After achieving excellent triple-digit returns in 2023, Bitcoin (BTC 2.64%) Mining stocks have fallen across the board in early 2024. For example Marathon Digital Holdings (MARA -3.01%) is down 32%, and Riot Platforms (REVOLT -2.08%) has fallen by 35%. These sharply negative returns are even more striking considering all the hype surrounding Bitcoin and the new spot Bitcoin exchange-traded funds (ETFs).
On the one hand, this could be a fantastic opportunity to buy the dip in Bitcoin mining stocks. On the other hand, there is likely a fundamental change in the market outlook that is leading to this sharp downward correction. Let's take a closer look.
Impact of Bitcoin Halving
Now that the Bitcoin ETF approval drama is over, the market is starting to become aware of the potential impact of the next Bitcoin halving, scheduled for April 2024. A Bitcoin halving only takes place every four years and is therefore highly anticipated by the market. In three previous halving cycles, Bitcoin's price has skyrocketed, and many investors expect the same pattern this time.
Image source: Getty Images.
While the investment thesis for Bitcoin itself is pretty clear, it is a little more unclear for Bitcoin miners. The halving will reduce the mining reward paid to Bitcoin miners by half. Currently, every time a Bitcoin miner adds a block to the Bitcoin blockchain, they receive a reward of 6.25 BTC, which is worth about $250,000 at today's prices. That might sound like a lot, but a lot of it goes into owning and operating Bitcoin mining rigs, which consume enormous amounts of energy.
In April 2024, the “mining reward” will be reduced to 3,125 BTC. This might not seem like a big deal until you consider how it impacts both the revenue and bottom line of Bitcoin miners. Think about it for a second. What would happen if your boss told you that your “paycheck” would be cut in half starting in April? Oh, and you'll also be expected to work the same number of hours and do the same amount of work. If you're like most people, you'd probably look for new opportunities as quickly as possible.
And that's why I think there will be a shakeout in the Bitcoin mining industry this year. All other things being equal, Bitcoin miners will have a much harder time breaking even in 2024. There is growing consensus that the new break-even point will be at a Bitcoin price of $40,000. If the Bitcoin price falls below this level, many Bitcoin miners could go out of business.
The difficulty of picking winners
In 2023, all that mattered was the number of mining rigs a Bitcoin miner could bring online. The more rigs, the more Bitcoins they could mine and the more money they could make. Very easy to understand. They just bought the biggest miners.
But that changes in April. The playing field is stacked in favor of the Bitcoin mining companies with the lowest costs, the most liquidity, and the least debt. While the absolute number of mining rigs still matters, of course, the focus will be on getting production costs under the magic $40,000 mark. If you run a fleet of extremely inefficient machines that use a lot of electricity, you lose.
This is what currently makes buying Bitcoin miners so risky when the price drops. You really don't know who the new winners will be. There are many factors to consider. The current consensus is that Riot Platforms will be among the winners due to its low cost base.
Is there an alternative to buying certain mining stocks?
Instead of trying to pick winners, it may be easier to simply invest in a diversified ETF like the Valkyrie Bitcoin Miners ETF (WGMI -2.85%). This fund holds about 20 different stocks related to the Bitcoin mining industry. You don't have to pick winners because, in theory, you're leaving it to a much smarter fund manager to figure out the right portfolio mix for you.
No, you may not make the same profit as if you chose a single Bitcoin mining stock, but you also diversify some of your risk. In theory, this ETF should have the highest allocations to the best Bitcoin miners. If, like me, you expect major turmoil in the Bitcoin mining industry this year, this may be a safer way to play Bitcoin mining stocks. However, the Valkyrie Bitcoin Miners ETF is down 30% at the start of the year, so it's certainly not without risk.
The investment narrative around Bitcoin continues to change. Yes, Bitcoin mining stocks were a full investment last year. But when you really delve into the economics of the upcoming Bitcoin halving, it's easy to see that Bitcoin mining stocks face much more downside risk this year. As for me, I'm avoiding direct exposure to Bitcoin mining stocks until after the next big miner bust.
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