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Bitcoin mining stocks staged some monster rallies last year. But this year, they’ve cooled off a bit – and that’s despite bitcoin’s price rise. Here are three reasons why they might be building up for a brand-new surge.
1. The Bitcoin halving.
Miners are responsible for processing bitcoin transactions and securing the blockchain. And in return, they earn newly generated bitcoins. The fourth “halving” event will happen sometime between April 18th and April 20th – with the amount of bitcoin that miners earn per transaction block getting chopped in half. At first, that could hurt miners’ profitability – as their electricity costs to produce the same number of coins will roughly double. But after a few lean months, they could start bringing in more profits (if history is anything to go by).
The Bitcoin Production Cost Indicator from Capriole Investments explains this below. The bottom red line estimates the average electricity cost to mine a single bitcoin, while the middle purple line is the total cost (electricity plus operating costs). The green line is what miners sell their coins for. So the higher the green line is above the middle line, the more profit miners bank on average.
The Bitcoin Production Cost Indicator shows how bitcoin mining costs have changed over time. Source: Capriole Investments. Chart drawn with TradingView.
Now, the biggest gaps between the green and purple lines started nine months after the 2016 halving (yellow rectangle) and six months after the 2020 halving (blue rectangle). That’s mostly because the bitcoin price went higher (and stayed higher for a while) after each halving. Per the indicator, it now costs around $50,000 to mine a bitcoin – that’s made up of “variable” electricity costs ($30,000) and “fixed” operating costs ($20,000). Later this month, the variable electricity costs will roughly double to $60,000, putting the total cost around $80,000. So in theory, if bitcoin’s price can break above $80,000 (and stay above it for a while), miners could be in a good spot after the halving.
2. Decent bang for your buck.
Time will tell how the halving affects miners’ balance sheets. But right now, their stocks aren’t that expensive. The Valkyrie Bitcoin Miners ETF (ticker: WGMI; expense ratio: 0.75%) invests in about 35 companies involved in bitcoin mining. That includes publicly traded mining companies and businesses that work with miners in some way (for example, data center providers or mining hardware producers).
Investors pay less for company earnings (green bars), book value (blue), and sales (yellow) for WGMI than they do for US stocks in general (SPY), making them relatively cheap by those metrics. But in terms of what they’re paying for company cash flow generation (white), mining stocks are on the pricier side.
Financial ratios of the Valkyrie Bitcoin Miners ETF (WGMI) vs the SPDR S&P 500 ETF Trust (SPY). Source: Morningstar.
3. Interesting technicals.
Looking at WGMI’s price chart can give you a general sense of investor sentiment toward bitcoin mining stocks. Notice how the $18 to $20 area (green box) has been a kind of unbreakable ceiling (resistance) for the past year or so. But, the yellow trendline shows you that the price lows have been trending higher – and that leaves you with a potential ascending triangle pattern. Ascending triangles tend to break above the resistance more often than not.
Price chart analysis of the Valkyrie Bitcoin Miners ETF (WGMI). Chart drawn with TradingView.
The logic here is that sellers eventually get tired of defending the price ceiling, giving buyers the power to push the price through it. Of course, that scenario could fall to the wayside if the price now makes a lower low instead of a higher one – and the yellow trendline starts to give way. The blue 20-week simple moving average (SMA) tracks the ETF’s average closing price over the past 20 weeks. It’s sloping upward for now, giving the buyers the upper hand.
What’s the opportunity here?
Let’s be clear. Bitcoin mining stocks won’t do well if bitcoin keels over from here. But historically, halvings have boosted bitcoin’s price. They’re usually followed by a year or more of good times for miners, with the money just rolling in.
As for which mining stocks to go for, well, you could take investor John C. Bogle’s legendary advice: “Don’t look for the needle in the haystack. Just buy the haystack.” Some miners will do better than others after the halving, so it makes sense to spread your bets around. You might also consider dollar cost-averaging your buys: buying a set amount at set intervals could help you take advantage if prices dip lower in the short run.
For US investors, the Valkyrie Bitcoin Miners ETF (WGMI) could do the trick. But if you can’t access it where you live, you could try investing instead in a few of the fund’s mining stocks. The table below shows WGMI’s top five mining stock holdings. If it were me, I’d put the same amount of cash in each miner, just to dial back on company-specific risks (rather than trying to echo this fund’s percentages).
The top five bitcoin mining company holdings in the Valkyrie Bitcoin Miners ETF (WGMI).
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