As a general rule of thumb, Bitcoin (BTC 0.69%) mining stocks tend to go up when the price of Bitcoin is going up, and down when the price of Bitcoin is going down. That makes sense, given that their revenue and profitability are directly tied to the price of Bitcoin. Thus, when Bitcoin soared by 150% last year, Bitcoin mining stocks also skyrocketed in price.
But the Bitcoin halving, which took place on April 19, changes everything. We've now entered a new halving cycle, and changes brought about by the Bitcoin algorithm could have profound implications for mining stocks over the next 12 months. Let's take a closer look.
What happens to miners after the halving?
In a halving event, the reward paid out for mining a new block of Bitcoin drops by one-half. That directly affects Bitcoin miners, because their primary revenue source has just been reduced by one-half. Think of the effect on your own life if someone cut your primary source of income by 50%. You'd be reeling.
Image source: Getty Images.
That's why the period immediately following the halving is filled with so much uncertainty. Bitcoin miners need to make up for their dramatic revenue shortfall, otherwise they could go out of business. Even before the halving took place in April, analysts were warning of a potentially brutal shakeout in the Bitcoin mining industry, in which only the best-capitalized and most efficiently run miners had any chance of making it.
What appears to be happening right now is that Bitcoin miners are selling massive amounts of Bitcoin on their balance sheets to make up for the shortfall of revenue. During the first two weeks of June, for example, miners sold more than $200 million in Bitcoin. As a result, Bitcoin holdings of these miners are at the lowest level they have been in 14 years.
CRYPTO: BTC
Key Data Points
As a survival measure, selling massive amounts of Bitcoin makes sense. But it also exerts downward pressure on the price of Bitcoin. That might help to explain why the price of Bitcoin, which traded as high as $73,750 just three months ago, briefly dropped below the $60,000 level in late June.
The good news is that the Bitcoin ecosystem will eventually find a new equilibrium. As the price of Bitcoin recovers, so will the fortunes of Bitcoin miners. In three previous halving cycles, the price of Bitcoin has absolutely skyrocketed. So there's good reason to hope that the same pattern will repeat with the 2024 halving cycle, bringing relief to beleaguered Bitcoin miners.
The AI opportunity
There's an interesting plot twist to this year's Bitcoin halving cycle, and it involves artificial intelligence (AI). Since Bitcoin miners deploy massive amounts of computing power in order to mine a single bitcoin, some of this computing power can theoretically be diverted to other tech sectors. As a result, we're now seeing Bitcoin mining companies sign AI computing deals, and that could open up an entirely new revenue source around AI going forward.
In a best-case scenario, of course, the new AI-related revenue will make up for all the lost Bitcoin mining revenue. In turn, this will make it increasingly unnecessary to sell Bitcoin in order to survive. That means the whole Bitcoin mining cycle might find a new equilibrium faster than anyone expected. Once Bitcoin recovers, miners might be able to make money from both Bitcoin and AI.
My only concern is that the process of shifting computing resources from Bitcoin mining to AI could be a lot more difficult and resource-intensive than it initially sounds. In other words, you don't just flip a switch or press a button. Not all Bitcoin mining rigs can be used for AI computing. And Bitcoin mining rigs powered by renewable energy sources may not be appropriate for AI computing. As a result, only certain Bitcoin mining companies may be able to profit from this opportunity.
Which Bitcoin mining stocks to buy?
The best Bitcoin mining stocks to buy right now could be those that are diversifying into AI. The new revenue might not arrive fast enough to help them much during this current Bitcoin halving cycle, but if you are thinking long-term, it could be a very attractive catalyst for future growth.
NASDAQ: CORZ
Key Data Points
One Bitcoin mining stock on my radar right now is Core Scientific (CORZ +0.43%), which has been moving aggressively into the AI computing space. At the beginning of June, the company inked a 12-year deal with AI company CoreWeave for high-performance computing (HPC) power. That deal triggered enormous interest from Wall Street. For the year, Core Scientific is now up a remarkable 170%.
Just keep in mind that if you are planning on investing in Bitcoin mining stocks, you need to keep a constant eye on how companies are responding to market trends. In the previous Bitcoin halving cycle, for example, one key theme was finding new sources of cheap renewable energy to power Bitcoin mining. In the current Bitcoin halving cycle, it could be all about leveraging the power of AI.
