Bitcoin Just Hit an All-Time High, so Why Are Crypto Stocks Falling?

When cryptocurrency is hot, it’s absolutely scorching. A case in point would be the current crypto climate, wherein bitcoin (BTC-USD) is on a tear and other digital tokens are following its lead.

As bitcoin’s rising tide lifts all (or at least, most) cryptocurrency boats, shouldn’t crypto-related stocks also head north? Not necessarily, since the stock market doesn’t always take its cues from the crypto market.

Indeed, that’s one of the main challenges of investing in cryptocurrency stocks. You have to navigate two markets at once — and sometimes those markets are at odds with each other.

The ETFs and the halving

First and foremost, what’s lifting bitcoin in 2024? There are several contributing factors at work. While this is difficult to measure or quantify, it’s likely that institutional investors are getting into cryptocurrency.

You’re not likely to see 401(k) funds and family offices pile into Bitcoin this year. However, some financial big shots, such as BlackRock (NYSE:BLK) and Fidelity, seem to be on the vanguard of a crypto-friendly movement.

I cited BlackRock and Fidelity in particular because those two financial firms have created bitcoin exchange-traded funds (ETFs). The Securities and Exchange Commission (SEC) made this possible when it approved bitcoin ETFs earlier this year.

This is a significant event because it will spark further interest in cryptocurrency while enabling otherwise restricted funds and investors to indirectly take a stake in bitcoin. Thus, it’s surely not mere happenstance that bitcoin suddenly rallied when the SEC finally approved spot bitcoin ETFs.

There also happens to be an important cryptocurrency-related event coming up soon. In April, the reward that crypto miners receive for producing bitcoins will be cut in half. This is known as the bitcoin halving.

Bitcoin halvings occur approximately once every four years, and bitcoin-price rallies have coincided with previous halving events. However, the sample size is quite small, so it’s difficult to draw any meaningful conclusions or predict what will happen to the bitcoin price in April.

For what it’s worth, these halving events might put a floor on the bitcoin price since they’re a way to control the available, circulating supply of bitcoins. That’s long-term thinking though, and bitcoin might not necessarily rally during the next couple of months.

Bitcoin certainly rallied during the past few days though. For a hot minute, bitcoin surged past its previous all-time high of $68,789 set in November 2021 — hitting $68,991 on Tuesday.

Thus, it was a big win for patient bitcoin investors who adhered to the strategy of “HODL” (hold on for dear life). Many of these investors have held on through extended periods of extreme volatility, and now it looks like the bitcoin bulls are back in the driver’s seat.

Crypto stocks diverge from bitcoin

What about cryptocurrency-related stocks? Not everyone wants to own bitcoin ETFs, and some investors prefer to take positions in companies that offer crypto-associated services.

That’s an interesting strategy, but don’t assume that there’s a one-to-one correlation between bitcoin and cryptocurrency stocks. For example, even while the news of bitcoin reaching an all-time high is in the headlines, Coinbase (NASDAQ:COIN) stock fell 2% to 3% around midday on Tuesday.

Coinbase offers a cryptocurrency-trading platform, and it’s a decent-sized company with a $54 billion market capitalization. In comparison, cryptocurrency mining companies like Marathon Digital Holdings (NASDAQ:MARA) are much smaller; for example, Marathon has a market cap of around $5 billion.

This size differential might explain why Coinbase stock declined 2% to 3% while Marathon Digital Holdings stock tumbled 10%. 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%).

With the difference in the companies’ sizes, Coinbase has another advantage over mining companies right now. Remember, the April halving event means that bitcoin miners’ rewards will be cut in half. Certainly, that’s not great news for companies like Marathon, Riot and Hut 8.

Most of all, these crypto-associated businesses still have to generate revenue and navigate a challenging fiscal landscape in which borrowing costs are high. Although there’s a halving event coming up in April, these crypto businesses (and other companies, as well) first have to deal with a March Federal Reserve meeting.

In other words, cryptocurrency stocks are down today, but they’re not alone; in fact, the major stock-market indexes are in the red. What’s worrisome for crypto businesses isn’t necessarily specific to that type of business. If the Federal Reserve signals that it’s going to keep interest rates higher for longer, all businesses will be affected, and the smaller ones could get hit the hardest.

Sure, there may be a buying opportunity if cryptocurrency stocks fall far enough. Just don’t operate under the assumption that they’ll necessarily recover if bitcoin heads higher.