important point

  • Bitcoin Mining Stocks Significantly Underperformed Bitcoin Last Year

  • Margins thin as competition among miners increases and the amount of energy required increases

  • Rising electricity bills and declining Bitcoin value are also hitting miners hard.

  • A higher number of variables beyond simply the price of Bitcoin means that mining stocks are trading with greater volatility.

Times are tough for Bitcoin miners. In this article, I briefly explain how and why, and delve into why I think mining stocks are far more risky than simply investing in Bitcoin itself. Let’s begin.

Mining competition is fiercer than ever

First, competition within mines is more intense than ever. The advantage of blockchain is that we can see all sorts of statistics about the Bitcoin network in real time. One of them is difficulty adjustment. For the uninitiated, difficulty adjustment is a mechanism that changes the mining difficulty (at approximately 10 minute intervals) so that the new supply of Bitcoin released by mining remains constant.

In other words, as more miners join the network, the difficulty will increase so that Bitcoin is released at the same pace as before. And vice versa, when miners stop working, the difficulty decreases.

As the graph below shows, the difficulty of mining Bitcoin these days is passed through First time in history to reach 50 trillion hashmarks. Just three years ago, that number made him stay at 14 trillion.

This is great for the Bitcoin network. The more miners, the more secure the network. But for the miners themselves, this means a higher amount of energy is needed to complete the now-more difficult assignment of validating transactions on the network.

Oh, there is a double whammy. If you turned on the lights, charged your cell phone or boiled the kettle last year, you’ve noticed that electricity prices around the world are skyrocketing. The following graph shows rising electricity prices in the United States, which has the highest number of miners, according to the Cambridge Electricity Consumption Index (the country is responsible for his 38% of the network’s hashrate).

This means that mining requires more energy, and the cost of that energy has increased significantly.

People are using Bitcoin less

So you can see that the costs are rising. But the bad news isn’t over yet.

Bitcoin volumes have plummeted throughout the bear market. Perhaps the best barometer of this is looking at the volumes of centralized exchanges. 2022 is down 46% compared to 2021.

A similar pattern can be seen when looking at Bitcoin fees, with fees dropping significantly during the height of the pandemic bull market. this is. . .was temporarily suspended In May, the Bitcoin Ordinals protocol sparked a resurgence of network activity. However, the chart below shows that fees have dropped for five consecutive weeks since then (although they were still up significantly at the start of the year) and have given up most of that rise.

Similar to the cost aspect, which saw an increase in required inputs (increased demand due to difficulty adjustments) and an increase in the cost per unit of those inputs (increased electricity bills), miner profitability also , is affected by: Brutal double blow.

Not only are recoverable fees (revenue) declining as trading volumes have fallen significantly from the bull market, but miner revenues (fees and block subsidies) are being received in depreciated Bitcoin. increase. This means that even after battling tougher competition and struggling to increase costs, the value (revenue) of Bitcoin in the market has declined significantly, still 60% from its peak in November 2021. means that it is also going down.

Mining stocks are more volatile than Bitcoin

Now consider the following four variables:

  1. amount of energy required
  2. The cost of that energy (electricity)
  3. Fees received and block rewards (i.e. earnings)
  4. The value of these fees and block rewards (Bitcoin price)

Therefore, mining companies not only depend on the price of Bitcoin (variable 4), but also on several other factors (yes, variables 1 and 3 also depend heavily on the price of Bitcoin. In fact, it is driven by economic incentives (mining up to a certain price range will be discussed in a separate article).

So, at least for the time being, mining stocks are riskier than direct investments in Bitcoin. As with all things, the greater the risk, the greater the reward, and there was a time when mining stocks outperformed Bitcoin as a result.

But over the past year or so, mining investors have gotten even worse than Bitcoin investors (they themselves are licking their wounds). Let me illustrate this with the following mining ETF, launched in February 2022.

All of this shows how difficult mining was. And that’s not to mention the big bad wolf that is regulation. The regulatory crackdown in the US has been ferocious, and while Bitcoin has so far been relatively unaffected, miners (particularly those listed in North America) are theoretically immune to regulation and decentralized. More vulnerable than the asset Bitcoin itself (especially miners listed in North America). , at least).

This is not intended as an advocate for Bitcoin or anti-mining. This is just to show that as investments he compares the two and why mining stocks tend to be more volatile. And if it’s more volatile than Bitcoin, it really says something.

By Jules

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