Why Bitcoin mining stocks plunged on Wednesday

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What happened

Shares of crypto miners plunged during trading on Wednesday as the price of Bitcoin (CRYPTO: BTC) fell. As of 4:15 p.m. ET, Bitcoin was down 4.95% in the past 24 hours, but is down 6.2% since early this morning.

The impact on the miners was rapid. Riot Blockchain (NASDAQ: RIOT) fell 13.1% today, Marathon Digital (NASDAQ: MARA) fell 14.4%, and Hut 8 Mining (NASDAQ: HUT) fell 12.8%. Shares ended the day down 12.1%, 13.2% and 12.3%, respectively.

Image source: Getty Images.

So what

The decline in Bitcoin can be a double whammy for Bitcoin miners. First, they earn their income in Bitcoin as compensation for providing mining services to the network. So when Bitcoin goes down, their income also goes down without any real compensation for their costs. Given the high levels of fixed costs associated with mining, we could see net income drop significantly if the current trend in Bitcoin continues.

Many of these companies have also chosen to keep Bitcoin on their balance sheets, making Bitcoin’s decline even worse. At the end of Q3 2021, Riot has 3,995 bitcoins, Marathon 7,035 bitcoins, and Hut 8 has over 5,000 bitcoins in reserve. In the last few hours alone, these companies have lost over $ 50 million just to the value of Bitcoin on their balance sheets.

Miners will not only see a negative impact on the income statement if Bitcoin continues to fall; they will also see their balance sheets collapse, and that should be a concern for investors.

Now what

In some ways, this move should be seen as short-term. Bitcoin miners will rise and fall with the price of Bitcoin, so if the value of the cryptocurrency rebounds in the next few days, we will likely see stocks recovering as well.

But I fear the best days have passed for Bitcoin and its miners. Bitcoin has proven not to be a great hedge against inflation, and other cryptocurrencies are stepping up their usefulness and attracting users at a rapid rate.

We’re also going to see the Federal Reserve cut its stimulus policies in 2022, which likely helped boost the crypto rally in 2020 and 2021. This could put pressure on Bitcoin as less money is flowing through the system.

If you are bullish on Bitcoin, this is an asset you can invest in directly, but today is a reminder that miners are in fact a leveraged bet on Bitcoin. When it does fall, they will fall even harder, and that is exactly what we are seeing in the market today.

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! Challenging 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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