• Investors “long bitcoin” and “short miners”, as it is safer to invest in bitcoin spot ETFs than take on the risk of holding miners before the upcoming Bitcoin half-doubling.
  • Investors will only return to their stock if they see that the miner can produce strong returns.
  • History suggests that mining stocks could rally following the halving of their share price, and M&A, transaction fees, and other strategies may help them remain profitable.

BTC Price Index and Live Chart – CoinDesk”>(BTC) reaching an all-time high on Tuesday.

The share prices of Bitcoin miners, who are vital to the Bitcoin ecosystem, have not replicated the rally. Investors, fearful of the upcoming risks of the so-called “halving”, instead invest in spot Bitcoin ETFs.

What is Bitcoin Halving and why should you care?

Bitcoin miners have historically been seen as a proxy of bitcoin’s value, with higher returns during BTC rallies. Due to restrictions, investors who could not buy bitcoin on exchanges were able to buy mining stocks. This helped to fuel the massive rally in the last bull market cycle of 2021.

These stocks, as was expected, plummeted during the subsequent bear-market, and a few well-known miners also filed for bankruptcy . The industry recovered from the crypto winter, and the miners fixed their problems. There was hope that the share prices of these companies would rise during a bitcoin rally. Bitcoin’s value is up 54% in the past year, and has just reached an record high of $69,000. However, the Valkyrie Bitcoin Miners Fund (WGMI), which tracks the performance publicly traded miners fell 21%.

The disconnect between BTC mining stocks and BTC gave investors a somber warning that this bull market is different.

This time, the main driver for the bitcoin rally was the Securities and Exchange Commission’s approval of spot bitcoin exchange traded funds in the U.S.

These ETFs are traded on stock exchanges, just like miners’ stocks. They can be accessed by any American brokerage account. Investors could gain a direct exposure to digital assets without needing to open separate accounts on crypto exchanges. The investors could also hold bitcoins without being exposed to the volatility of mining stocks or corporate risks.

Investors can now directly access bitcoin prices with the approval of Bitcoin ETFs. Before the ETF was approved, public mining stocks represented the only traditional vehicle through which investors were able to gain exposure to bitcoin’s price appreciation,” Galaxy mining analysts led by Brandon Bailey wrote in a Research Note.

Retail investors could still purchase mining stocks. But for institutional players, who are the ones making the biggest impact in the market, short-selling mining stock became their preferred strategy. The report said that “institutions are more likely to go short mining stocks and long Bitcoin ETFs in the short term.” This is something we have seen play out starting at the beginning of 2024.

Investors will be reluctant to fund some miners unless they can demonstrate a strong cash flow. This could pose “challenges on the equity market for operators with lower margins, higher costs, and weaker records of return on capital,” according to the analysts.

Bitcoins halving the uncertainty

The upcoming Bitcoin halving in April will increase the level of competition among miners. This halving was coded into the Bitcoin network to help reduce inflationary pressure. The Bitcoin network rewards miners with bitcoins for maintaining the network. However, every four years this reward is halved.

Here’s CoinDesk coverage of the halving.

Bitcoin surged in value after the May 2020 halving. Miners also joined in. There weren’t a lot of large-scale mining operations at the time. The market is now crowded, with a lot of large-scale mining companies competing for the bitcoin rewards, which will be reduced to 3.125 bitcoins from 6.25 bitcoins. The difficulty of mining blocks has also reached an all-time-high, making things even more difficult after the halving.

Investors in mining stocks are faced with a lot of uncertainty. In a post, George Kikvadze executive vice chairman of Bitfury Group wrote: “Uncertainty reigns as to which miners can weather the storm, and survive the impending halving in revenue.”

Investors are seeking tangible reassurances in the face of this uncertainty, and they are diverting their capital into Bitcoin ETFs because they perceive them as safe.

‘Temporary setback’

Is there any good news for the miners?

Analysts at Galaxy predict that the mining industry will benefit from a few positive trends. Transaction fees could be “the biggest wildcard” in mining revenue for 2024. Ordinals, which are NFT-like assets that have been recorded on the Bitcoin Blockchain, generate fees. This has helped miners increase their revenue recently.

The analysts wrote that “while we might expect the hashrate to fall following the halving (as weaker miner shut down their operation), a significant spike in fees around the same time could boost revenues high enough to allow less efficient miners who would otherwise be unprofitable, to still mine on the margin.”

Other options could help miners, such as hedging power costs and using bitcoins to hedge price volatility. Analysts also predict that mergers-and-acquisitions will increase this year, as smaller and less efficient miners may need to be purchased by larger companies to survive.

Read more: Bitcoin Halving is Poised to Unleash Darwinism Upon Miners

Kikvadze, Bitfury CEO, said that despite market concerns, historical precedent indicates that miners will “thrive”. He looked at publicly traded stocks of miners during the May 2020 halves, and found that “miners either underperformed Bitcoin or remained on a par with it in the months prior to the halving. They outperformed Bitcoin during the subsequent “Bitcoin Summer” bull run.”

Miners have so far underperformed the price of bitcoin as we approach the halving. If the past is any guide, mining stocks may be in for a boost after the halving. A rally of bitcoin’s price beyond its all-time high could also help.

The current slump in Bitcoin mining stocks is temporary and expected as a result of the halving. After the dust settles down, the robust miners will shine and investors will flock into the sector,” Kikvadze said.

Read more: Will Bitcoin’s next halving be another hype cycle?

Nick Baker is the editor.