Around 2 a.m. EST on Dec. 30, famous cryptocurrency bitcoin reached an all-time high of $28,579.59, according to CoinDesk. It’s since pulled back a little, but is still up roughly 7% over the past 24 hours (remember, cryptocurrencies trade around the clock whereas stocks only trade when the market is open).
Fresh highs from bitcoin motivate traders to continue scooping up shares of bitcoin miner stocks like Bit Digital, Riot Blockchain, and Marathon Patent Group. As of noon EST, here’s where these stocks were:
- Bit Digital was up 23% but had been up 39% earlier in the session.
- Riot Blockchain was up 10%, down slightly from up 12% earlier in the day.
- Marathon was only up 5% but had traded 10% higher shortly after the market opened.
These three stocks aren’t just big winners today, they’re also among the biggest winners in 2020. Not only is each one at least a 10-bagger and crushing the market, each is also drastically outpacing gains from bitcoin. And that could be a long-term problem for investors.
Up close to 300% in 2020, is bitcoin a bubble? To answer that, let’s consider how bitcoin works. And let’s also consider the time-tested economic principle of supply and demand.
Decentralized computers voluntarily choose to run the bitcoin blockchain network, and are compensated with bitcoin for their efforts. However, they’re paid with new bitcoin — each token has a unique digital signature. Because of how the bitcoin blockchain is set up, there can only ever be 21 million tokens in existence. But there’s already over 18 million in circulation. To keep the network from hitting its upper limit of 21 million anytime soon, new tokens are issued at a decreasing rate.
Prior to May 2020, bitcoin miners received 12.5 bitcoin tokens per new block created. But the bitcoin payout is cut in half every couple years, most recently in May. Now, miners receive just 6.25 bitcoin tokens per block. By some counts, new blocks are currently being created every 10 minutes. This means that roughly 900 new bitcoin tokens enter circulation every day.
Now consider current demand for bitcoin. Technology company MicroStategy is one of many companies currently buying bitcoin. In MicroStrategy’s case, it’s opting to hold bitcoin on its balance sheet in lieu of cash. On Dec. 11, it even issued $650 million in convertible notes for the express purpose of buying more bitcoin. By Dec. 21, the company had already used the funds to purchase almost 30,000 bitcoin tokens to go along with the bitcoin it already had.
The demand for bitcoin from MicroStrategy alone was roughly 3,000 per day during that 10-day span — tripling new bitcoin supply. Furthermore, there’s plenty of additional ongoing demand from other institutions and retail investors alike.
When demand outpaces supply like this, prices generally go up. As long as this remains the case with bitcoin, I expect prices to keep rising and…