- “Safe trade” in listed crypto-related companies turns sour
- Reason bearish turn exposes investors in crypto stocks with much of the downside risk, with a capped upside as opposed to delving in the underlying asset itself
Bitcoin too volatile for your portfolio?
Don’t know the difference between Ethereum and Ethereum Classic?
For many investors wanting to participate in the growth story of cryptocurrencies, buying into the underlying assets require a strong constitution to weather the inevitable ups and downs the nascent asset class is infamous for.
Which is why for some investors, a hedged bet by way of a crypto-stock was often found to be more palatable.
Why invest directly in Bitcoin when a bet on MicroStrategy (-3.91%) provide
Yet according to some estimates, just US$0.23 out of every dollar invested in MicroStrategy actually reflects an investment in Bitcoin.
And the fortunes of listed companies whose prospects rely entirely on the rise and fall of cryptocurrencies often don’t reduce the volatility in their stock prices, but do cap the upside even when digital assets rally.
Last week, as investors prepared for what was meant to be a new epoch for cryptocurrencies, stocks of some of the companies most closely associated with the space started to rise in anticipation.
As El Salvador declared Bitcoin legal tender, not just accepting the cryptocurrency for taxes but mandating that businesses must accept it as well, companies such as Riot Blockchain (-5.52%) and Coinbase Global were amongst a score of firms that rose alongside the anticipation.
But the rollout of Bitcoin in El Salvador didn’t go as planned, with the country’s Bitcoin wallet called Chivo, crashing within hours of its release.
Not helping matters, Coinbase Global (-3.16%), revealed last week that it might be sued by the U.S. Securities and Exchange Commission as it intended to rollout its “Lend” product that would pay interest on cryptocurrency deposits.
The circumstances have emboldened short sellers who have been looking for new prey to hunt and they appear to have set their sights on the orbit of listed cryptocurrency stocks.
Traders increased bets against MicroStrategy, Riot Blockchain (-5.52%) and Bit Digital Inc (-7.95%), all of which dropped 14% or more during the holiday-shortened week.
But the trade isn’t without dangers. Given how volatile cryptocurrencies are, the sentiment can very rapidly switch from bearish to bullish faster than you can say “Dogecoin.”
And publicly shorting cryptocurrency companies may also raise the ire of retail investors who may yet come to their rescue akin to GameStop (-4.40%) and AMC Entertainment (+3.38%).