Original author: Roger Huang
Original compilation: 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 (worth $221,000) Bitcoin (valued at $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 consuming computing and energy costs, packaging miners currently receive an additional issuance reward of 6.25 Bitcoins per block. This is the only way new Bitcoins can be generated, and halving is a way to slow down the rate of inflation by 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 mining could be done on a regular laptop. Today, with top miners combined running over 450 EH/second of computing power, Bitcoin mining has become big business. In fact, some estimates put the Bitcoin network’s annual energy consumption on par with that of a middle-income country.
Bitcoin’s hash rate over past market cycles, source: Forbes
This arms race has resulted in millions of dollars in annual costs (such as purchasing specialized hardware, energy bills, and overhead), and as a result many miners have grown 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 achieved more than 0.5 EH/s in computing power in October 2023. Here are the 10 largest ones.
Core Scientific was once the worlds largest Bitcoin miner by computing power, but it declared bankruptcy in December 2022 under Chapter 11 of the U.S. Bankruptcy Code. 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%. Bitcoin surged 542% in the 12 months following the halving amid a COVID-19-driven financial boom. When Bitcoin was in its infancy, it surged 8,256% in the year after its first halving in 2012.
Past Bitcoin halving schedule, source: Forbes
Outlook and Impact
As mentioned above, the overall performance of miners in 2023 is optimistic. Assuming history repeats itself, they may face a tough 12-16 months until the effects of the next halving are fully felt 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 could put pressure on assets like Bitcoin and gold that do not provide additional yield. After the halving, many Bitcoin miners will need to immediately shift into cost-cutting mode to survive the potential trough and catch the next wave. They risk diluting shareholders to raise capital.
On the other hand, there are also bullish indicators. Bitcoin has surged more than 30% since asset management giant BlackRock applied to list a spot Bitcoin ETF in June, and is up 120% this year. As the chart above shows, miners are among the largest corporate holders of Bitcoin in the world, so if a series of ETFs are launched in the United States (expected no later than March 2024), the value of these Bitcoins could surge. The size of this impact will depend on how much capital is allocated to these new products.
Price increases in the second half of 2023 are exciting, but estimates vary widely. For reference, the management scale of ProShares Bitcoin Strategy ETF (BITO), the first Bitcoin futures in the United States, exceeded $1 billion for the first time. The first gold ETF established in the early 2000s, SPDR Gold Shares (GLD), raised US$1 billion in its first three days of listing, setting a record at the time. Bitcoin spot trading volume is approximately $17 billion per day, so $1 billion represents nearly 6% of daily trading volume. A sudden rise could also liquidate short positions, accelerating any upward move.
How to decide
Its 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, nine leading Bitcoin mining listed stocks have increased in value by 250% through 2023, nearly three times the increase in Bitcoin’s price. Of course, the opposite will be true in 2022 when the market falls.
It may not be prudent to concentrate the majority of your Bitcoin investment in mining stocks, but it can be a useful catalyst during bull market times. Your investment in Bitcoin could be better allocated to holding the asset directly or purchasing exchange-traded products, such as potential spot ETFs, MicroStrategy (the worlds largest corporate holder of Bitcoin), etc., or closed-end end funds, The Grayscale Bitcoin Trust, for example, currently trades 13% below its underlying net asset value.
What exactly to hold, it is important to consider several factors such as production costs, debt on the balance sheet (which may increase the need to sell Bitcoin to pay expenses and harm the long-term interests of its finances). There are some useful data points to consider here, but its important for any investor to do their own research.
Market leaders Marathon and Riot appear to be slightly overvalued, according to an independent analysis that compares the enterprise value of Bitcoin mining stocks to their revenue. On the other hand, companies like BitDeer and Stronghold Digital trade at lower ratios. This doesn’t mean investors should immediately target the left side of the chart, as blue-chip mining companies like Riot and Marathon have reason to trade at a premium and are better positioned to weather a difficult post-halving period. It’s also worth noting that they hold by far the largest Bitcoin inventory of any publicly traded miner, which may prove to be extremely valuable over the next 12-16 months. Therefore, all aspects of a miners business must be considered when making investment decisions.
TeraWulf is a company that has come under increasing scrutiny from the investment community after it signed an ultra-cheap nuclear power contract in Pennsylvania in March, insulating it from geopolitically driven increases in energy prices.
Applied Digital Holdings (APLD:NASDAQ) is not a mining company by definition, it is an infrastructure provider that serves miners. It has also become the focus of investors attention due to the recent signing of nine-figure artificial intelligence orders. Many Bitcoin miners are clamoring to get into artificial intelligence, but to most, this is just marketing talk.
Given Core Scientifics massive computing power and its expected relisting on Nasdaq in January, it appears to be 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 its mined Bitcoins. This means its coffers will remain at 0 for the foreseeable future.
