What happened
The largest cryptocurrency in the world, Bitcoin (CRYPT: BTC), is getting bigger and bigger. In the past 24 hours, its price has gone up by about 2% and is approaching $ 58,000 per Bitcoin. This puts Bitcoin’s market capitalization at around $ 1.07 trillion, according to CoinDesk.
Today, US President Joe Biden signed the latest economic stimulus package, triggering a major recovery on Wall Street. These two factors – the price of Bitcoin and the stimulus – caused cryptocurrency stocks to skyrocket. Cryptocurrency miners like The9 Limited and Riot Blockchain increased by 17% and 12%, respectively. And mining equipment manufacturer Canaan had a colossal increase of 30% in the session.
Image source: Getty Images.
And
Canaan, Riot Blockchain and The9 are diverse companies. However, they tend to be traded together based on the direction of the cryptocurrencies. And cryptocurrencies tend to trade in the same direction as Bitcoin. On the one hand, it makes sense. Riot Blockchain extracts Bitcoin. To generate revenue, it periodically sells what it extracts. When prices rise, it is a good time for the company to sell, as it allows for greater revenue.
On the other hand, not all of these movements make total sense. For example, Canaan manufactures equipment used to mine Bitcoin. As the price goes up, more and more companies are attracted to mining. For proof, consider the total hash rate of the Bitcoin blockchain network. The hash rate measures the total computing power of the network. According to Blockchain.com, the total hash rate has increased by about 34% year on year.
Simply put, there is 34% more Bitcoin of machine power mining than at this time last year. Of course, last year, at this time, the price of Bitcoin was around $ 6,000. It has gone up almost 10 times since then, and mining companies are struggling to grab their piece of this increasingly valuable cake.
In the gold rush, it’s a great time to sell shovels. And Canaan sells Bitcoin shovels. However, the company has already announced that it is operating at maximum capacity for the remainder of the year and possibly next year. This is great for business. But as the price of Bitcoin continues to rise, that doesn’t mean there is more demand for Canaan’s products – its demand has already reached its limit.
However, Canaan, Riot Blockchain and The9 shares are all favorites among traders. As long as that is the case, they are likely to see unusual movements on days like today, as investors buy the news.
The graph shows the six-month returns for Canaan, Riot Blockchain, The9, Bitcoin and S&P 500. CAN data by YCharts
What now
In my opinion, all of these actions remain risky investments. This does not mean that they cannot go up any further. In fact, they have already risen much higher than I thought possible, so congratulations to the long-term shareholders. However, I think that these actions would eventually return to align with the fundamentals of the business. Consider these three stocks from a price / sales (P / S) perspective:
Data source: Calculated from company files and data from Yahoo! Finance. Author’s graphic. YOY = year after year.
Canaan’s P / S ratio is likely to improve in 2021, as its sales are likely to be strong. We cannot project the price the company will get per machine, but it is fair to say that its overall revenue will increase. Still, 45 times more than sales is a high price for a low-margin hardware business, even though this year is growing.
With The9, the most recent financial update on its website is from 2019, so it is not clear what your financial picture is now. However, it had revenue of just $ 49,000 (a thousand, not millions) at the time. This is a P / S ratio of more than 12,000, given its current market capitalization of $ 627 million. However, the company plans to start announcing financial results again on March 30, so we can see a very different picture.
Finally, there is Riot Blockchain, trading at a P / S ratio of 535. The company is increasing its mining power and the price of Bitcoin is rising, yes. But that multiple assumes that Bitcoin is going much higher. Given the unpredictability of cryptocurrencies, it appears that Riot Blockchain investors are taking a big risk when buying stocks today.
There is nothing wrong with having more risky investments in your portfolio. In fact, I have shares that I consider risky. However, remember that you don’t need to invest exclusively in high-risk companies. Many of the safest stocks on the market have also delivered some of the best returns in the past decade. The trick is to learn how to stay in the long run.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even our own – helps all of us to think critically about investing and making decisions that help us become smarter, happier and wealthier.