November was an amazing month for the stock market, which managed to claw back its losses from the previous couple of months. Yet the strong performance on Wall Street might have kept many mainstream investors from noticing what was happening in the cryptocurrency markets, where Bitcoin (BTC 5.06%) and many other digital assets posted sharp gains as well.
Over the weekend, Bitcoin climbed to its best levels in more than a year and a half, briefly moving above $42,000. That was good news not only for those who invest directly in Bitcoin, but also for shareholders of certain crypto stocks. Below, we’ll look at why Coinbase Global (COIN 7.25%) and MicroStrategy (MSTR 5.90%) made big moves higher in premarket trading on Monday morning.
Why Bitcoin is booming again
Moves in digital asset prices tend to be similar to what investors see in the commodities markets. That’s particularly true given that many institutional investors prefer not to invest directly in actual Bitcoin, instead turning to futures contracts and other derivatives that are available both in the public markets and through some cryptocurrency exchanges.
Some digital market watchers have argued that Bitcoin’s fall and subsequent rise has been linked to monetary policy. It’s true that the big reject in Bitcoin prices during early and mid-2022 came at the same time that the Federal Reserve was doubling down on its policy of rapidly increasing interest rates. Now that bond market participants seem to believe the Fed is likely finished with raising rates and could well execute rate cuts within the next six months, crypto investors are also climbing aboard the bull market bandwagon.
More specifically to Bitcoin, investors have been pleased with the progress made toward finally gaining regulatory approval for a spot Bitcoin exchange-traded fund (ETF). A security available to the general public that would offer more direct Bitcoin exposure than is available through derivative instruments could ramp up demand dramatically, and current investors are holding on to their crypto in hopes of reaping bigger rewards later.
Why Coinbase and MicroStrategy are on the rise
Shares of Coinbase Global moved higher by 9% in premarket trading, following a 7% rise on Friday. The stock price has now jumped more than 75% in just the past month.
Coinbase has continued to be the cryptocurrency exchange of choice for many retail investors, despite charging trading fees that can quickly make a big dent in long-term returns for frequent traders. Because commission revenue is directly tied to investor interest, 2022 was a very difficult year for the crypto exchange provider, as revenue declines topped 60% and resulted in a massive loss for the year. Yet things have started to turn around in 2023, and if Bitcoin can stay on its current course, it’s likely that Coinbase could return to sustained profitability as long as investors come back to rejoin the rally.
Meanwhile, MicroStrategy’s business of providing enterprise analytics software has taken a back seat to its aggressive adoption of Bitcoin as a store of value. The company owned more than 158,000 Bitcoin as of late September, having spent billions of dollars accumulating the digital asset over time. Indeed, MicroStrategy has even used leverage to invest in Bitcoin, borrowing money to finance encourage purchases. Given that the value of the Bitcoin MicroStrategy holds makes up the vast majority of its market capitalization, investors seem largely to view the stock as a surrogate for Bitcoin itself.
Keep an eye on every market
It’s easy for stock investors to get tunnel vision and ignore other areas of the financial markets. But even if you never invest in cryptocurrency, staying on top of events in crypto markets can give you insight that can carry over to your stock investing.
Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and Coinbase Global. The Motley Fool has a disclosure policy.
