This article is from: Coindesk

Original author: Aoyon Ashraf

Original translation: Odaily Planet Daily Kate

Editor's note: This article was published on March 6, with data lagging behind (Odaily Planet Daily also noted the latest data), but the views expressed in the article are still applicable to the upcoming Bitcoin halving event.

• We found that investors are "long on Bitcoin and short on mining machines." Before the Bitcoin halving, investors consider it safer to put their funds into Bitcoin spot ETFs rather than holding mining machines, which may bring risks.

• Mining companies need to prove that they can bring substantial returns to convince investors to hold their stocks.

• Historical patterns indicate that mining stocks may rebound after the halving, and transaction fees, mergers and acquisitions, and other strategies may help them remain profitable.

This Tuesday (Note: the original article was dated March 5), Bitcoin (BTC) hit a historic high, causing a stir in the cryptocurrency community.

However, the stock prices of miners, who play an important role in the Bitcoin ecosystem, failed to replicate the dazzling surge, as investors are concerned about the risks posed by the upcoming halving and have instead put their funds into Bitcoin spot ETFs. Historically, Bitcoin miners have been seen as representatives of Bitcoin prices, but with higher returns during Bitcoin rebounds. Investors around the world, restricted from buying Bitcoin on exchanges, could buy mining stocks to gain exposure to the risk. This fueled a surge in stock prices during the last bull market cycle in 2021.

Subsequently, as expected, these stocks plummeted in the following bear market, and some well-known miners also filed for bankruptcy. As the entire industry emerged from the harsh cryptocurrency winter, miners also addressed their issues, hoping that their stock prices would rise during Bitcoin rebounds. But something unexpected happened: Bitcoin prices rose by about 54% this year, hitting a historic high of over $69,000 (Note: as of the article's publication on March 6, according to OKX exchange data, the historic high has exceeded $73,000), while the Valkyrie Bitcoin Miners ETF (WGMI), which tracks the performance of listed mining companies, fell by about 21%.

The decoupling of Bitcoin and mining stocks serves as a heavy reminder to investors: this bull market is different.

This time, the main driver of Bitcoin's rebound is the approval by the U.S. Securities and Exchange Commission (SEC) to issue spot Bitcoin ETFs in the United States.

Like mining stocks, these ETFs trade on stock exchanges, and almost all U.S. brokerage accounts can trade them. This allows investors to have more direct exposure to digital assets without needing to purchase them through independent accounts on cryptocurrency exchanges. This also ensures that investors can hold Bitcoin without exposing their portfolios to the volatility of mining stocks and their company risks.

"With the approval of Bitcoin ETF products, investors can now directly benefit from the growth in Bitcoin prices." wrote Brandon Bailey, lead analyst at Galaxy Mining, in a research report. "Before the ETF was approved, listed mining stocks were one of the few traditional tools for investors to gain exposure to the appreciation of Bitcoin prices. Retail investors may still buy mining stocks, but for institutional investors—who are often the driving force behind Bitcoin price increases—shorting mining stocks has become their preferred trade." The report added, "In the short term, institutions seem to be more inclined to go long on Bitcoin ETFs and short on mining stocks, and we have seen this trend since early 2024."

Analysts say that unless miners can demonstrate strong positive cash flow, investors may hesitate to finance some miners, which will "challenge the stock market for operators with low profitability, high costs, and poor capital returns."

Uncertainty of Bitcoin Halving

Another obstacle facing mining stocks is the upcoming Bitcoin halving event in April, which will intensify mining competition. Halving is part of the Bitcoin network code, aimed at reducing the inflationary pressure of cryptocurrency. Miners running the network can receive Bitcoin rewards, but the halving, which occurs once every four years, will halve the rewards.

After the last halving in May 2020, Bitcoin soared, and miners joined in. At that time, there were not many large miners. But this time, many large miners have emerged in the market, and they will compete for Bitcoin rewards, as block rewards will decrease from 6.25 BTC to 3.125 BTC. In addition, the difficulty of mining a block has also reached a historic high, making the situation after "mining" even more severe.

"This brings huge uncertainty to mining stock investors." wrote George Kikvadze, Vice Chairman of Bitfury Group, in a blog post. "There is still uncertainty about which miners can survive the upcoming halving and income reduction." He added, "Therefore, investors seek tangible guarantees in this uncertainty and shift their funds to what they consider safe: Bitcoin ETFs."

Temporary Setback

So, do miners still have hope?

Analysts at Galaxy Mining predict that several positive trends can help miners. One of them is transaction fees, which could be the "biggest variable" in mining income for 2024. Because fees generated by Ordinals (assets similar to NFTs recorded on the Bitcoin blockchain) have recently helped increase miners' income, which may help them survive after the halving.

The analysts wrote, "While we expect the hash rate to decrease after the halving (as weaker miners shut down their operations), the significant increase in transaction fees during the same period may greatly increase income, allowing less efficient miners to continue mining within the profit margin."

Other options that may help miners include hedging electricity costs and using mined Bitcoin to hedge price fluctuations. Analysts also predict that merger and acquisition activity may increase this year, as smaller, less efficient miners may need to be acquired by larger miners to survive the competition.

Meanwhile, Kikvadze of Bitfury stated that despite market concerns, historical precedents indicate that miners will "thrive after the halving." He studied the performance of listed mining company stocks during the halving period in May 2020, and the results showed that "in the months leading up to the halving, mining stocks underperformed or were on par with Bitcoin, but during the subsequent 'Bitcoin summer' bull market, mining stocks outperformed Bitcoin."

So far, miners' performance in the halving event has been lower than Bitcoin prices. If history repeats itself, mining stocks may gain traction after the halving event, and the rebound in Bitcoin prices surpassing historic highs may also help.

"The current slump in publicly traded Bitcoin mining stocks is a temporary setback, expected during the halving event. As the dust settles, strong miners will shine, and investors will flock in." Kikvadze said.

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