During the past three years, Bitcoin's (BTC 3.47%) price surged more than 450%. The world's top cryptocurrency rallied as interest rates peaked, its first spot price exchange-traded funds (ETFs) were approved, and its latest halving cut the rewards for mining in half. The growing adoption of Bitcoin among retail, institutional, corporate, and even government investors made it seem like a more viable hedge against inflation and other macro headwinds.
Bitcoin's rising price lifted the stocks of many companies invested in the cryptocurrency's future. Strategy (MSTR 1.62%), which transformed from a slow-growth enterprise software company into a Bitcoin hoarder, saw its stock surge nearly 1,000% during the past three years.
Image source: Getty Images.
Yet the two biggest Bitcoin miners -- Mara Holdings (MARA 1.23%) and Riot Platforms (RIOT +1.54%) -- both underperformed the token. During those three years, Mara's stock rose less than 50% as Riot's stock advanced less than 240%. Let's see why those top Bitcoin mining stocks decoupled from the price of Bitcoin.
CRYPTO: BTC
Key Data Points
How do Bitcoin miners make money?
Mara and Riot weren't originally Bitcoin miners. Mara was a patent holding company, while Riot was a struggling medical device maker named Bioptix. But as the Bitcoin boom started, both companies abandoned their original business models, ordered thousands of dedicated Bitcoin miners, and rebranded themselves as Bitcoin mining companies.
Mara and Riot both added their mined Bitcoin to their own balance sheets. They also periodically sold some Bitcoin to generate more cash.
But to support their purchases of more miners and data centers, Mara and Riot issued more shares and took on more debt. Both companies more than doubled their number of shares outstanding during the past three years, and that dilution should continue for the foreseeable future.
At the end of September, Mara held 52,850 Bitcoins (valued at about $6.1 billion), which accounted for nearly two-thirds of its current enterprise value of $9.5 billion. Riot held 19,287 Bitcoins (valued at about $2.2 billion), which equals nearly 30% of its enterprise value of $7.7 billion. Those growing Bitcoin hoards are impressive, but some investors probably think it makes more sense to directly invest in Bitcoin instead of these mining stocks. Bitcoin's newer spot price ETFs make it even easier to do that.
Mara and Riot are expanding their mining fleets to cover their costs, but high electricity costs are still consuming a large portion of their revenue. During the past three years, the Ukrainian war, the Middle East conflicts, inflation, and other macro headwinds have driven up those energy prices.
To make matters worse, Bitcoin's latest halving in 2024 made it twice as difficult for Mara and Riot to mine the same amount of Bitcoin with the same amount of electricity. That halving slowed Bitcoin's supply growth, and it generated headwinds for the capital-intensive miners. Those halvings will occur every four years until the last Bitcoin is mined in 2140, and that rising difficulty could make it harder for pure play Bitcoin miners like Mara and Riot to sustain their businesses.
Will these miners continue to underperform Bitcoin?
It's easy to see why Mara, Riot, and other Bitcoin miners underperformed Bitcoin. It doesn't make too much sense to invest in a mining company -- which needs to constantly buy more miners, expand its data centers, and grapple with volatile energy costs -- instead of Bitcoin or a spot price ETF.
However, some of these miners could pivot their huge fleets of miners to remotely process more machine learning and artificial intelligence (AI) tasks. That's why CoreWeave (CRWV +1.25%), which was once a dedicated Ethereum (ETH 4.19%) miner, abandoned the cryptocurrency market in 2018 and repurposed its data centers to process AI tasks. Those miners could generate some near-term buzz by expanding into the AI market, but those gains could be short-lived unless they significantly reduce their dependence on Bitcoin. So, if you're bullish on Bitcoin's future, it's smarter to simply invest in the token instead of these messier miners.
