Anyone who is familiar with the cryptocurrency world knows just how volatile Bitcoin can be. From $4,600 in March 2020 to its peak of $68,000 in November 2021, and then back down to $15,500 a year later. Currently, it is ticking around the $27,000 mark.
What’s even more volatile than Bitcoin, however, is Bitcoin mining stocks. The Valkyrie Bitcoin Miners ETF, launched in February 2022, allocates at least 80% of its holdings to companies that receive more than 50% of their revenue or profit from Bitcoin mining operations. Since its launch, it has underperformed Bitcoin, down 59% compared to a 37% fall in Bitcoin prices, though since the start of 2021 it has outperformed, up 142% against Bitcoin’s 62% rise.
So, why have mining stocks suffered more than expected? Firstly, miners did not monetise their Bitcoin holdings as their value in dollar terms rose during the pandemic. Secondly, miners overleveraged, taking out loans to purchase new equipment as mining revenues surged. This equipment has since fallen in price, as has the Bitcoin price. Additionally, the hash rate on the network – measuring the total computing power mining Bitcoin – is at an all-time high, making competition more fierce and therefore requiring more energy to mine Bitcoin.
The Ordinals protocol was a bonus for miners, increasing transaction fees on the network. However, this spike in fees was short-lived and has since fallen back to normal levels. In bear markets, the inverse happens – as the price of Bitcoin falls, fewer people use the network, meaning fewer transaction fees.
In conclusion, miners have faced a difficult year. With rising costs and falling revenues, their share prices have been hit hard. They will always suffer when the price of Bitcoin is falling, and outperform when it rises as more people use the Bitcoin network, meaning more transactions and more revenue.
