Over the past two months, there has been major weakness in many of the retail-driven growth sectors such as electric vehicles (EV), SPACs, and cannabis stocks. Many stocks in these sectors have corrected by anywhere from 30 to 50%. They also failed to participate in the recent market rally.
One notable exception to this group was the cryptocurrency stocks like Riot Blockchain (Nasdaq: RIOT), Marathon Digital Holdings (Nasdaq: MARA), and MicroStrategy (Nasdaq: MSTR). These stocks all are engaged in crypto mining or hold bitcoin on their balance sheets, so their stock prices are considered a proxy for the asset. Interestingly, this group of stocks did not decline primarily due to the strength in crypto prices which have trended higher since mid-February.
Coinbase Catalyst
However, these stocks were not participating in the uptrend and were merely range-bound despite the strength in bitcoin and ethereum. In hindsight, this was a clear indication of distribution especially with the weakness in many of the other retail favorites.
The Coinbase (Nasdaq: COIN) IPO turned out to be the perfect catalyst. All of a sudden, investors had a larger, higher-quality, and more liquid vehicle for crypto exposure. So, there was some rotation from the more speculative crypto stocks into Coinbase.
This triggered a meaningful 20% pullback in many of these names. However, the selling only intensified once cryptocurrencies started to back off. Over the last week, bitcoin is down by 15%. The major catalysts were rumors of a U.S. regulatory crackdown on bitcoin use for money laundering and the Turkish government putting a ban on bitcoin purchases. Of course, another contributing factor is simply that it's had big gains in a short amount of time so some investors and traders were looking to take profits.
What's Next?
It's entirely possible that bitcoin and ethereum make new highs, yet these stocks fail to do so. They were quite overvalued relative to the amount of bitcoin they mined and held on their balance sheets. So, these stocks had lofty valuations, since there was a shortage of methods that investors could get exposure to this trend.
Now, there is Coinbase which is much more liquid and closer to a real business. In contrast, Riot has a $3.7 billion market cap, yet it only mined around 900 bitcoin in 2020 which comes out to about $27 million, using a very generous average bitcoin price of $40,000 for 2020. People can speculate on bitcoin much more easily by just buying it through an ETF or with Coinbase.