Why investors should pay attention to Bitcoin’s decline

While AI stocks continue smashing records, one of the market’s favourite risk assets is moving in the opposite direction. This analysis explores why crypto is underperforming during a bull market, how AI is attracting capital away from digital assets, and whether investors should be worried about growing signs of speculation.

Bitcoin struggles in the AI world

While US AI and semiconductor stocks are on an unprecedented boom, one macro asset is conspicuously missing the action. That’s Bitcoin.

Both Nasdaq and S&P hit new all-time highs week after week. Bitcoin, sadly, is languishing at $70k, that’s 43 percent beneath its peak price (see below).

And Bitcoin prices have been falling for the last four weeks. This potentially reasserts Bitcoin’s multi-month bear trend back into the congestion area at just above $60k.

What’s going on here? Why is the premier crypto digital asset struggling to rally when investor sentiment is uber bullish on Wall Street?

One widely-discussed reason is that quantum computing – computing that relies on quantum physics – may break the Bitcoin network. How? In the not-so-distant future, researchers feared that new quantum technology may be able to reverse engineer a holder’s ‘private key’ to drain funds from the wallet (technical paper here if anyone is interested). Bitcoin security may be compromised; ergo, investors stay away.

But I doubt that’s the whole story for Bitcoin’s persistent decline.

Many moons ago, Bitcoin was touted as an ‘inflation-proof’ asset. That is, BTC should, theoretically, protect holders against monetary-induced inflation because of its limited quantity (21 million HardCap). Well, inflation is running hot these days (US PCE inflation at 3-year high) yet Bitcoin is failing to stir into action.

To be fair, Bitcoin bulls will tell you that gold – another inflation-proof asset – is also trading flat year-to-date. Prices are down nearly a fifth from its January peak (see below). As for silver, prices are currently trading 38 percent beneath its $120 peak price. It appears Bitcoin is not alone in suffering a heavy drawdown this year.

Still, this divergence is an unusual market trend. A highly speculative asset like BTC should rally in tandem with a bullish stock market rather than be mired in a “crypto winter”. Hot money, it seems, is piling into AI/Hardware stocks at the expense of digital assets, especially as crypto’s relative under-performance against AI deepens.

For example, look at ARM Holdings’ (NASD:ARM) recent rally. Prices tripled in just eight weeks. And this is not a risky small-cap stock. ARM’s market cap is now the 28th largest globally ($436 billion). Its former owner – Softbank (9984 JP) – is also doing really well off ARM’s stellar bull run.

The list of AI-Hardware stocks soaring like ARM is long – and getting longer. see, eg, Dell Technologies (DELL) or Samsung (005930:KS). The latter is now a trillion-dollar company.

Very few crypto assets are doing as well as AI stocks this year, with the possible exception of Hyperliquid (HYPE-USD).

Momentum chasers will most likely buy AI stocks rather than suffer a big relative underperformance holding Bitcoins during a winter.

Bitcoin miners pivot into AI

AI is not only drawing money away from crypto assets, it is also changing the crypto industry.

For many years, Bitcoin miners saw no improvement in their stock prices because they can’t make money mining Bitcoin. The persistent need to keep buying ever more powerful – and increasingly expensive – computing rigs for smaller and smaller Bitcoin rewards crushed miners’ profit outlook.

But once these miners pivot to AI, their stock prices immediately soared. Why? Because there is a ready market for their vast and powerful mining warehouses.

Hut8’s (NASD:HUT) share price, for example, soared in the past few months as it secured agreements with hyperscalers like Google (GOOG) to compute their inference models. Prices zoomed past its 2021 highs swiftly.

Seeing this successful transition, Hive (HIVE), Cipher (CIFR), Keel Infrastructure (KEEL), Riot (RIOT) all scrambled to pivot away from low-yielding Bitcoin mining. Mara (MARA), one of the biggest bitcoin miners, sold $1.5 billion worth of its Bitcoin stash earlier this year to reduce debt and fund a transition to AI. Meanwhile, Riot also dumped 3,778 bitcoins in March.

