• Investors are “long bitcoin and short miners” since it’s safer to position money into bitcoin spot ETFs moderately than taking up risk which can arise from holding miners ahead of the upcoming Bitcoin halving.

• Miners must prove they’ll generate strong returns to steer investors to rotate back into their stocks.

• Historical patterns suggest mining stocks may rally after the halving, while transaction fees, M&A and other strategies might help them stay profitable.

The crypto community is abuzz about bitcoin {{BTC}} reaching an all-time high on Tuesday.

Nonetheless the share prices of miners – who play a very important role throughout the Bitcoin ecosystem – have did not copy the dizzying rally as investors, wary of upcoming risks from the so-called halving, are in its place pouring money into spot bitcoin ETFs.

Read more: What’s the Bitcoin Halving?

Historically, bitcoin miners were seen as a proxy for bitcoin’s price, but with higher returns when BTC rallied. Investors worldwide who couldn’t buy bitcoin from exchanges because of this of restrictions could buy mining stocks to realize exposure. That helped fuel the large rally in the middle of the last bull market cycle in 2021.

Unsurprisingly, these stocks slumped significantly in the middle of the next bear market and a number of high-profile miners filed for bankruptcy, too. Since the industry emerged from the brutal crypto winter and miners cleaned up their issues, there have been hopes that their share prices would get well amid a bitcoin rally. But something else happened: Bitcoin’s price is up about 54% this yr and just hit an all-time high above $69,000, while the Valkyrie Bitcoin Miners ETF (WGMI), a fund that tracks the performance of publicly traded miners, fell about 21%.

This disconnect between BTC and mining stocks gave investors a somber reminder that this bull run is different.

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The first driver of the rally in bitcoin, this time around, was the Securities and Exchange Commission this yr approving spot bitcoin exchange-traded funds throughout the U.S.

Just like the miners’ stocks, these ETFs trade on stock exchanges – accessible to easily about any American brokerage account. This enabled investors to realize more direct exposure to the digital asset without having to buy them through separate accounts at crypto exchanges. This also ensured that they could hold bitcoin without having to indicate their portfolio to the volatile nature of the mining stocks and their corporate risks.

“With the approval of Bitcoin ETF products, investors can now access direct exposure to bitcoin price. Prior to the approval of the ETF, public mining stocks were one in all the one traditional vehicles through which investors could get exposure to bitcoin price appreciation,” Galaxy’s mining analysts, led by Brandon Bailey, wrote in a research note.

It’s possible that retail investors should still buy into mining stocks, but for institutional players – people who move the needle normally – short-selling mining stocks became the favored trade. “Institutions are seemingly more likely throughout the short run to go long the Bitcoin ETFs and short mining stocks, which we’ve got seen begin to play out since the starting of 2024,” the report added.

Unless the miners can show strong positive money flow generation, investors will likely balk from funding some miners, posing “challenges throughout the equity marketplace for lower margin, higher cost operators with weaker track records for return on capital,” the analysts said.

Bitcoin halving uncertainty

One other roadblock for mining stocks, this time around, is the upcoming Bitcoin halving event in April, which might ramp up the competition for the miners. The halving is a component of the Bitcoin network’s code to reduce inflationary pressure on the cryptocurrency. Miners are rewarded bitcoin for running the network, but every 4 years, a halving cuts that reward in half.

Read CoinDesk’s halving coverage here.

Bitcoin soared after the last halving in May 2020, and miners joined in. On the time, there weren’t many large-scale miners. This time around, though, the market is crowded with many large-scale miners, who will compete for bitcoin rewards that can probably be cut to 3.125 from 6.25 bitcoin. On top of that, the issue of mining a block has also risen to an all-time high, which might make things even tougher post-halving.

This poses a giant uncertainty for investors in mining stocks. “Uncertainty prevails regarding which miners will weather the storm and survive the approaching revenue halving,” George Kikvadze, executive vice chairman of Bitfury Group, wrote in a blog post.

“Consequently, investors seek tangible reassurances amidst this uncertainty and are diverting capital to the perceived safety of Bitcoin ETFs,” he added.

‘Temporary setback’

So, is there any silver lining for the miners?

Galaxy’s analysts predict that there are few positive trends that will help the miners. Considered one in every of them is transaction fees, which could possibly be the “biggest wildcard” for mining revenue in 2024. As fees generated by Ordinals – NFT-like assets recorded on the Bitcoin blockchain – have recently helped miners’ revenue, and which may help them stay afloat post-halving.

“While we’d expect hashrate to drop following the halving [as weaker miners shut down their operations], a giant fee spike across the equivalent period could boost revenues sufficiently high, enabling less efficient miners that will otherwise be unprofitable to still mine on the margin,” the analysts wrote.

One other options that may also help the miners include hedging their power cost and using the mined bitcoin to hedge pricing volatility. The analysts also predict that mergers and acquisitions will likely ramp up this yr as smaller, less efficient miners will likely needs to be bought out by larger ones to survive the competition.

Read more: Bitcoin Halving Is Poised to Unleash Darwinism on Miners

Meanwhile, Bitfury’s Kikvadze said that historical precedent suggests miners will “thrive” after the halving, despite the market’s concern. He checked out the performance of publicly traded miners’ stocks in the middle of the May 2020 halving, which showed “miners underperformed or remained on par with Bitcoin throughout the months leading as much because the halving, they outperformed it in the middle of the next ‘Bitcoin summer’ bull run.”

Up to now, miners have underperformed bitcoin’s price heading into the halving event. If history holds true, there might be a likelihood that mining stocks could catch a bid after the halving event, while a rally in bitcoin price past an all-time high might also help.

“The current lull in publicly traded Bitcoin miners is a temporary setback, anticipated amidst the halving event. Since the dust settles, robust miners will shine, and investors will flock to the sector,” Kikvadze wrote.

Read more: Will the Next Bitcoin Halving Be One other Hype Cycle?