Why These Bitcoin Stocks Are Tumbling Today

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What happened

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Shares of three stocks, Riot Blockchain (NASDAQ: RIOT), Overstock.com (NASDAQ: OSTK), and Seven Stars Cloud Group (NASDAQ: SSC), that have ridden cryptocurrency mania to explosive gains tumbled on Friday. These declines were driven by a reckoning in the cryptocurrency markets, with bitcoin and other high-profile digital currencies suffering from major sell-offs.

Stock

% Change at 11 a.m. EST

Daily Low as of 11 a.m. EST

Riot Blockchain

(9.9%)

(26.8%)

Overstock.com

(6.7%)

(14%)

Seven Stars Cloud Group

(12.5%)

(24.5%)

So what

Shares of these three companies have soared recently due to bitcoin- and blockchain-related developments. Riot Blockchain was known as Bioptix prior to a name change and a shift in strategy in October. The company now focuses on buying cryptocurrency and blockchain businesses. It previously focused on making diagnostic equipment for the biotech industry.

Overstock.com, an e-commerce company, has been investing in blockchain for the past few years. The stock soared this year thanks to various blockchain-related initiatives, including a joint venture for a global property registry and the tZERO security token sale.

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Seven Stars Cloud Group announced in September that it planned to launch an asset-backed securitization, tokenization, and exchange platform powered by artificial intelligence and blockchain. In December, the company bought an additional 20% stake in BBD Digital Capital Group, with plans for the company to "operate a global AI + Blockchain digital issuance and trading platform of index / future derivatives."

These rallies hit a speed bump on Friday when major cryptocurrencies experienced steep declines. At 11:15 a.m. EST, here's how these digital assets had fared over the past day:

Cryptocurrency

1-Day Change

Bitcoin

(19.5%)

Ethereum

(23.2%)

Bitcoin Cash

(29.7%)

Ripple

(20.5%)

Litecoin

(24.9%)

All three companies have tied themselves to cryptocurrency, with speculators pushing up the stocks in hopes of selling at a higher price to a "greater fool" down the road. Their massive rallies, driven by nothing more than name changes and press releases, have a striking similarity to the dot-com bubble, when slapping a ".com" onto a company's name would send a stock soaring.

This cryptocurrency correction may not be the end of this mania. Bitcoin has crashed before, each time eventually rising to new heights. That may happen again, or this may mark the beginning of the end of the cryptocurrency bubble.

Now what

A rule of thumb for investing in stocks: Don't buy a stock because you think it will go up in price; buy it because it's worth more than the price, based on fundamentals and growth prospects. Riot Blockchain doesn't have fundamentals -- it produced no revenue over the trailing-12-month period and posted a net loss of $13 million.

Seven Stars produced $107 million of revenue over the past nine months, but managed a gross margin of just 5.5% and a net loss of $5.1 million. And Overstock has never been very profitable, producing typical operating margins in the ballpark of just 1%.

Cryptocurrency mania may not end anytime soon, and it could just be getting started as more people pile into digital currencies. These stocks may very well recover if bitcoin and other cryptocurrencies start moving higher. But none of this will last forever, and Friday's rout should be a wake-up call for those speculating in bitcoin stocks.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.