Bitcoin (BTC -1.67%) mining companies are some of the best-performing stocks of the year. Top Bitcoin miner Riot Platforms (RIOT -1.49%) is up a dizzying 172% year to date. Marathon Digital Holdings has gained 153%. And shares of eco-friendly Bitcoin miner CleanSpark is up by a head-turning 92%. So it's no surprise that investors are scooping up these mining stocks as a way to pump up their portfolio returns.
But there might be a better way to get access to the Bitcoin mining sector, and that's through an exchange-traded fund (ETF). The one ETF that I have in mind is the Valkyrie Bitcoin Miners ETF (WGMI -0.80%). This specialized fund invests 80% of its net assets in companies that derive at least one-half of their revenue or profits from Bitcoin mining, or that provide specialized chips, hardware, software, and services to Bitcoin mining companies.
Diversification benefits
Instead of trying to choose a winner in the hyper-competitive Bitcoin mining sector, it could make sense to invest in an ETF that covers the broader Bitcoin mining market. That way, you get access to a wide range of Bitcoin miners without being overexposed to any particular stock. Moreover, you can gain access to the companies that are selling the "picks and shovels" to the Bitcoin miners without having to invest in them directly.
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As of Sept. 22, the Valkyrie Bitcoin Miners ETF held stakes in 21 companies. The largest holdings include several pure-play Bitcoin mining stocks: Riot Platforms (10.6%), CleanSpark (10.2%), and Marathon Digital Holdings (9.8%). In addition, the ETF holds smaller stakes in several other Bitcoin mining stocks, including Hut 8 Mining (4.7%), HIVE Technologies (4.8%), and Terawulf (5%). Thus, approximately one-half of the ETF's holdings are in the largest Bitcoin mining stocks.
But what's most interesting is what else the fund holds. For example, it holds a 10.5% position in Iris Energy, which builds, owns, and operates data centers and infrastructure for the mining of Bitcoin. And it holds a 9.4% stake in Cipher Mining, a company dedicated to expanding and strengthening Bitcoin's critical infrastructure in the U.S. The fund also holds much smaller positions in top tech names such as Nvidia (4.8%), AMD (1.2%), Samsung (1.2%), and Taiwan Semiconductor Manufacturing (1.2%).
Potential trade-offs
The trade-off for diversification, though, is returns well below the hottest single stocks. While the Valkyrie Bitcoin Miners ETF is now the top-performing ETF through the first nine months of the year, its performance doesn't come anywhere close to that of star performer Riot Platforms. The Valkyrie Bitcoin Miners ETF is up 110% for the year, but Riot is up by 172%. Thus, you are definitely sacrificing some return on your investment in exchange for all of the diversification benefits you are getting.
In addition, it needs to be pointed out that with an ETF, you are paying a management fee for the portfolio rebalancing that needs to occur on a regular basis. Currently, the expense ratio for the Valkyrie Bitcoin Miners ETF is 0.75%, which is generally considered to be a good ETF expense ratio. However, every dollar paid out in management fees is a dollar whose value is not compounded over the long haul.
From my perspective, though, the trade-off between diversification and returns is one worth taking. For one, it makes my job as an investor much easier. Instead of having to compare each Bitcoin mining stock against the other in order to find the "winner," I can simply buy one fund and let it do all the heavy lifting. All I have to do is find a fund that invests in several of the top Bitcoin mining stocks.
Moreover, the broad diversification of an ETF that holds 20 different companies means that I am much more protected from the downside of a crypto bear market. In 2022, for example, Bitcoin lost 65% of its value and Bitcoin mining stocks went along for the ride. So you definitely want some downside protection in order to smooth out your annual returns. Because the ETF holds tech companies that are only tangentially related to Bitcoin mining, you are basically getting insurance that you won't lose as much as if you were holding just a single Bitcoin mining stock.
Diversification reduces risk
If you are new to crypto investing, diversification could be a great way to reduce your risk. By holding a basket of Bitcoin miners, instead of just the "best" Bitcoin miner, you get access to more diversification as well as protection against a crypto downturn. You lose some upside, but you're not forced into picking a winner.
So the next time you are thinking about investing in a Bitcoin mining stock, consider the alternatives. If you are risk-averse, new to crypto, or unwilling to manage your portfolio actively, a fund like the Valkyrie Bitcoin Miners ETF could be a great option.
