Why Bitcoin Bond Stocks Crashed in August

Many actions in the orbit of the leading cryptocurrency Bitcoin (BTC -3.16%) plunged in August. Here are some prominent examples, according to data from S&P Global Market Intelligence:

Bitcoin Price Data by YCharts.

As expected, exchange-traded funds (ETFs) have been linked to the spot price of Bitcoin, such as iShares Bitcoin Trust ETF (IBIT -2.68%)almost exactly matched the cryptocurrency’s 10.4% price drop. Meanwhile, enthusiastic Bitcoin investors MicroStrategy (MSTR -2.21%) and cryptocurrency miners at Riot platforms (Revolt -1.75%) demonstrated the increased volatility that results from adding dollar-based investments to the unpredictable Bitcoin asset over time. MicroStrategy shares fell 18%, and Riot investors took a 26% hit.

Reasons for recent Bitcoin price movements

First, why did Bitcoin fall last month? Isn’t this cryptocurrency (and the sector in general) supposed to experience a massive boom right now? There is a four-year cycle of Bitcoin price increases based on the predictable halving of miner rewards, which also halves the rate of inflation. Additionally, capital pouring into those new Bitcoin spot ETFs should accelerate price gains.

And yet, Bitcoin’s price is down 21% from its all-time high of $73,750 in March, about a month ago. before top rewards by halving.

What gives?

As it turns out, you’re looking at a mixture of economic concerns and a misunderstanding of the classic half-life. Bitcoin is widely seen as a risky investment, which makes it sensitive to changes in the economy.

For example, it shows price gains and increased trading activity when interest rates on new debt are low. The opposite is true when interest rates rise. Lower certainty about where debt rates will go in the near future can also affect the price of Bitcoin, and this is a main reason behind the price declines in August.

The Federal Reserve was due to consider cutting interest rates soon, but mixed economic reports reduced the chances of that policy change in early August. The Fed’s next meeting could still end with a long-awaited rate cut move, but that outcome isn’t guaranteed today — and it certainly wasn’t a slam dunk forecast until late August. So Bitcoin has been fighting these economic headwinds all month.

Regarding the lack of price-boosting power from the reward halving, it should be noted that price gains tend to occur several months after the halving.

Three months after the halving in 2016, for example, the price of Bitcoin fell by 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 534% at that time. And there was nothing normal about economic trends or market movements that year.

Every situation is different and I cannot guarantee a big move in Bitcoin at some point in 2024. All I can say is that the lack of a big jump so far should not be seen as the end of the halving market. power of movement. History doesn’t exactly repeat itself, but it often rhymes with previous cycles.

So when Bitcoin bulls like MicroStrategy President Michael Saylor suggest that the price of Bitcoin could triple by the end of the year, I can take them seriously. These would be just the normal chart 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 venture into Bitcoin. The business software developer is more often discussed as a direct play on crypto, and for good reason. The company held 226,331 bitcoins at the end of the second quarter, as reported on August 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 $20 million in operating profit in the second quarter — simple rounding errors alongside the game-changing effects stemming from Bitcoin price swings.

Riot Platforms takes Bitcoin addiction 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 began two weeks before the halving event. During the same period in 2023, Riot’s mining costs were only $5,734 per coin. This company simply cannot afford to stay in business if the value of Bitcoin cannot keep up with these skyrocketing mining costs.

So indirect Bitcoin investments like Riot and MicroStrategy add another layer of risk to an already risky type of investment. The long-term rewards could also be high, assuming they get 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 digital crypto investor’s cup of tea, especially during downtrends like the one you saw in August.