Why Cryptocurrency Mining Stocks Took a Hit This Week

What happened

It was an eventful week for cryptocurrency mining stocks, with both Riot Blockchain (NASDAQ:RIOT) and Bit Digital (NASDAQ:BTBT) giving operational updates. For its part, SOS Limited (NYSE:SOS) announced a financing arrangement, one that stands in stark contrast to how CleanSpark (NASDAQ:CLSK) does business.

However, with the price of Bitcoin falling in recent days, all of these cryptocurrency mining stocks were down for the week. From the close of the market last Friday to the close of the market on Thursday, Riot Blockchain stock was down 24%, Bit Digital stock was down 17%, SOS stock was down 19%, and CleanSpark stock was down 20%, according to data from S&P Global Market Intelligence.

So what
On Wednesday, Bit Digital reported financial results for the third quarter of 2021. The company was able to mine 248 Bitcoins for the quarter, a decrease of 66% from the same quarter last year. The reason for the decline was China's ban on mining. Bit Digital has had to work hard to get its operations moved out of China as a result. The transition is well underway with all of its mining machines now either in North America or in transit.

While Bit Digital is missing out on some of Bitcoin's boom, Riot Blockchain is able to take full advantage. On Monday it reported third-quarter results as well. During Q3, the company mined a record 1,292 Bitcoins, an increase of almost 500% from the third quarter of 2020.

Ongoing gains by Riot Blockchain is why the stock scored an upgrade from a Wall Street analyst this week. According to The Fly, BTIG analyst Gregory Lewis increased its price target on the stock from $45 per share to $50 per share.

However, these cryptocurrency mining companies are generating tokens for their work -- not dollars. And that's a problem when you're incurring real-world expenses. To keep the lights on, many companies chose to issue stock, diluting existing shareholder value. SOS moved this way last week when it announced it was selling 51.5 million American depositary shares to raise $90 million.

A financing arrangement like this is common. For example, after Q3 was over, Riot Blockchain sold almost 20 million shares to raise $600 million. However, CleanSpark is taking a notably different path here. As of the end of October, the company had mined 1,083 Bitcoins in 2021. But it had sold 370 to fund its ongoing growth, a move that is more shareholder-friendly in my opinion.

Now what
Among these four companies, I'd say that Riot Blockchain and CleanSpark are two of the better cryptocurrency miners. But any investing thesis for any of these companies needs to include something about the future price of Bitcoin. It's the most central point of any such investing thesis.

In my opinion, Bitcoin has been around long enough and seen enough adoption to solidify itself as more than a passing fad. Over the next five years, I wouldn't be surprised if it generates market-beating returns. However, I don't believe Bitcoin will head straight up -- historically it's been a volatile ride and prone to periods of stagnant returns.

Therefore, it's possible that all four of these stocks could underperform the market at times. That's something that all potential investors need to take into account.