has led investors to believe that it may be safer to put money into bitcoin spot ETFs rather than taking on the risk that may arise from holding miners ahead of the halving event.
Miners need to prove they can generate strong returns to persuade investors to rotate back into their stocks. Historical patterns suggest that mining stocks may rally after the halving, while transaction fees, mergers and acquisitions, and other strategies might help them stay profitable.
The crypto community is abuzz about bitcoin reaching an all-time high on Tuesday. However, the share prices of miners, who play a vital role in the Bitcoin ecosystem, have failed to replicate the dizzying rally as investors are wary of upcoming risks from the halving and are instead pouring money into spot bitcoin ETFs.
Historically, bitcoin miners were seen as a proxy for bitcoin’s price, but with higher returns when BTC rallied. Investors worldwide who couldn’t buy bitcoin from exchanges due to restrictions could buy mining stocks to gain exposure. This helped fuel the giant rally during the last bull market cycle. However, these stocks slumped significantly during the subsequent bear market, and some high-profile miners even filed for bankruptcy.
As the industry emerged from the brutal crypto winter and miners cleaned up their issues, there were hopes that their share prices would recover amid a bitcoin rally. However, the disconnect between BTC and mining stocks has given investors a somber reminder that this bull run is different.
The main driver of the rally in bitcoin this time around was the approval of spot bitcoin exchange-traded funds in the U.S. by the Securities and Exchange Commission. This enabled investors to gain more direct exposure to the digital asset without having to buy them through separate accounts at crypto exchanges. This also ensured that they could hold bitcoin without exposing their portfolio to the volatile nature of mining stocks and their corporate risks.
With the approval of Bitcoin ETF products, investors can now access direct exposure to bitcoin price. Prior to the approval of the ETF, public mining stocks were one of the only traditional vehicles through which investors could get exposure to bitcoin price appreciation.
It’s possible that retail investors may still buy into mining stocks, but for institutional players, short-selling mining stocks became the preferred trade. Unless miners can show strong positive cash flow generation, investors will likely shy away from funding some miners, posing challenges in the equity market for lower margin, higher cost operators with weaker track records for return on capital.
Another roadblock for mining stocks this time around is the upcoming Bitcoin halving event in April, which will ramp up the competition for miners. The halving is part of the Bitcoin network’s code to reduce inflationary pressure on the cryptocurrency. Miners are rewarded bitcoin for running the network, but every four years, a halving cuts that reward in half.
Bitcoin soared after the last halving in May, and miners joined in. However, this time around, the market is crowded with many large-scale miners who will compete for bitcoin rewards that will be cut to 6.25 from 12.5 bitcoin. On top of that, the difficulty of mining a block has also risen to an all-time high, making things even tougher post-halving.
Overall, investors are long on bitcoin and short on miners as they navigate the uncertainties and risks surrounding the upcoming halving event. Miners will need to prove their profitability and adapt to the changing landscape to attract investors back to their stocks.