The setup: Nobel Prize winners and corporate titans have come out and said that bitcoin is a fraud and a danger, and I respect their arguments. They may be right. But I’m a trader, and you can’t look at the chart on bitcoin and some bitcoin stocks and not want to find a way to get in on the trade.
I have seen enough manias over the years to recognize that bitcoin may just be another one. I’ll leave the arguments over whether it is a true currency, an investment, a store of value or whatever to other guys.
To me, bitcoin trades like a penny stock having a momentum blow-out top. You’d be foolish to short it, but you’d be equally silly to stay out of it while the mania is there and you can find ways to trade it.
The ways I have found: I’m not trading bitcoin itself, as I have plenty of concerns about the cryptocurrency exchanges and how well they work. I want something more liquid, and that means I’m looking at bitcoin-related stocks.
The three I am using right now are Riot Blockchain (RIOT), Digital Power Corp. (DPW) and Marathon Patent Group (MARA). On the surface, only RIOT has an obvious bitcoin connection, and that should raise a red flag to some extent.
It’s not like there is a clear bitcoin industry group the way there is the energy or the retailing sectors. There are stocks moving based on clear and loose ties to anything bitcoin.
I’m tempted to say that all bitcoin stocks are junk, but that might be unfair because I’m not truly looking at them as investments. Maybe something on the bitcoin bandwagon is a solid company, but I’m not digging in deep enough to find out.
I’m looking for trading vehicles. I wouldn’t recommend anyone buy these stocks or any bitcoin-related securities.
How to play it: The stocks are moving with bitcoin, but not in lockstep. Whenever bitcoin dips – which hasn’t been happening much – I’m looking for these stocks to base out. Then, as bitcoin rebounds, these stocks tend to follow.
If bitcoin were to break below its 30-day moving-average line, it would be a time to stop trading it, but right now it’s buy the right set-ups whenever bitcoin takes a breather.
Jeff Bishop is lead trader at TopStockPicks.com, and the co-founder of RagingBull.com. He runs short-term trading strategies, using stocks, options and leveraged ETFs. At the time this commentary was published, he had no shares, options or open orders in RIOT, DPW or MARA.