Blockchain rewards are about to be halved, are Bitcoin miners still worth investing in?

Words: Roger Huang

Compiler: Luffy, Foresight News

The block reward for Bitcoin mining is halved every four years, and the next halving will occur in April 2024, when the block reward subsidy will drop from 6.25 BTC ($221,000 value) to 3.125 BTC ($110,625 USD). Miners also receive transaction fees paid by network participants, but these are only a fraction of their remuneration. While the practical impact of the halving will double the cost of production for Bitcoin miners, Bitcoin mining stocks may still be a good fit for certain cryptocurrency portfolios.

Background

The Bitcoin network adds transactions to the network through a process called mining. As compensation for the computational and energy costs consumed, the packaged miners of each block are currently rewarded with 6.25 BTC. This is the only way to generate new bitcoins, and the halving is a way to slow down inflation, which makes existing assets more scarce. This process will continue until 2140, when the last Bitcoin is minted.

When Bitcoin was launched 15 years ago, it was worth only a few cents, and mining could be done on an average laptop. Today, with top miners running more than 450 EH/s combined, Bitcoin mining has become big business. In fact, some estimates put the Bitcoin network’s annual energy consumption on par with that of middle-income countries.

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Hash rate of Bitcoin over past market cycles, source: Forbes

This arms race has brought millions of dollars in costs each year (e.g., procurement of specialized hardware, energy costs, and overheads), so many miners have evolved into multinationals with global supply chains. In fact, there are 15 major miners listed on major stock markets such as the NASDAQ and TSX, all of which achieved more than 0.5 EH/s in October 2023, with the top 10 miners listed below.

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Core Scientific used to be the world’s largest Bitcoin miner in terms of hash power, but it declared bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in December 2022. Most of the computing power on the Bitcoin network is in the hands of private miners, many of whom operate mining pools that individual miners join, source: Forbes

It’s worth noting that Bitcoin halving has historically been an extremely bullish sign. In the 12 months following the 2016 halving, Bitcoin soared 287%. In the midst of the pandemic-driven financial boom, Bitcoin surged 542% in the 12 months following the halving. When Bitcoin was still in its infancy, it surged 8,256% in a year after its first halving in 2012.

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Past Bitcoin halving schedule, source: Forbes

Outlook & Impact

As mentioned above, miners have been positive overall in 2023. Assuming history repeats itself again, they may face a difficult 12-16 months until the effects of the next halving are fully exerted to compensate for the reduction in rewards. A big reason for this complication is that mining profitability is already at an all-time low, and the halving will take place during rising interest rates, which could put pressure on assets like Bitcoin and gold that don’t provide additional yield. After the halving, many Bitcoin miners will need to immediately switch to a cost-cutting model to ride out the potential trough and catch the next wave. They have the potential to dilute shareholders’ equity to raise capital.

On the other hand, there are also bullish indicators. Bitcoin has surged more than 30% since asset management giant BlackRock filed to list a spot bitcoin ETF in June, and is up 120% year-to-date. As you can see in the chart above, miners are among the largest holders of bitcoin businesses in the world, so if a series of ETFs are launched in the U.S. (which is expected to be no later than March 2024), the value of these bitcoins could skyrocket. The magnitude of this impact will depend on how much capital is allocated to these new products.

The price increases in the second half of 2023 are exciting, but assessments vary widely. For reference, the AUM of the ProShares Bitcoin Strategy ETF (BITO), the first Bitcoin futures in the United States, exceeded $1 billion for the first time. The first gold ETF launched in the early 2000s, SPDR Gold Shares (GLD), raised a record $1 billion in its first three days of listing. Bitcoin spot trading volume is around $17 billion per day, so $1 billion accounts for nearly 6% of daily trading volume. A sudden rise may also liquidate short positions, accelerating any upward movement.

How to make decisions

It’s important for investors to find the right balance across their entire cryptocurrency portfolio, even when it comes to Bitcoin. Miners tend to offer more beta (return/volatility) than just holding Bitcoin directly. For example, in 2023, the value of nine leading Bitcoin mining listed stocks increased by 250%, almost three times the increase in Bitcoin’s price. Of course, the opposite was true when the market fell in 2022.

It may not be prudent to concentrate the majority of your investment in Bitcoin on mining stocks, but it can be a useful catalyst during a bull run. Your investment in Bitcoin can be better allocated to directly holding the asset or buying exchange-traded products, such as a potential spot ETF, MicroStrategy (the world’s largest corporate holder of Bitcoin), etc., or a closed-end terminal fund, such as the Grayscale Bitcoin Trust, which is currently trading at a discount to its underlying net asset value.

Exactly what to hold, it’s important to consider several factors, such as production costs, debt on the balance sheet (which could increase the need to sell Bitcoin to cover fees and harm the long-term benefits of its finances). Here are some useful data points to consider, but it’s important for any investor to do their own research.

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• According to an independent analysis comparing the enterprise value of Bitcoin mining stocks to their revenues, market leaders Marathon and Riot appear to be slightly overvalued. On the other hand, companies such as BitDeer and Stronghold Digital have lower transaction ratios. This doesn’t mean investors should immediately aim for the left side of the chart, as blue-chip miners like Riot and Marathon have a reason to trade at a premium, and they are better positioned to weather a difficult post-halving period. It’s also worth noting that they have by far the largest inventory of Bitcoin of any publicly traded miner, which could prove to be extremely valuable over the next 12-16 months. Therefore, it is essential to consider all aspects of the miner’s business when making investment decisions.
• TeraWulf is a company that is gaining traction from the investment community after it signed an ultra-cheap nuclear energy contract in Pennsylvania in March, insulating it from geopolitically driven energy price increases.
• Applied Digital Holdings (APLD: NASDAQ) is not a mining business by definition, it is an infrastructure provider that provides services to miners. It has also become the focus of investors’ attention due to the recent signing of AI orders in the high 9 figures. Many Bitcoin miners are clamoring to get involved in artificial intelligence, but for most, it’s just marketing rhetoric.
• Given Core Scientific’s massive hashrate, which is expected to relist on the Nasdaq in January, it appears attractive to investors. However, it’s worth noting that even if the company succeeds in getting out of the bankruptcy lawsuit, it will have a heavy debt burden that will need to be repaid by continuing to sell the bitcoins it mines. This means that its vaults will remain at 0 for the foreseeable future.