After governments printed trillions of dollars to shore up the global economy, they became the critical ingredient in a bull market spanning asset classes, from stocks, to real estate, to commodities, to crypto. Sometimes, those worlds coincided in a spectacular way. Blockchain and crypto stocks on U.S. markets started to feel like derivative products tracking crypto darlings such as Bitcoin and Ethereum by proxy.
Early in the run, stocks like MicroStrategy ($MSTR) made waves as they replaced U.S. dollars with Bitcoin on their balance sheets, rising over 360% over the last year. The success of $MSTR adding Bitcoin to their balance sheet is cited as an event that later inspired Elon Musk’s Tesla ($TSLA) and Jack Dorsey’s Square ($SQ) to follow suit.
As the run progressed, a handful of small-cap crypto mining companies and blockchain players joined the party. Crypto mining companies, which use computer hardware to do computations in order to be rewarded with currency, found themselves rallying as crypto rose. For these mining players, a single-digit percent move in the price of Ethereum or Bitcoin often translated into a double-digit move in their stock.
Let’s take a closer look at these mining companies and how they’re doing:
Marathon Patent Group ($MARA) and Riot Blockchain ($RIOT), two small-cap crypto mining companies, rose over 3,000% in the last year, becoming staples of our Bullish Rippers list. $MARA and $RIOT both maintain Bitcoin mining operations in the U.S., generating thousands of dollars per day in revenue. Mining crypto is the way by which proof-of-work cryptos like Bitcoin and Ethereum verify transactions and help money move around the blockchain. For doing the computational legwork, the miners are rewarded with crypto that they can then hold onto or sell into the market.
In the later stage of this run, the number of movers and shakers has expanded even further. Since the start of 2021, shares of SOS Limited ($SOS) and Canaan Inc ($CAN) have outpaced the growth in the price of Ethereum and Bitcoin. $SOS, which announced it would start mining Bitcoin and Ethereum in early 2021, has jumped over 380% since the start of the year. Canaan, which makes mining equipment, also got love from investors who speculated on increased sales of mining units - which caused it to rise 207%.
As already established, these companies trend with the price of the broader crypto market. This means as crypto rises, these stocks rise in tandem with it. As a result, which crypto stagnated in the last month, the stocks followed the downward pattern. This is apparently clear when you review the movement of these stocks against cryptos over the last month.
So what does this relationship among “crypto stocks” and cryptocurrencies like Ethereum and Bitcoin tell us? Well, it fabulously illustrates the demand for crypto exposure among equity investors, but also the speculative nature of crypto stocks.
Many investors are not buying crypto directly because of perceived concerns about taxability. For example, Coinbase does not prepare traditional 1099 tax forms. Instead, they tell people to do their own taxes, which necessitates paying a third party company to process your transactions to gauge the tax impact. Since few people want to do that, these companies have risen as intermediaries for crypto exposure.
There’s only one problem: Investors buying these stocks think they’re getting exposure to the crypto market, but what they’re really getting exposure to is the psychology of crypto. When crypto is trending up, investors want in. When crypto is trending down, investors want nothing to do with these players. These stocks have knee-jerk valuations which are more closely related to market sentiment around the broader crypto space than book values.
Buying shares of Canaan is liken to buying shares of a company selling pickaxes to gold miners. Buying shares of MicroStrategy gives investors exposure to Bitcoin, but also makes them invest in a business intelligence company with lots of moving pieces. Mining companies such as $MARA and $SOS might be generating revenues by mining crypto, but with that more factors to worry about: what price are they selling the crypto at? What happens if mining becomes unprofitable, unsustainable, or is stopped by a change in software? What happens if all of this investment gets washed by a sudden drop in crypto markets? Should they be holding these assets on their books or selling them?
No matter how you look at these players: the risk in crypto, which is a volatile and unstable init of itself, will be magnified in these stocks because these stocks are not based in fundamentals; they are based in psychology about what is popular. These are things that investors need to consider now, especially given concerns about the crypto run slowing down.
New Ways to Gain Crypto Exposure
Crypto stocks provide evidence that there is enough demand for crypto on equity markets. However, it is understandably mystifying to investors. Buying, storing, selling, staking, identifying crypto investments and filing taxes for investments serves investors with a new set of problems. And these are unlikely to be problems that traditional investors want to solve. Think of your uncle; I doubt he wants to pay a third party to file his crypto taxes.
However, buying crypto stocks thinking you’re getting meaningful exposure to crypto might be even worse than paying a third party. Nonetheless, your uncle (or other investors) might not have to choose between speculative equity-based crypto gambles and the complexities of buying and taking custody of crypto yourself. This is because of the rise of crypto ETFs cropping up as a way to gain long-term exposure to the crypto market. The Osprey Bitcoin Fund ($BTC) and Grayscale Ethereum Trust (ETHE) are two recent crypto ETF entrants which are backed by real cryptocurrency holdings.
As a bonus, there are a handful of crypto-centric ETF companies which allow investors to gain access to altcoins or alternative crypto strategies. Though not all brokerages support buying crypto-focused ETFs, many old-fashioned ones (such as TD Ameritrade and InteractiveBroker) do. Of course, we’d be remiss if we didn’t mention Robinhood (which offers a crypto buying & custody solution) and Uphold (which files 1099s for investors in the U.S.).
Overall, a critical takeaway for investors is that buying crypto stocks is one way of betting on the crypto market. However, investing in crypto-centric businesses is not the same as investing in crypto. Investors will get more out of investing in crypto directly or buying ETFs tracking cryptos. You’re welcome to gamble your money on crypto stocks and make a little here and there, but when a prolonged reversal or recession strikes crypto? Directly owning crypto or ETFs which own crypto will always have value. I cannot say the same for investing in companies which have employees to pay, mining systems to upkeep and other expenses and factors relating to their business.