Miners’ selling could be a reason for Bitcoin’s falling prices.

HODL is yesterday?

One of the pillars of bitcoin investing is HODL. That is, you train yourself to develop a pair of ‘diamond hands’: Use all your spare cash to buy Bitcoins and never sell.

A big proponent of this tactic is Strategy (MSTR, formerly known as Microstrategy). But these days, even that company is selling bitcoins.

On June 1, the company sold 32 bitcoins for the first time (see its Bitcoin buying program here) in order to fund its preferred dividends. A ‘discipline sale of Bitcoins’ has become now a capital management tool for the firm.

In other words, as long as Strategy requires cash to pay its note holders (four in total: STRK 8%, STRF 10%, STRD 10%, and STRC 11.5%), it may be forced to sell its massive Bitcoin holdings, bit by bit. The 843,706 Bitcoin stash simply does not generate enough cash to pay the obligated hundreds of millions in preferred dividends.

With a falling Bitcoin price and strained finances, no wonder Strategy’s stock is down 70 percent from its 2024 peak (see below).

More crucially, when other HODLers see this Strategy’s selling, doubt will emerge about the entire HODL strategy. If the largest whale is trimming, perhaps we should do so too! A crisis of confidence may develop, and we may see the start of a long-term unwinding of Bitcoin holding strategy, especially for indebted owners.

Gone, I suspect, is the HODL strategy.

Will AI spending turn out like Bitcoin mining?

Seasoned macro investors will point out my critical error in thinking that Bitcoin is inflation proof. It is not. Rather its status is perhaps more straightforward: Bitcoin is a highly speculative asset. Nothing more, nothing less. Prices go up during a boom; and slump in a bust.

I find this line of thought interesting. Because for a speculative asset like Bitcoin to lose ground to another sector means that sector is perhaps even more speculative!

That speculative industry is AI.

Pushing this reasoning further, I find a few striking similarities between Bitcoin mining and current AI spending:

Bitcoin mining is unprofitable because miners couldn’t get enough revenue from the network. Growth just isn’t there. Equipment got more expensive, as did power.

Many Bitcoin miners ran At-the-Market (ATM) equity offering programs to provide for their working capital. But ATM constantly dilutes its equity base and suppress share prices. Any bull runs tended to be short-lived.

Here lies the same danger for AI-Hyperscalers: revenue growth.

For AI companies to make a decent return on their current infrastructure spending ($700 billion and counting), their AI revenue streams have to increase dramatically from here. Any shortfall from the market’s current lofty expectations will see their share prices crater. See, eg, a good essay here explaining why the current AI investing is expensive.

Google (GOOG), announced this week that it will raise $80bn from equity, and market is already unhappy. Because this means dilution. Like Bitcoin miners, Google will attempt to raise $40 billion using ATMs. Can the market absorb this avalanche of shares without hitting share price? For now, yes. In the future? That’s questionable.

And more importantly, AI is currently delivering Bitcoin-type price returns. And investors large and small are piling into the sector.

Like iShares Bitcoin’s (IBIT) massive launch in 2024, Roundhill Memory (DRAM) this year became the fastest-growing ETF ever, gathering $10 billion in assets in just two months.

Evidently, the AI is becoming very crowded. Another danger point.

Final remarks

Market expectations for AI companies are exceeding rosy.

But any shortfall from these bullish projections – eg weak revenue growth – may hit the high-flying AI shares. Pair this revenue risk with riskier balance sheets (due to equity dilution and debt), chances of a Bitcoin-style meltdown among AI giants and hyperscalers are possible.

A falling bitcoin may also indicate that risk sentiment is not as strong as we assumed. It may be sending a signal that stagflation is here to stay.

Lastly, don’t forget the Iran crisis is still unresolved.