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What happened
The price of Bitcoin (CRYPTO: BTC) was around $ 38,400 at 12:45 p.m. EDT Thursday, according to CoinDesk – up sharply from its weekly low of around $ 35,000 on Sunday. There have been two big news for Bitcoin in the past week. The first is about a social media post from Tesla CEO Elon Musk, which may just be a short-term catalyst. However, the Bitcoin blockchain is also now officially scheduled to receive a major upgrade, which could be a demand driver in the longer term.
However, it’s not as if tech company MicroStrategy (NASDAQ: MSTR) needs more reasons to buy Bitcoin. The company is already taking on as much debt as possible to buy more and more bitcoin, as we’ll see in a minute. And given what he owns, it’s no surprise to see his stock rise with the price of Bitcoin in recent days. So far for the week, MicroStrategy stock is up 21%.
And with the price of Bitcoin rising, stocks that benefit from mining are also up for the week. As of this writing, Riot Blockchain (NASDAQ: RIOT) shares were up 13%, Canaan (NASDAQ: CAN) was up 8%, CleanSpark (NASDAQ: CLSK) was up 9% and Ebang International Holdings (NASDAQ: EBON) was up. up 13%.
Image source: Getty Images.
So what
First the short-term catalyst for Bitcoin: On June 13, Musk said Tesla would resume allowing Bitcoin as a two-way payment method. First, he wants to ensure that at least 50% of the energy used to run the Bitcoin network blockchain comes from clean energy sources. Second, he also wants to see Bitcoin move in a greener direction.
While Bitcoin emerged around the time of Musk’s comments, it’s important to note that most people don’t use Bitcoin to pay for things like they would with fiat currency. Part of this is because cryptocurrency investors believe Bitcoin will increase in value over time. Therefore, it doesn’t make much sense to spend it. That’s why I see Musk’s backing as a short-term boost for Bitcoin.
But what if people wanted to do more digital transactions with Bitcoin in the future? It could be a problem. You see, right now Bitcoin is limited by the volume it can handle, and the normal payment volume for an entire economy would be too much. This is due to the way information is processed and recorded on the blockchain.
On June 12, Bitcoin developers and miners took a big step forward to address this scalability issue. The developers have come up with a set of upgrades for the Bitcoin blockchain called Taproot. But the developers only come up with ideas – miners should signal their support for the proposals by putting a marker on the blocks they are processing. Once enough miners have “voted” for the changes, the blockchain network is ready for the upgrade. And on Saturday, more than 90% of miners had reported their support for Taproot, the level of support needed to make it happen.
According to many developers, the Taproot update is expected to go into effect for Bitcoin in November. Important changes include the possibility of faster transaction processing – basically, data on the blockchain is expected to get smaller, making it faster and less power consuming. But also, Taproot will allow developers to rely on the Bitcoin blockchain as they can already on blockchains like Ethereum, which could be a revolutionary update.
Image source: Getty Images.
Now what
Taproot will provide Bitcoin with new use cases that could drive demand and drive up prices. And without a doubt, this is something MicroStrategy shareholders are hoping for. The company currently holds over 92,000 bitcoins, and on June 14, it issued an additional $ 500 million in senior convertible notes to buy even more Bitcoin. This management team is clearly betting the firm that Bitcoin will rise. And MicroStrategy could be in dire financial straits if that doesn’t work.
The ripple effect Taproot could have on Bitcoin miners is unclear at this time. We often discuss how miners are rewarded with 6.25 bitcoin for every block they mine – it’s a way companies like Riot Blockchain and CleanSpark make money. But miners also make money from transaction fees, which have increased dramatically over the past year.
Bitcoin Average Transaction Fee Data by YCharts
Transaction fees have fallen sharply in recent weeks, but remain historically high at over $ 6 per transaction. If Taproot speeds things up, fees could drop further, resulting in lower revenues for some of these mining companies. That said, everything is relative since they are paid in Bitcoin, not in dollars. Simply put, there are a lot of variables involved, which makes it difficult to predict what the earnings of these companies will look like.
What is more certain is that Bitcoin miners continue to increase their computing power, creating a booming business opportunity for Canaan and Ebang. These two companies manufacture equipment for cryptocurrency mining. But just because miners are buying a lot of equipment right now doesn’t mean that investors interested in this space can be indifferent to the stocks they buy. For example, Canaan continues to inform shareholders of new orders it receives. On June 16, the company announced that it had just received a new order for 10,000 mining machines from Genesis Digital Assets. This is just one of many agreements Canaan has announced in recent weeks.
In contrast, Ebang’s revenue fell 83% year-over-year in 2020 as management noted weak demand for its mining machinery – in perspective, that’s not much worse than the drop in 69% of Canaan’s revenue in 2020. But since the release of its annual report in April, Ebang shareholders have not been told about the resumption of sales like Canaan’s. Therefore, in conclusion, as with any investment, you cannot just invest in a trend. You also want to invest in the real world companies that are making the most of their opportunities, as evidenced by their results.
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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