Bitcoin's rapid rally over the past few weeks has helped it erase its losses for the year, but equity investors have yet to pile back into crypto-related stocks with the same conviction.
Since hitting a six-month low in late January, Bitcoin prices have surged more than 30 per cent including a 13 per cent jump in March. Meanwhile, the NYSE FactSet Global Blockchain Technologies Index - which tracks 35 stocks with exposure to the cryptocurrency space - remains 13 per cent lower for 2022.
"There's a lot of debate on exactly what these companies should be worth and their long term place in the marketplace," said D.A. Davidson analyst Christopher Brendler. Gyrations in equity markets, particularly among tech stocks, and prospects for higher interest rates have also weighed on the group, he added.
Crypto mining firms have been among the hardest hit from Bitcoin's roughly 50 per cent slide earlier this year from a record high in November. Shares of Hut 8 Mining Corp., Voyager Digital Ltd. and Bit Digital Inc. have all fallen 25 per cent or more year to date, while Marathon Digital Holdings Inc. is down about 6.8 per cent.
On Wednesday alone, Stronghold Digital Mining Inc. sank 33 per cent to a record low after its fourth-quarter earnings missed estimates and the company warned that its 2022 hashrate target - a measure of how quickly it can mine - was no longer achievable, citing operational headwinds.
Steep and sudden price swings are not uncommon in the crypto space, but sharp declines in value, like the one seen in Bitcoin to begin the year, still create headaches for stocks with heavy exposure.
For miners, any plunge in crypto prices begins to compress their typically robust profit margins. While Bitcoin's recent rebound has eased some of those pressures, the runup in energy prices over the past month as a result of the war in Ukraine is likely to drive up operating expenses for the miners that need to consume large amounts of electricity in order to run their mining rigs.
"Bitcoin rallying is good for the names but doesn't necessarily fix the problems unless we get a more hospitable equity environment because these companies all need to raise a lot of capital to hit their growth targets," according to Brendler.
Other crypto-exposed stocks are looking to capitalize on Bitcoin's depressed price, which remains about 30% below its record high despite its recent rebound. MicroStrategy Inc. announced Tuesday that it received a $205 million loan from a subsidiary of Silvergate Capital that it plans to use to buy more Bitcoin.
Still, investors that are willing to look past the near-term uncertainties and can stomach the volatile trading may end up as winner over the long haul.
"The stocks are extremely cheap even on today's metrics, but if you fast forward and think about how much Bitcoin they could use offset their enterprise value, they're really cheap," Brendler said.
