In 2023, Bitcoin mining stocks were a no-brainer investment. All of them were up triple digits or more last year, and it was really just a matter of finding the Bitcoin mining companies with the largest number of Bitcoin mining rigs. The more mining rigs they had, the more Bitcoin they could mine and the more money they could make. Simple, right?
Well, all that could change in 2024. For one, there's the upcoming Bitcoin halving, which could lead to a shakeout in the Bitcoin mining industry. That, in turn, could open the door to the arrival of new Bitcoin mining competitors. The one I'm keeping my eye on is Ocean, a new Bitcoin mining venture backed by legendary tech entrepreneur Jack Dorsey.
Bitcoin mining companies vs. Bitcoin mining pools
Perhaps the biggest investor misconception about Bitcoin mining is that the largest players are the publicly traded Bitcoin mining stocks. That couldn't be further from the truth. In fact, large Bitcoin mining companies Marathon Digital Holdings (MARA +8.60%) or Riot Platforms (RIOT +4.64%) each account for less than 5% of the total Bitcoin mining market. If you add up the market share of the public Bitcoin miners, it amounts to less than 30%.
NASDAQ: MARA
Key Data Points
So who controls the other 70%? There are some privately held Bitcoin mining companies, of course. But the two biggest players -- Foundry USA and AntPool -- are Bitcoin mining pools.
You can think of each mining pool as a giant syndicate that consists of many smaller Bitcoin mining operations. In exchange for contributing their computing power to the syndicate, each participant receives a percentage of the overall profits. Right now, Foundry (based in upstate New York) and AntPool (based in China) are responsible for nearly 57% of all Bitcoin mined by these mining pools.
What is Jack Dorsey's new venture?
And that's where Ocean comes into the picture. Ocean is a new type of Bitcoin mining pool that launched in November 2023 with the tagline, "Bitcoin mining as it was supposed to be." It's backed by Jack Dorsey, who has been a Bitcoin supporter for more than a decade. In fact, Jack Dorsey famously touted Bitcoin as "amazing" when it was trading for just $11 back in 2012. He was also one of the first tech visionaries to think of the possible ways social media companies might integrate cryptocurrencies like Bitcoin into their business models.
Image source: Getty Images.
According to Dorsey, the growing power of the biggest Bitcoin mining pools is bad for Bitcoin. The goal of Bitcoin is to be as decentralized as possible, and if just two mining pools are at the center of Bitcoin production, that's not good. In fact, danger signals start to flash anytime a Bitcoin miner starts to control anywhere near half of the total market.
And that's what we're seeing with Foundry and AntPool. If they ever decided to combine forces, they could potentially control more than one-half of total Bitcoin production. That would raise the specter of a 51% attack, which is among the most feared cyber risks within the blockchain industry.
So Ocean is supposed to change all that by changing the incentives for Bitcoin miners and making it easier for small miners to be successful. While Ocean is still microscopically small, given that it just launched, it's an entrant to keep an eye on. In a best-case scenario, miners who once participated in larger Bitcoin mining pools (i.e., Foundry or AntPool) will start to participate with Ocean. Over time, that will help with the decentralization problem and help to preserve the stability of Bitcoin.
Potential impact on Bitcoin mining stocks
Jack Dorsey's new venture could have an impact on the way we think about Bitcoin mining stocks. For example, it could shift attention away from the miners themselves to the companies providing the "picks and shovels" to these Bitcoin miners. And that includes Block Inc. (SQ +3.21%), where Jack Dorsey is the CEO.
NYSE: SQ
Key Data Points
For the past 12 months, Block has been ramping up its exposure to the Bitcoin mining space. In April 2023, for example, it bought up Bitcoin mining chips from Intel as part of a larger plan to become more involved in the production of tools and equipment needed to mine Bitcoin. In July, it unveiled a Mining Development Kit (MDK) for Bitcoin miners. And in December, it unveiled a new Bitcoin wallet.
Moreover, Jack Dorsey's new venture will likely bring more attention to the concept of Bitcoin mining pools and how they impact the profitability of publicly traded miners. For example, most investors may not realize that Marathon Digital operates one of the biggest Bitcoin mining pools (known as MaraPool) in North America.
Another example comes from Riot Platforms. At the end of 2022, the company made a big deal of ditching its Bitcoin mining pool and joining another. Simply stated, the choice of which mining pool to join was having an impact on its bottom line.
Which Bitcoin miners to buy next?
Going forward, I'm going to be paying attention to Jack Dorsey's new forays into the Bitcoin mining space, including those made by his company, Block. These moves could give you a good idea of where Bitcoin mining is headed and help you to make better decisions about which publicly traded Bitcoin mining stocks to invest in next.
