After posting stellar triple-digit returns in 2023, Bitcoin (BTC 1.86%) mining stocks are down across the board in early 2024. For example, Marathon Digital Holdings (MARA +0.43%) is down 32%, and Riot Platforms (RIOT +7.03%) is down 35%. Those sharply negative returns are all the more striking, given all the hype around Bitcoin and the new spot Bitcoin exchange-traded funds (ETFs).
On 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 market outlook that's causing this sharp correction to the downside. Let's take a closer look.
Impact of the Bitcoin halving
Now that the Bitcoin ETF approval drama is over, the market is starting to wake up to the potential impact of the next Bitcoin halving, scheduled for April 2024. A Bitcoin halving occurs only once every four years and, as a result, is highly anticipated by the market. In three previous halving cycles, the price of Bitcoin has skyrocketed, and many investors are expecting the same pattern this time around.
Image source: Getty Images.
While the investment thesis is fairly clear for Bitcoin itself, it's a bit murkier for Bitcoin miners. The halving reduces the mining reward paid out to Bitcoin miners by one-half. Right now, every time a Bitcoin miner adds a block to the Bitcoin blockchain, they are paid a reward of 6.25 BTC, which is worth roughly $250,000 at today's prices. That might sound like a lot, but much of it goes to owning and operating Bitcoin mining rigs, which consume vast amounts of energy.
In April 2024, the "mining reward" will be slashed to 3.125 BTC. That might not seem like a big deal until you consider how it impacts both the top and bottom lines for Bitcoin miners. Think about it for a second. What would happen if your boss told you your "paycheck reward" would be slashed by one-half starting in April? Oh, and you're also expected to work the same number of hours and put in the same amount of work. If you're like most people, you'd probably start looking for new opportunities as soon as possible.
And that's why I think there will be a shakeout in the Bitcoin mining industry this year. All other things staying the same, Bitcoin miners will have a much harder time breaking even in 2024. The growing consensus is that the new break-even point will be a Bitcoin price of $40,000. If the price of Bitcoin falls below that level, a lot of Bitcoin miners could go out of business.
The difficulty of picking winners
In 2023, all that really mattered was the number of mining rigs a Bitcoin miner could bring online. The more rigs, the more Bitcoin they could mine and the more money they could make. Very easy to understand. You just bought the biggest miners.
CRYPTO: BTC
Key Data Points
But all that changes in April. The competitive playing field will be stacked in favor of Bitcoin mining companies with the lowest costs, the greatest liquidity, and the least debt. While the absolute number of mining rigs will obviously still matter, the emphasis will be on getting production costs below that magic $40,000 mark. If you're running an entire fleet of highly inefficient machines gobbling up a lot of electricity, you lose.
That makes buying the dip on Bitcoin miners so risky right now. You really don't know who the new winners will be. There are a lot of factors to take into account. The current consensus is that Riot Platforms, due to its low cost base, will be among the winners.
Is there an alternative to buying specific mining stocks?
Instead of trying to pick winners, it might be easier just to invest in a diversified ETF, such as the Valkyrie Bitcoin Miners ETF (WGMI +5.35%). This fund holds approximately 20 different stocks related to the Bitcoin mining industry. There's no need to pick winners because, theoretically, you're letting a much smarter fund manager figure out the right portfolio blend for you.
No, you might not get the same type of upside as if you picked a single Bitcoin mining stock, but you also diversify away some of your risk. In theory, this ETF should have the highest allocations to the best Bitcoin miners. If you're expecting a lot of turbulence in the Bitcoin mining industry this year, as I am, this might be a safer way to play Bitcoin mining stocks. That said, the Valkyrie Bitcoin Miners ETF is down 30% to start the year, so it's certainly not without risk.
The investment narrative around Bitcoin continues to shift. Yes, Bitcoin mining stocks were a slam-dunk investment last year. But if you really dig into the economics of the upcoming Bitcoin halving event, it's easy to see how Bitcoin mining stocks come with much more downside risk this year. As for me, I'm avoiding direct exposure to Bitcoin mining stocks until after the next big miner shakeout.
