Bitcoin might be one of the best-performing investments this year, but the prices of some of crypto companies put it to shame. Tread carefully—Uncle Sam might soon crash the party.
Bitcoin has risen about 65% in 2023 to $27,350. That’s after the oldest cryptocurrency limped through 2022 as a series of scandals and bankruptcies sent the industry into a tailspin. Few had expected token prices to recover so quickly. Some analysts have attributed the recent run since March to the regional banking crisis, which token proponents say bolsters Bitcoin’s case as an alternative to the traditional financial system.
But tokens’ performance is nothing compared to that of some of the companies that do business in them. Crypto trading platform
Coinbase Global
(ticker: COIN) has skyrocketed 81% to $60.94 so far this year. Shares of Bitcoin miners
Marathon Digital Holdings
(MARA) and
Riot Blockchain
(RIOT) have risen 192% and 254% respectively.
Even enterprise software company
MicroStrategy
(MSTR)—whose CEO Michael Saylor stepped back from the top role during last year’s crypto downturn—has more than doubled this year to $310 per share, bolstered by the company’s large holdings of Bitcoin.
Investors counting on those gains to continue in the long-term should take heed. Crypto companies depend both on token prices continuing to rise and on their ability to keep making money from the market. Both of those pillars are under threat.
On the token side, the recent gains have largely been driven by the same factors that have helped all risky assets: the prospect that interest rates are poised to pause or even start falling.
Higher rates tend to hurt the returns of investments with the least prospect of near-term profits. By design, Bitcoin and other crypto tokens generally don’t throw off income. Proponents say that Bitcoin will one day be widely used as a store of value—and that other tokens will eventually have practical value as their blockchains become useful to the real world. But since those days still seem years away, higher rates have an outsize negative impact on returns, as they do on other higher-risk investments.
So this year, the prospect that the Federal Reserve is nearing the end of its rate-hiking campaign was a huge boost to token prices. The problem now is that tailwind has likely passed. Investors have not only priced in a pause in rates, but expect the Fed will start cuts later this year. That’s a risky bet, and if cuts aren’t in the offing, token prices could turn on a dime.
“Any indication of further rate hikes could lead to crypto assets trading sideways to down until there’s more clarity,” said Compass Point Research & Trading analysts in a note last week.
Crypto companies’ second big problem extends beyond token prices themselves and into a regulatory sphere that is as negative on the industry as it has ever been.
Even since the crash of FTX last year, “the tone in Washington changed from one where they were open to talking about crypto to one of ‘We really want to stamp this out,’” says Marathon Digital Holdings CEO Fred Thiel. “While I’m not a conspiracy theorist, there’s definitely a concerted effort, coordinated or not, from different branches of government to put pressure on the industry.”
To wit, last week, the White House proposed a 30% tax on electricity used by crypto miners, a move the Biden administration said was needed to offset mining’s environmental impact. Miners, for their part, say their practices encourage the development of sustainable energy sources and help power companies sell excess energy that would otherwise be wasted.
For crypto platforms like Coinbase, the biggest threat is from the Securities and Exchange Commission, which in March sent the company a notice that it is likely to sue the firm for securities violations. While the firm said the agency’s target wasn’t completely clear, executives say they believe it is likely looking at what tokens it lists, as well as products it offers customers that generate yield. Coinbase has long denied that it offers securities on its platform.
Coinbase executives on an earnings call last week noted that the smaller tokens and staking products that the SEC could be targeting represent a relatively small portion of the company’s current profits. However, analysts who cover the stock have seen the yield business as one of the most promising areas of growth for the firm.
“We continue to think retail crypto volumes will remain weak and the regulatory overhang will linger for some time,” wrote BofA Global Research analysts in a note after the earnings report. The analysts rate the stock “Underperform.”
And while last year it seemed that there was growing support in Congress to pass legislation that might limit the SEC’s powers, now crypto skeptics appear to have the upper hand and are cheering the crackdown.
“The problem is not regulatory ambiguity, it is mass noncompliance,” said Rep. Stephen Lynch (D., Mass.) at a hearing on Wednesday.
That isn’t a good sign that crypto firms will get Congressional protection from enforcement agencies—and certainly not a good environment for their profits while the scrutiny persists.
Whether it’s through a rude awakening from the Fed on token prices or an assault by the SEC on firms’ profit centers, the risks for crypto stock investors abound.
Write to Joe Light at [email protected]
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