Why Crypto Mining Stocks Got Crushed Today

What happened

Shares of crypto mining stocks were completely smashed in trading on Monday as crypto prices fell. The most notable drop came from Bitcoin (BTC -16.50%)which is down 16.4% in the last 24 hours at 3 pm ET and during that period has been at levels below $23,000.

On the mining side, Bitfarms (BITF -15.72%) fell as much as 15.7% on Monday, Cabin 8 Mining (CABIN -12.23%) fell 17%, digital bits (BTBT -13.38%) down to 15.5%, Canaan (THEY CAN -12.87%) fell 14.5%, and riot block chain (RIOT -10.06%) down 15.7%. Each of these stocks had rallied slightly near the end of trading, but all fell by double-digit percentages during the day.

And that

Cryptocurrency miners generate tokens as income, so the drop in value of those cryptocurrencies will ultimately mean less money for them. But to make matters worse, most of these companies have significant amounts of Bitcoin they have mined on their balance sheets. Their decline is taking a big bite out of the value of the assets they own.

Furthermore, Bitcoin mining has significant fixed costs. Those who buy computer equipment have initial outlays that must be paid for mining, but some rent space from cloud companies. Those expenses will not go away even if the price of Bitcoin continues to fall.

It is actually surprising that crypto miner stocks have not fallen further given that they are so leveraged on the Bitcoin price and there is real business risk if the tokens lose more ground.

Now what

I don’t know where Bitcoin miners go from here. These companies need the price of Bitcoin to stay high to trade profitably, but it keeps falling with no end in sight. News on Monday that major crypto lending firm Celsius Network had paused all transfers and that even cryptocurrency exchange Binance had paused withdrawals from Bitcoin accounts were negative signs for the industry.

Confidence seems to be waning in cryptocurrencies, and the only safe haven in the asset class was supposed to be Bitcoin, but even that thesis is falling apart. If we haven’t bottomed out yet, miners could soon be forced to sell some of their Bitcoin to fund trades, adding to the downward pressure on prices.

Outside of a recovery in Bitcoin price, I don’t see a great way forward for miners. Their costs are relatively fixed, but the tokens they generate are worth less almost every day.

Investors looking for exposure to Bitcoin may be better off buying the tokens. At least one Bitcoin cannot go bankrupt like a miner can, and given current market conditions, a lower risk asset may be the way to go.

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