Coinbase, MicroStrategy and Co.: Get into crypto stocks now?

It may sound harsh, but Bitcoin’s 12-month performance is better than most stocks in the crypto space. A year ago, in June 2021, Bitcoin was hardly higher than today. The situation is different with the well-known crypto stocks. The course of companies like block, MicroStrategy or Coinbase was twice as high on average as it is now. As a result, the thought can arise that these public companies have been disproportionately penalized by the market and can now be valued cheaply.

Not correction, but collapse

If one does not look at the 12-month period, but at the distance to the all-time high (ATH) that was reached for most crypto stocks in the fall of 2021, the picture becomes even bleaker. For quite a few stocks we find a gap of up to 90 percent to the all-time high. Here are a handful of crypto stocks that have been particularly hard hit:

1. baking: ATH at around USD 44, current price around USD 2.90 (-84%)
2. Coinbase: ATH at around USD 300, current price around USD 67 (-78%)
3. Riot Blockchain: ATH at around USD 37, current price around USD 6.20 (-83%)
4. Marathon Digital: ATH at around USD 70, current price around USD 8.80 (-87%)
5. Hat 8 Mining Corp.: ATH at around USD 14, current price around USD 2.30 (-83%)

The list can be continued indefinitely: the majority of crypto stocks are between 70 and 90 percent down on their all-time high in autumn last year. The shares were certainly overvalued at the time and the prices were not fundamentally justified. After all, crypto has been part of the tech bubble – to be honest.

Crypto Stocks: A Phenomenon of the Former Zero Interest Rate Policy?

But rising inflation is now swinging the pendulum in the opposite direction. Rising key interest rates and negative expectations of the macro environment are leading to an exaggeration towards the south. The word recession can be heard more and more frequently from well-known investors and economists.

With a view to the prices of crypto shares, the question arises as to what should not be priced in. Of course, the Ukraine war can escalate further and inflation can also be more persistent than previously assumed by market participants. Nevertheless, there may just as well be a relaxation of the two points raised. A look at sentiment indices such as the fear-and-greed index or the cash quota among fund managers also paints a picture of great fear and great pessimism. As impossible as perfect timing is on the stock market, there are increasing signs that we may not be too far from the bottom.

Price-earnings ratio gives hope

This impression is reinforced in part when looking at the price-to-earnings (P/E) ratio of crypto stocks. The stock market price is divided by the earnings per share. The lower the P/E, the cheaper the stock. As a rule of thumb, a P/E of over 20 tends to be expensive. On the other hand, if the P/E slips into negative territory because the company is making losses, then this is again very negative. To get an idea of ​​how crypto stocks are doing, let’s go back to our top five candidates:

1. baking: PER 2021 none reported and for 2022e at -3.99
2. Coinbase: P/E 2021 at 17.65 and for 2022e at -9.88
3. Riot Blockchain: P/E 2021 at -285.90 and for 2022e at 6.02
4. Marathon Digital Holdings: P/E 2021 at -92.76 and for 2022e at 10.80
5. Hat 8 Mining Corp.: P/E 2021 at -17.66 and for 2022e at 6.73

We note that with the exception of Coinbase, all other crypto stocks have had their P/E (2021) in negative territory. It turns out that the mining companies (3, 4 and 5) were particularly hard hit. Her losses are massive, but her 2022 P/E outlook is in an attractive 6-11 range.

Bad, worse, mining

If gold bars or gold ETFs are too boring for you, you can turn to gold mining companies. After all, they benefit above average when the price of gold rises. This leverage also applies to bitcoin mining companies. When Bitcoin prices rise, their share prices rise more than those of the cryptocurrency mentioned – assuming good management or efficient working methods.

However, this lever can also swing in the other direction. Especially when the production, be it gold or Bitcoin, is hardly profitable anymore. Rising key interest rates make the financing-intensive mining measures increasingly unattractive. At the same time, rising energy costs are squeezing the margin of the energy-intensive business. While some food manufacturers or pharmaceutical companies can pass on inflation, especially energy price inflation, through higher prices, mining companies cannot. They have no pricing power, but must orient themselves to market prices.

Bitcoin reserves have to believe it

It is impressive that given this poor environment for bitcoin miners, the Hashrate stays that stable. Most crypto mining companies have been able to raise a lot of money in the past two years. It seems that they are currently mining undeterred and living off their cash reserves.

On the other hand to sell first miners are already boosting their bitcoin to keep their operations running. This can be fine for a few months. At some point, however, there comes a point when the Bitcoin price has to rise or the difficulty (i.e. the effort required to mine a Bitcoin) has to fall in order to be able to guarantee sufficient profitability.

Crypto stocks: A look at the portfolio

For example, those who like Blockchain ETFs VanEck Digital Asset Equity or ETC Group Digital Assets & Blockchain Equity should be aware that the group of mining companies has the highest share in the fund compared to other crypto industries such as asset management or brokerage. Even more than Coinbase, Block or Silvergate Capital, for example, they are to be understood as a bet on rising Bitcoin prices.

On the other hand, anyone who is aware of the high risk of mining stocks can also expect a rapid X-fold increase if the Bitcoin price returns to its old heights. Anyone toying with the idea must take a closer look at the company’s condition and reserves than is otherwise recommended. After all, it would be very annoying if the company ran out of steam before the next bull run and you had to post a deceased portfolio.

Conclusion

All crypto stocks have taken a beating. Their prices have developed from very expensive levels in autumn 2021 to levels that tend to be more favorable at the moment. Anyone who is convinced of the medium to long-term success of the crypto economy and who comes to the conclusion that the majority of the negative influencing factors are priced into the prices can start with the first, cautious follow-up purchases.

As with all tech stocks, crypto prices are even more dependent on collective market psychology than defensive dividend stocks, for example. The emotions of greed and fear play a very important role in business models with particularly high expectations for the future. Anyone who tries counter-cyclical investing must not only be aware of the high risks, but also have sufficient self-confidence to swim against the tide.

You can also find out how the crypto market could continue in the coming months in our current June issue of the BTC-ECHO magazine.

Disclaimer: The article only reflects the personal opinion of the author and is in no way to be understood as a recommendation to buy or sell.