There were two major stories for the popular cryptocurrency Bitcoin (CRYPTO: BTC) over the past week, causing disparate market reactions. On Monday, the Justice Department announced that it had seized Bitcoin obtained during a ransomware attack. This caused Bitcoin to fall because investors started to wonder how secure Bitcoin really is. But on Tuesday, El Salvador voted to make Bitcoin legal tender. This was seen as a big development for the long-term adoption of Bitcoin, sending coins higher.
In total, Bitcoin has only risen by around 1% since the start of the week. But it was a volatile race to get there.
Shareholders are already well aware, but Bitcoin stocks can trade as volatile as Bitcoin itself. All of those stocks have skyrocketed during the week. But since Thursday afternoon, CleanSpark (NASDAQ: CLSK) the stock was up 13% for the week. Marathon Digital Holdings (NASDAQ: MARA) and Osprey Bitcoin Trust (OTC: OBTC) also increased by 9% and 8%, respectively. On the other hand, Canaan (NASDAQ: CAN) the stock was down almost 15%.
To highlight how volatile Bitcoin stocks can be, consider that only one of these companies (CleanSpark) released any news during the week. None have filed anything with the Securities and Exchange Commission. In addition, no prominent Wall Street analyst has weighed on stocks and caused the price per share to fluctuate. These stocks have all made big moves without any company specific news other than the fluctuating price of Bitcoin.
As mentioned, only CleanSpark had news during the week. It happened on the afternoon of June 7 – ironically, the stock’s least volatile trading day.
CleanSpark management made an appearance at Water Tower Research Fireside Chat. During the presentation, Executive Chairman Matt Schultz announced that he had just learned that the CleanSpark share would be included in the Russell 2000 Index. For this reason, Shultz said his data suggests that 4.7 million and 5.9 million CleanSpark shares will be purchased for exchange-traded funds (ETFs) and index funds by June 25. This interesting development might help explain why CleanSpark was up for the week.
Having said that, I would expect CleanSpark, Marathon Digital, and Canaan to move with the price of Bitcoin as it is the most fundamental part of their business. For example, a higher price for Bitcoin encourages more mining activity, requiring more mining equipment. Canaan is supplying this equipment and sales have recently resumed. The company generated more than $ 61 million in revenue in the first quarter of 2021, more than ten times more than the previous quarter.
As sales pick up for Canaan, there is still a lot of uncertainty. The company released first quarter results on June 1, noting that it was not giving forward guidance due to the fluctuation in the price of Bitcoin. However, a representative clarified via email the next day that Canaan management expects to generate between $ 150 million and $ 250 million in revenue in the second quarter. This is an astonishing rate of growth that investors should take note of. However, this is also an extremely wide range of revenue forecasts, highlighting how unknown this business is yet given the fluctuations in the price of Bitcoin.
The price of Bitcoin is also a big issue for Marathon Digital. Not only is the company mining Bitcoin, it has also bought Bitcoin and owns all the Bitcoin it is mining. As of June 2, he held 5,518 bitcoins. With Bitcoin trading at around $ 36,600 at the time of writing, these bitcoins are valued at over $ 200 million, or roughly 7.5% of its market cap – a sizable number.
CleanSpark also offers products in the sustainable energy sector, so its long-term fate is not completely tied to that of Bitcoin. However, if you are investing in Canaan or Marathon Digital for the long term, you are relying on two things. First of all, you rely on Bitcoin to go up. Second, you rely on them to create shareholder value by running good companies. But the price of Bitcoin is the most important factor – a well-run Bitcoin business is not a compelling investment when the price of Bitcoin skyrockets.
For this reason, investing more directly in Bitcoin may be a better way to invest in this space. You can do this relatively easily through a cryptocurrency exchange or with a fund like Osprey Bitcoin Trust. Osprey only holds Bitcoin. The only problem sometimes is that stocks trade at a premium to the underlying Bitcoin assets – currently the premium is around 19%.
Once Osprey Bitcoin Trust trades closer to its net asset value, it can be a good way to invest in Bitcoin. If you think Bitcoin is going up, you can profit from it without taking on the operational risks associated with owning shares in other companies.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning 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.