from.
