Why are cryptocurrency stocks falling as Bitcoin hits an all-time high?

When cryptocurrency is hot, it’s really hot. A case in point is the current cryptocurrency landscape, where Bitcoin (BTC-USD) is in a downward trend and other digital tokens are following suit.

With Bitcoin’s rally lifting all (or at least most) cryptocurrency boats, shouldn’t cryptocurrency stocks be heading north as well? Not necessarily. This is because the stock market does not always take signals from the cryptocurrency market.

In fact, this is one of the main challenges of investing in cryptocurrency stocks. You have to navigate two markets at the same time, and sometimes they conflict with each other.

ETFs and Halving

First of all, what will boost Bitcoin in 2024? There are several contributing factors at work. Although this is difficult to measure or quantify, it is likely that institutional investors will jump into cryptocurrencies.

It’s unlikely we’ll see 401(k) funds and family offices pile into Bitcoin this year. However, some financial giants like BlackRock (NYSE:BLK) and Fidelity appear to be at the forefront of the cryptocurrency-friendly movement.

The reason I specifically mentioned BlackRock and Fidelity is because both financial companies created Bitcoin exchange-traded funds (ETFs). The U.S. Securities and Exchange Commission (SEC) made this possible when it approved a Bitcoin ETF earlier this year.

This is an important event as it will generate more interest in the cryptocurrency and allow limited funds and investors to indirectly acquire Bitcoin shares. So it was no mere coincidence that Bitcoin suddenly rebounded when the SEC finally approved a spot Bitcoin ETF.

There will also be an important event related to cryptocurrency soon. In April, the rewards cryptocurrency miners receive for producing Bitcoin will be cut in half. This is called the Bitcoin halving.

Bitcoin halvings occur approximately once every four years, and the rise in Bitcoin prices has coincided with previous halving events. However, the sample size is very small, making it difficult to draw meaningful conclusions or predict how the Bitcoin price will change in April.

For what it’s worth, these halving events can put a bottom in the price of Bitcoin because they are a way to control the available circulating supply of Bitcoin. However, this is long-term thinking and Bitcoin may not necessarily bounce back in the coming months.

However, Bitcoin has clearly rebounded over the past few days. During a hot moment, Bitcoin surpassed its all-time high of $68,789 set in November 2021, hitting $68,991 on Tuesday.

Therefore, this was a huge win for patient Bitcoin investors who stuck to the “HODL” (Hold on Dear Life) strategy. Many of these investors have endured long periods of extreme volatility, and now it looks like the Bitcoin bulls are back in control.

Cryptocurrency stocks are different from Bitcoin

What about cryptocurrency stocks? Not everyone wants to own a Bitcoin ETF, and some investors prefer to take positions in companies that provide cryptocurrency-related services.

It’s an interesting strategy, but don’t assume there is a one-to-one correlation between Bitcoin and cryptocurrency stocks. For example, Coinbase (NASDAQ:COIN) stock was down 2-3% around midday on Tuesday even as news of Bitcoin hitting record highs dominated the headlines.

Coinbase provides a cryptocurrency trading platform and is a modest-sized company with a market capitalization of $54 billion. In comparison, cryptocurrency mining companies like Marathon Digital Holdings (NASDAQ:MARA) are much smaller. For example, Marathon has a market cap of about $5 billion.

This difference in size may explain why Marathon Digital Holdings shares are down 10%, while Coinbase shares are down 2% to 3%. Other examples of Bitcoin mining stocks that fell sharply include Riot Platforms (NASDAQ:RIOT) stock (down 7% midday) and Hut 8 (NASDAQ:HUT) stock (down 8%).

Due to the difference in company size, Coinbase currently has another advantage over mining companies. The April halving event means Bitcoin miners’ rewards will be cut in half. Of course, this isn’t good news for companies like Marathon, Riot, and Hut 8.

Above all, these cryptocurrency-related companies still need to generate revenue and navigate a difficult financial environment with high borrowing costs. The halving event is scheduled for April, but these cryptocurrency companies (and others) first have to deal with the Federal Reserve meeting in March.

That said, cryptocurrency stocks are down today, but they’re not alone. In fact, the major stock market indices are in the red. Concerns about cryptocurrency businesses are not necessarily limited to that type of business. If the Fed signals that it will keep interest rates high for longer, all businesses will be affected, with small businesses likely to be hit hardest.

Of course, if the cryptocurrency stock price falls sufficiently, there may be a buying opportunity. Don’t operate under the assumption that if Bitcoin rises, it will necessarily recover.