Written by Roger Huang
Compiled by: Luffy, Foresight News
Bitcoin mining block rewards are halved every four years, with the next halving taking place in April 2024, when the block reward subsidy will drop from 6.25 Bitcoins (worth $221,000) to 3.125 Bitcoins (Value $110,625). Miners also receive transaction fees paid by network participants, but these are only a small part of their compensation. While the actual impact of the halving will be to double the cost of production for Bitcoin miners, Bitcoin mining stocks may still be a good fit for certain cryptocurrency portfolios.
background
The Bitcoin network adds transactions to the network through a process called mining. As compensation for the computational and energy costs consumed, miners who package each block can currently receive an additional reward of 6.25 bitcoins. This is the only way to generate new bitcoins, and halving is a way to slow down the rate of inflation, making existing assets more scarce. This process will continue until the last bitcoin is minted in 2140.
When Bitcoin was launched 15 years ago, it was worth just a few cents and could be mined on a regular laptop. Today, with top miners collectively running more than 450 EH/sec of hashrate, Bitcoin mining has become big business. In fact, some estimates put the Bitcoin network’s annual energy consumption at the same level as a middle-income country.
Bitcoin hash rate in past market cycles. Source: Forbes
This arms race has resulted in millions of dollars in annual costs (e.g., purchasing specialized hardware, energy costs, and management fees), so many miners have evolved into multinational companies with global supply chains. In fact, there are 15 major miners listed on major stock markets such as Nasdaq and the Toronto Stock Exchange, all of which have achieved a hash rate of more than 0.5 EH/s in October 2023. Here are the top 10.
Core Scientific was once the world's largest Bitcoin miner by computing power, but it declared bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in December 2022. Most of the computing power on the Bitcoin network is in the hands of private miners, many of whom operate mining pools that individual miners join. Source: Forbes
It’s worth noting that Bitcoin halvings have historically been extremely bullish signs. In the 12 months following the 2016 halving, Bitcoin surged 287%. In the COVID-driven financial boom, Bitcoin surged 542% in the 12 months following the halving. When Bitcoin was still in its infancy, it surged 8,256% in the year following its first halving in 2012.
Past Bitcoin halving schedule, source: Forbes
Outlook and Impact
As mentioned above, miners are generally optimistic about 2023. Assuming history repeats itself, they may face a difficult 12-16 months until the effects of the next halving are fully played out to make up for the reduction in rewards. A big reason for this complication is that mining profitability is already at an all-time low, and the halving will occur during a period of rising interest rates, which may put pressure on assets like Bitcoin and gold that do not provide additional returns. After the halving, many Bitcoin miners will need to immediately shift to cost-cutting mode to survive the potential trough and catch the next wave. They are likely to dilute shareholders to raise funds.
On the other hand, there are bullish indicators. Bitcoin has surged more than 30% since June, when asset management giant BlackRock filed to list a spot Bitcoin ETF, and is up 120% so far this year. As the chart above shows, miners are among the world's largest corporate holders of Bitcoin, so if a series of ETFs are launched in the U.S. (expected no later than March 2024), the value of those Bitcoins could soar. The size of this effect will depend on how much capital is allocated to these new products.
The price increase in the second half of 2023 is exciting, but assessments vary widely. For reference, the first Bitcoin futures in the United States, ProShares Bitcoin Strategy ETF (BITO), exceeded $1 billion in management for the first time. And the first gold ETF, SPDR Gold Shares (GLD), established in the early 2000s, raised $1 billion in the first three days of listing, setting a record at the time. Bitcoin spot trading volume is about $17 billion per day, so $1 billion accounts for nearly 6% of daily trading volume. A sudden rise could also liquidate short positions, accelerating any upward trend.
How to make decisions
It’s important for investors to find the right balance across their entire cryptocurrency portfolio, even when it comes to Bitcoin. Miners tend to provide more beta (return/volatility) than just holding Bitcoin directly. For example, through 2023, the nine leading Bitcoin mining listed stocks increased in value by 250%, nearly three times the gain in Bitcoin’s price. Of course, the opposite was true when the market fell in 2022.
It may not be prudent to concentrate the majority of your Bitcoin investment in mining stocks, but it can be a useful catalyst during a bull market. Your investment in Bitcoin could be better allocated to holding the asset directly or buying exchange-traded products, such as potential spot ETFs, MicroStrategy (the world's largest corporate Bitcoin holder), etc., or closed-end funds, such as the Grayscale Bitcoin Trust, which is currently trading at a 13% discount to its underlying net asset value.
When considering what to hold, it is important to consider several factors, such as production costs, debt on the balance sheet (which could increase the need to sell Bitcoin to cover expenses and hurt the long-term interests of its finances). There are some useful data points here, but it is important for any investor to do their own research.
According to an independent analysis comparing the enterprise value of Bitcoin mining stocks to their revenues, market leaders Marathon and Riot appear slightly overvalued. On the other hand, companies like BitDeer and Stronghold Digital trade at lower ratios. This does not mean that investors should immediately aim for the left side of the chart, as blue chip mining companies like Riot and Marathon have reason to trade at a premium and they are better positioned to survive a difficult post-halving period. It is also worth noting that they have by far the largest Bitcoin inventory of any publicly traded miner, which could prove to be extremely valuable over the next 12-16 months. Therefore, it is important to consider all aspects of a miner's business when making an investment decision.
TeraWulf is a company that has been gaining more attention from the investment community since it signed a super-cheap nuclear power contract in Pennsylvania in March, insulating it from geopolitically driven energy price increases.
Applied Digital Holdings (APLD: NASDAQ) is not a mining company by definition, but an infrastructure provider that provides services to miners. It has also become the focus of investors due to its recent signing of a high nine-figure artificial intelligence order. Many Bitcoin miners are clamoring to get involved in the field of artificial intelligence, but to most people, it is just marketing talk.
Given Core Scientific's massive hashrate and the fact that it is expected to be relisted on the Nasdaq in January, it seems attractive to investors. However, it is worth noting that even if the company successfully emerges from bankruptcy proceedings, it will have a heavy debt burden that it will need to repay by continuing to sell the Bitcoin it mines. This means that its coffers will remain at zero for the foreseeable future.
