Why are miners struggling after BTC reached a historical high?

Original Title: Bitcoin Soared to an All-Time High. So Why Aren't Miners Blasting Off, Too?

Author: Aoyon Ashraf, CoinDesk

Translation: Odaily 星球日报 Kate

Editor’s Note: This article was published on March 6, and the data is lagging (Odaily 星球日报 also notes the latest data), but the viewpoints presented remain applicable to the upcoming Bitcoin halving event.

• We find that investors are "going long on Bitcoin and short on miners." Ahead of the Bitcoin halving, investors consider putting funds into Bitcoin spot ETFs to be safer than the risks associated with holding mining stocks.
• Miners need to prove they can deliver substantial returns to persuade investors to hold their stocks.
• Historical patterns indicate that mining stocks may rebound after the halving, while transaction fees, mergers, and other strategies may help them remain profitable.

This Tuesday (Note: the original publication date is March 5), Bitcoin (BTC) hit an all-time high, sending the cryptocurrency community into a frenzy.

However, the stock prices of miners, who play a crucial role in the Bitcoin ecosystem, failed to replicate the dazzling surge, as investors worried about the risks posed by the upcoming halving and shifted their funds into spot Bitcoin ETFs. Historically, Bitcoin miners have been seen as proxies for Bitcoin prices, but they tend to offer higher returns during Bitcoin rebounds. Investors around the world, restricted from purchasing Bitcoin on exchanges, could buy mining stocks to gain exposure to the risks. This drove stock prices up significantly during the last bull market cycle in 2021.

Subsequently, as expected, these stocks plummeted during the following bear market, with some well-known miners filing for bankruptcy. As the entire industry emerged from the brutal cryptocurrency winter, miners cleaned up their issues, hoping their stock prices would recover with Bitcoin's rebound. But unexpectedly, Bitcoin's price has risen about 54% this year, recently hitting a historic high of over $69,000 (Note: as of the article's publication on March 6, according to OKX exchange data, the historical high has surpassed $73,000), while the Valkyrie Bitcoin Miners ETF (WGMI), which tracks the performance of publicly traded miners, has dropped about 21%.

The decoupling between Bitcoin and mining stocks serves as a heavy reminder for investors: this bull market is different.

This time, the primary driver of Bitcoin's rebound is the approval of spot Bitcoin exchange-traded funds (ETFs) by the U.S. Securities and Exchange Commission (SEC) this year.

Like mining stocks, these ETFs are traded on exchanges and can be accessed by nearly all U.S. brokerage accounts. This allows investors to gain more direct exposure to digital assets without having to purchase them through independent accounts on cryptocurrency exchanges. It also ensures that investors can hold Bitcoin without exposing their portfolios to the volatility and company risks associated with mining stocks.

“With the approval of Bitcoin ETF products, investors can now directly benefit from the rise in Bitcoin prices,” wrote analysts at Galaxy, led by Brandon Bailey, in a research report. “Before the approval of the ETF, publicly traded mining stocks were one of the only traditional tools for investors to gain exposure to the appreciation of Bitcoin prices. Retail investors may still buy mining stocks, but for institutional investors—who, in most cases, are the driving force behind Bitcoin price increases—shorting mining stocks has become their preferred trade.” The report added, “In the short term, institutions seem more inclined to go long on Bitcoin ETFs and short on mining stocks, and we have seen this trend emerge since the beginning of 2024.”

Analysts say that unless miners can demonstrate strong positive cash flow, investors may shy away from financing some miners, which will “pose challenges for operators with lower margins, higher costs, and poor capital returns in the stock market.”

Uncertainty of Bitcoin Halving

Another obstacle facing mining stocks is the upcoming Bitcoin halving event in April, which will intensify competition among miners. The halving is part of the Bitcoin network code, aimed at reducing the inflationary pressure of the cryptocurrency. Miners running the network can earn Bitcoin rewards, but the halving, which occurs every four years, will cut the rewards in half.

After the last halving in May 2020, Bitcoin soared, and miners joined in. At that time, there were not many large miners. But this time, many large miners have emerged in the market, competing for Bitcoin rewards, which will decrease from 6.25 BTC to 3.125 BTC. Additionally, the difficulty of mining a block has also risen to an all-time high, making the situation even more challenging after the "halving."

“This presents significant uncertainty for investors in mining stocks,” wrote George Kikvadze, Executive Vice Chairman of Bitfury Group, in a blog post. “Which miners will survive and navigate the upcoming revenue halving remains uncertain.” He added, “Therefore, investors are seeking tangible assurances amid this uncertainty and are shifting funds toward what they perceive as safe Bitcoin ETFs.”

Temporary Setback

So, do miners still have a glimmer of hope?

Analysts at Galaxy predict several positive trends that could help miners. One of them is transaction fees, which could be the “biggest variable” in mining revenue for 2024. Fees generated by Ordinals (NFT-like assets recorded on the Bitcoin blockchain) have recently bolstered miners' revenues, which may help them sustain their livelihoods after the halving.

Analysts wrote, “While we expect the hash rate to decline after the halving (as weaker miners shut down their operations), a significant surge in transaction fees during the same period could greatly enhance revenues, allowing less efficient miners that would otherwise be unprofitable to continue mining within profitable margins.”

Other options that could help miners include hedging electricity costs and using mined Bitcoin to hedge against price fluctuations. Analysts also predict that M&A activity may increase this year, as smaller, less efficient miners may need to be acquired by larger miners to survive in the competition.

Meanwhile, Bitfury's Kikvadze stated that despite market concerns, historical precedents indicate that miners will “thrive” after the halving. He studied the performance of publicly traded mining stocks during the May 2020 halving, finding that “in the months leading up to the halving, miners underperformed compared to Bitcoin or were on par with it, but during the subsequent 'Bitcoin summer' bull market, miners outperformed Bitcoin.”

So far, miners have underperformed Bitcoin prices during the halving event. If history holds, mining stocks could gain popularity after the halving event, and the rebound of Bitcoin prices breaking historical highs may also help.

“The current slump of publicly traded Bitcoin miners is a temporary setback, expected during the halving event. As the dust settles, strong miners will shine, and investors will flock to them,” Kikvadze stated.