Bitcoin mining stocks bounced today as the price of Bitcoin rebounded to around the $30,000 level after what has been an extraordinarily difficult week for the sector.
Bitcoin finally stopped its downward plunge today after what has been a difficult week in which the world’s largest cryptocurrency briefly fell below $26,000. Investors this week have been selling as they digest the macro outlook and the Federal Reserve’s tightening monetary policy, which has already included multiple rate hikes and the Fed’s clear intention to begin reducing its $9 trillion balance sheet.
Fed Chair Jerome Powell only added fuel to the flame yesterday when he said in an interview that engineering a soft landing for the economy and maintaining a strong labor market would not be easy while raising interest rates to rein in some of the highest inflation seen in decades. Powell also indicated that the Fed will likely raise its benchmark overnight lending rate by a half-point at its upcoming meetings in June and July on top of the half-point hike it just did in May, which had been the Fed’s largest rate hike in more than two decades.
In addition to the macro outlook, crypto investors also got spooked after the notable algorithmic stablecoin TerraUSD (UST -36.14%) saw its price collapse this week, currently trading around $0.15. Stablecoins are digital assets pegged to a commodity or fiat currency and are typically backed by these assets, but algorithmic stablecoins have no real assets backing them. Instead, they use complex coding to maintain their peg. TerraUSD’s peg is to the U.S. dollar, so it is supposed to stay right around $1.
Terra (LUNA) (LUNA 424.67%), which is TerraUSD’s sister token and helps TerraUSD maintain its link to the dollar, has billions of reserves in Bitcoin, so investors have been concerned that Terra would sell the Bitcoin reserves amid the troubles and flood the market. But some of those fears seemed to dissipate today, at least temporarily.
Bitcoin miners trade in a heavily correlated fashion to the price of Bitcoin because that is the asset they mine and hold, so naturally, as the price of Bitcoin gets more or less valuable, so does their business.
But I’m not a huge fan of the model because the miners need to buy lots of hardware to have enough computing power to solve cryptographic puzzles extremely quickly in order to mine Bitcoin.
There are also concerns it could be tough for these miners to finance future equipment purchases with their stock prices so low, and there can be regulatory issues also. Cryptocurrencies could continue to be volatile as well, but overall I would rather just buy Bitcoin on the dip than these stocks.