Crypto Stocks Demonstrate Why They Are Among the Riskiest Assets

Crypto-curious stock investors take little comfort in the rebound in stocks of companies linked to the world of digital assets last week, with the sector lagging behind almost all other risky corners of financial markets this year by a wide margin. 

Coinbase Global Inc., touted last year as one of the best ways to access crypto when it was first registered on the Nasdaq, has fallen 75% since December. MicroStategy Inc. fell by 62%, or more than Bitcoin, for which the software company has been seen as a proxy since CHIEF Executive Officer Michael Sailor loaded his balance sheet with coins. Digital token mining leaders Marathon Digital Holdings Inc. and Riot Blockchain Inc. have reduced similar amounts, while smaller competitors such as Stronghold Digital Mining Inc. have fallen even further. 

As the second quarter concludes, cryptocurrency-related stocks are merging with digital tokens as one of the riskiest asset classes in the world. The NYSE FactSet Global Blockchain Technologies Index has fallen 65% this year, behind not only bitcoin but also an index that tracks highly volatile so-called meme stocks, as well as a measure of special means of acquisition names.

Crypto stocks "are essentially a leveraged bet on one of the riskiest assets that exist," said Steve Sosnick, chief strategist at Interactive Brokers LLC. He added that there are only a few other bets that he considered a higher risk for investors, including certain memes and penny stocks.

While Bitcoin's excessive drawdowns are nothing new in its roughly 12-year history, the most recent sell-off was particularly brutal given the scale of losses seen in the broader crypto industry. In less than six months, more than $1 trillion has been erased in the crypto market, with the index of the 100 largest digital assets falling by about 59% and becoming the worst year since the previous bear market in 2018.

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The cryptocurrency name sell-off, which began in early November after bitcoin hit an all-time high of nearly $69,000, has accelerated this year as investors around the world have begun to pull out of riskier asset classes amid fears that a series of aggressive rate hikes by the Federal Reserve aimed at cooling inflation will plunge the U.S. economy into recession. Another addition to the pain for investors was the May explosion of the Terra/Luna ecosystem, which triggered a series of liquidations across the industry and triggered a wave of panic sales. 

Despite the risks and deeply depressed stock prices, Wall Street analysts remain largely optimistic about the vast majority of crypto-exposed stocks. 

Coinbase, which has lost more than $60 billion since reaching a record high in November, currently has 20 buy recommendations, according to data compiled by Bloomberg. That's exactly the same number it had back in early January, when the stock was worth more than three times its current value. 

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"While we are not at all neglecting the impact of the current downturn in the crypto market, we also believe that any notion that Coinbase will not be able to survive this latest challenge is flawed in light of the facts on the ground," said BTIG analyst Mark Palmer, who this week lowered his target share price to $290. compared to the street high of $380. It closed Friday at $62.71 after rebounding 22% this week.

Other crypto stocks have seen similar bullish devotion from the analyst community. Bitcoin miners Riot Blockchain and Marathon Digital have at least 75% of equivalent purchase ratings and sports average 12-month price targets, which are about 379% and 293% respectively higher than their current stock prices.

They're not alone either. Among the 33 stocks that make up the NYSE FactSet Global Blockchain Technologies Index, the average projected return over the next year is nearly 200%, more than five times higher than the Nasdaq 100 index average.

Analysts See Huge Potential Gains for Some Crypto Stocks

Of course, the largely positive long-term prospects of the cryptocurrency market are not without reservations. 

"We remain skeptical that cryptocurrency prices are completely out of the woods," said Compass Point analyst Chris Allen. "We may see more denials given the uncertainty of Celsius/3AC's insolvency situation and the expected asset sales that are likely to lead to this."

One particularly troubling sign for investors looking to buy a drop in crypto stocks, despite the already historically deep sell-off of some names, stocks like Voyager Digital Ltd. have proven that there is always room for further declines.

Shares of the cryptocurrency brokerage firm fell 53% on Wednesday, the most since 2001, after it said it could issue a default notice to hedge fund Three Arrows Capital Ltd. due to its failure to repay a loan worth about $660 million. Prior to that drop, stocks had already lost roughly 90% of their value this year.

"Given the size of the exposure and given the uncertainty regarding Voyager's collection on any of these balance sheets, we believe it is difficult to arrive at a reasonable estimate of Voyager's net worth per share," KBW analyst Kyle Voigt wrote in a note after removing his leading stock rating.