Bitcoin’s Bull Market and Its Impact on Mining Stocks
Over the past three years, Bitcoin’s price has seen an astonishing rise of over 450%. This dramatic surge can be largely attributed to several key factors: interest rates reaching their peak, the approval of the first spot price exchange-traded funds (ETFs), and the recent halving event that reduced mining rewards by half. As adoption expands among retail, institutional, corporate, and even governmental investors, Bitcoin is increasingly viewed as a viable hedge against inflation and macroeconomic challenges.
The Ripple Effect on Industries
The ascension of Bitcoin has not just enriched those holding the cryptocurrency; it has also boosted the stock prices of various companies involved in its future. Take MicroStrategy (MSTR), for instance. Transitioning from a typical enterprise software provider to a Bitcoin powerhouse, MicroStrategy’s stock skyrocketed by nearly 1,000% during this period. This sort of transformation highlights the interconnectivity of Bitcoin’s price movements with the fortunes of related businesses.
The Downside for Bitcoin Miners
However, it’s a different story for Bitcoin’s biggest miners, Marathon Digital Holdings (MARA) and Riot Platforms (RIOT). Despite the overall bullish sentiment surrounding Bitcoin, these companies lagged behind, with stocks increasing by only about 50% and less than 240% respectively. This disparity raises the question: why are these mining stocks not keeping pace with Bitcoin’s remarkable rise?
Understanding Revenue Streams in Mining
Both Marathon and Riot started from entirely different backgrounds—MARA was originally a patent holding company, while RIOT was a struggling medical device manufacturer. As Bitcoin’s value skyrocketed, they pivoted to mining, acquiring specialized Bitcoin mining hardware and rebranding themselves accordingly.
In essence, these companies mine Bitcoin and hold it in reserve, but they also sell portions to generate cash flow. Yet, to fuel their growth in mining and expand their data centers, both companies have issued additional shares and accrued debt. Over the last three years, each company more than doubled their shares outstanding, leading to significant dilution for existing investors.
The Bitcoin Hoards
As of September, Marathon held approximately 52,850 Bitcoins valued at around $6.1 billion, constituting nearly two-thirds of its enterprise value. Riot, too, holds a substantial stash—19,287 Bitcoins valued at about $2.2 billion, making up nearly 30% of its enterprise value. While these impressive Bitcoin hoards initially seem attractive, some investors may find greater appeal in direct Bitcoin investments or newly established spot price ETFs that streamline the investment process.
Cost Challenges in Mining
Both Marathon and Riot must navigate rising operational costs, particularly electricity prices, which have been driven up by global conflicts and inflation. The situation is exacerbated by upcoming challenges; the Bitcoin halving taking place in 2024 will make mining more difficult, limiting the supply growth and putting additional strain on the already capital-intensive mining operations. This halving will continue every four years until the last Bitcoin is mined in 2140, raising concerns about the sustainability of operations for miners like Marathon and Riot.
Indications of Underperformance
Given the myriad of challenges, it’s clear why mining stocks have lagged behind Bitcoin itself. Investing in a mining company entails the constant need for capital to buy new equipment and scale operation, alongside coping with unpredictable energy prices. In contrast, simply holding Bitcoin or investing via ETFs seems much more straightforward.
Diversification into Other Technologies
Interestingly, there is a path forward for miners to evolve. Companies like CoreWeave (CRWV), which once focused on Ethereum mining, have transitioned to processing machine learning and artificial intelligence (AI) tasks. This potential pivot illustrates how mining operations might diversify to stay competitive. By repurposing their vast mining infrastructures for AI workloads, these companies could offer new avenues for growth, albeit with uncertainty concerning long-term viability.
Given these dynamics, if you have faith in Bitcoin’s trajectory, it may be more prudent to invest directly in Bitcoin rather than in mining stocks, which come with additional complexities and risks.
