Why Bitcoin mining stocks were soaring on Monday

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What happened

Shares of cryptocurrency mining stocks were soaring on Monday. Among them were BIT Mining Limited (NYSE: BTCM), Bitfarms (NASDAQ: BITF), Riot Blockchain (NASDAQ: RIOT) and CleanSpark (NASDAQ: CLSK). As of 1:30 p.m. EDT, those stocks were up 16%, 13%, 11% and 12% respectively.

There are probably two factors influencing these stocks today. First, the price of Bitcoin (CRYPTO: BTC) continued to rise over the weekend and is currently around $ 45,900 per bitcoin, according to CoinDesk. However, today the US Senate voted to push forward legislation that could hurt these companies, which may be the reason stocks pulled back slightly from their daily highs early this morning.

Image source: Getty Images.

So what

You’ve probably heard of the massive $ 1 trillion infrastructure spending bill that includes much-needed spending on American roads and bridges and so on. What investors may not know is that the bill contains a tax provision for digital assets. To condense the problem, critics say the language is too vague and, therefore, could broaden the definition of a “broker” to include any party involved in any part of the cryptocurrency trading process.

Coinbase Global and Square opposed changing the infrastructure bill in a joint statement with other cryptocurrency players. According to the statement released on August 4, the proposal would have made mining companies and hardware manufacturers fit the new broker description, placing prohibitive restrictions on those companies. Some senators had proposed changes to the digital asset provision to address these concerns, which these companies supported. However, today the Senate voted to move the infrastructure bill forward without these amendments.

That said, investors from BIT Mining, Bitfarms, Riot Blockchain, and CleanSpark don’t seem overly concerned about the provision of digital assets from the infrastructure bill. While these stocks have pulled back from early highs, the pullbacks have been small. Overall, it looks like investors are just celebrating Bitcoin’s gains over the weekend and through to today. These companies generate income from bitcoin mining and some even keep the bitcoin they mine. So it makes sense that investors are optimistic.

To be clear, none of these companies released any news today. They also haven’t filed anything with the Securities and Exchange Commission. And there were no prominent analysts updating their outlook for stocks. Therefore, investors should realize that today’s gains have been fueled by general optimism in the cryptocurrency space. These shares are not increasing due to a positive development specific to the company.

Image source: Getty Images.

Now what

Here’s another way to put what I just said: BIT Mining, Bitfarms, Riot Blockchain, and CleanSpark shares did not rise today because of something related to company fundamentals. But, for long-term investors, the fundamentals of the business are always the most important thing to watch.

To get a sense of how these companies are doing individually, shareholders will look forward to quarterly business updates. CleanSpark is expected to deliver third quarter 2021 results on August 16. Coincidentally, Bitfarms will release its second quarter 2021 results at the same time as CleanSpark.

Riot Blockchain and BIT Mining have not announced the release date of their results. But investors should generally consider the same metrics with these companies when they release their reports. Bitcoin mining is competitive, forcing these companies to constantly increase their computing power. This is measured with a metric called “hash rate” and the overall Bitcoin network hash rate has plummeted in recent weeks because China has banned mining operations.

The overall drop in Bitcoin’s hash rate is an opportunity for players still in the game – they can gain market share and mine more Bitcoin. Expect Bitcoin production to be up for all of these companies – a drop could be a sign of trouble. Additionally, keep an eye out for these companies’ plans for future hash rate growth. This will provide a good idea for ongoing capital needs.

It is important to master the specific capital needs of a Bitcoin mining company, as many, like Riot Blockchain, do not sell their mined bitcoins to generate cash. For this, many often turn to public markets, sometimes diluting shareholder value. This highlights the need to invest in companies with strong balance sheets if you are considering buying Bitcoin mining stock.

This article represents the opinion of the writer, who may disagree with the official recommendation position of a premium Motley Fool consulting service. Were motley! 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.

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