Many stocks in the orbit of leading cryptocurrency Bitcoin(CRYPTO: BTC) plunged in August. Here are a few prominent examples, according to data from S&P Global Market Intelligence:
Bitcoin price data by YCharts.
As expected, exchange-traded funds (ETFs) tied to Bitcoin's spot price, such as the iShares Bitcoin Trust ETF(NASDAQ: IBIT), matched the cryptocurrency's 10.4% price drop almost exactly. Meanwhile, the enthusiastic Bitcoin investors of MicroStrategy(NASDAQ: MSTR) and the cryptocurrency miners at Riot Platforms(NASDAQ: RIOT) demonstrated the boosted volatility that results from adding dollar-based investments to the unpredictable Bitcoin asset over time. MicroStrategy's stock fell 18%, and Riot's investors took a 26% hit.
The reasons for Bitcoin's recent price moves
First and foremost, why did Bitcoin fall last month? Isn't this cryptocurrency (and the sector in general) supposed to experience a massive boom right now? There's a four-year cycle of Bitcoin price boosts based on the predictable halving of miner rewards, which also halves its inflation rate. On top of that, capital pouring into those new spot Bitcoin ETFs should accelerate the price gains.
And still, Bitcoin's price is down 21% from an all-time high of $73,750 in March, about a month before the all-important rewards halving.
What gives?
As it turns out, you're looking at a mix of economic concerns and a misunderstanding of the classic halving cycle. Bitcoin is widely seen as a risky investment, making it sensitive to changes in the economy.
For instance, it shows price gains and increased trading activity when interest rates on new debt are low. The opposite is true when interest rates go up. Lower certainty about where debt rates will go in the near future can also hurt Bitcoin's price, and that's a leading reason behind August's price drops.
The Federal Reserve was supposed to look into lowering interest rates someday soon, but conflicting economic reports lowered the chances of that policy change in early August. The next Fed meeting could still end with a long-awaited rate-cutting move, but that outcome is not guaranteed today -- and it certainly wasn't a slam-dunk forecast by the end of August. So Bitcoin battled these economic headwinds all month long.
As for the lack of price-boosting power from the rewards halving, it should be noted that the price gains tend to come several months after the halving.
Three months after the 2016 halving, for example, Bitcoin's price had fallen 5%. But it was up 40% after another three months and posted a 262% gain after a full year.
The 2020 halving was a little different, with a 31% gain in three months and an 84% jump six months after the halving. On the other hand, the full-year gain was a full 534% that time. And there was nothing normal about any economic trends or market moves that year.
Every situation is different, and I can't guarantee a big Bitcoin move at any particular point in 2024. All I can say is that the lack of a big jump so far shouldn't be seen as the end of the halving cycle's market-moving power. History doesn't exactly repeat itself, but it often rhymes with previous cycles.
So when Bitcoin bulls like MicroStrategy chairman Michael Saylor suggest that Bitcoin could triple in price by the end of the year, I can take them seriously. That would just be the normal charting patterns, despite a slow start.
Riot and MicroStrategy add more risk, richer potential rewards
Speaking of MicroStrategy, last month was a showcase for the company's risky Bitcoin business. The developer of business software is more often discussed as a direct play on the crypto, and for good reason. The company held 226,331 bitcoins at the end of the second quarter, as reported on Aug. 1. They are worth $13.4 billion at today's prices, down from $14 billion on June 30.
The software business generated $11 million in revenue and a $20 million operating profit in the second quarter -- mere rounding errors next to the game-changing effects that spring from Bitcoin's price changes.
Riot Platforms takes its Bitcoin dependence to the next level. It mined the digital token at a direct cost of $25,327 per coin in the second quarter of 2024, a three-month period that started two weeks before the halving event. In the same period of 2023, Riot's mining costs were just $5,734 per coin. This company simply cannot afford to stay in business if Bitcoin's value can't keep up with these skyrocketing mining costs.
So, indirect Bitcoin investments like Riot and MicroStrategy add another layer of risk to an already risky investment type, The long-term rewards could also be great, assuming they make it through slow periods and economic downturns along the way.
Please check your risk tolerance before putting real money into any of these cryptocurrency investments -- especially the extra-risky ideas. These volatile tickers are not every investor's digital cup of encrypted tea, especially during downtrends like the one you saw in August.
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Anders Bylund has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
