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Is owning bitcoin stocks preferable to having bitcoin itself?


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    In a bull market, yes. In a bear market, no. Bitcoin stocks are more volatile than bitcoin itself, so be prepared for a wild ride.

    Over five years or more, bitcoin has outperformed bitcoin mining stocks such as MARA and RIOT with less volatility. Image: Dan Kitwood/Getty Images

    Over five years or more, bitcoin has outperformed bitcoin mining stocks such as MARA and RIOT with less volatility. Image: Dan Kitwood/Getty Images

    Bitcoin (BTC) is up about 150% for the year, lofted by high interest rates around the world and some hopeful news of the imminent arrival of spot BTC exchange-traded funds (ETFs) that many expect will propel the crypto market leader to new all-time highs. 

    The arrival of ETFs is expected to open the floodgates to institutional money, which is currently sidelined by investor mandates prohibiting a direct investment in BTC. There are several futures ETFs for bitcoin, but US regulators have been reluctant to approve spot ETFs, fearing the potential for market manipulation and fraud, not to mention the custody issues surrounding digital assets.

    Listen: Now you can trade perpetual futures on bitcoin

    The US Securities and Exchange Commission (SEC) recently lost a court case against digital asset manager Grayscale, which has been lobbying to launch its own spot ETF. This court decision, and the fact that the SEC did not appeal it, strengthens the arm of the fund managers awaiting ETF approvals, such as BlackRock, Valkyrie, WisdomTree and ARK Invest. These companies between them manage trillions of dollars in assets, so even a small percentage of these funds entering the crypto space should have an outsized influence on prices.

    Read:
    SEC defers decisions on spot bitcoin ETF, grayscale ether futures filings
    As good as gold?

    There’s another factor behind the 2023 rally in BTC: the upcoming ‘halving’ in 2024 when the rate of BTC supply will be reduced by half from the current 6.35 every 10 minutes. There is a halving in supply every four years, making the coins scarcer to come by and, therefore, more likely to cost more. These ‘halvings’ are generally preceded by a market rally, and so it is this time around.

    Read: Options traders are setting their sights on bitcoin at $50 000 by January

    Bitcoin mining shares

    Just as gold bugs prefer owning gold mines rather than physical gold (because mines are more highly geared to gold price shifts), so some prefer owning bitcoin mining shares rather than BTC itself.

    The table below looks at some of the main bitcoin miners and their performance so far this year. It’s clear you would have done exceptionally well holding stocks such as Bitfarms, Marathon Mining, and Riot Platforms, which delivered 350-450% gains over the year to date.

    Bear in mind that these results are flattered by the 150% rise in the price of BTC this year. In bear markets, the losses are equally amplified.

    Whether bitcoin stocks or BTC perform better is largely dependent on the trend direction and timeframe analysed, according to data compiled by Trading.biz analyst Cory Mitchell.

    Looking at two bitcoin stocks, Marathon Digital (MARA) and Riot Platforms (RIOT), both listed on Nasdaq, Mitchell notes that both tend to overshoot BTC in bull and bear markets. During the 75% decline in BTC’s price between November 2021 and December 2022, MARA dropped 95% and RIOT fell 91%.

    In the bull market between October 2020 and April 2021, BTC rallied 428%, against 1 413% for MARA and 1 160% for RIOT. 

    “Over and over again, there is a pattern that shows when bitcoin rises, MARA and RIOT tend to overshoot,” says Mitchell. “They perform better but then drop harder when bitcoin drops. While bitcoin is a volatile asset, MARA and RIOT are even more volatile, sometimes moving as much as five times that of bitcoin. For example, during the 2020/2021 rally, the stocks moved more than three times the amount of bitcoin.”

    How bitcoin stocks performed against BTC in 2023

    Stock (Nasdaq Code) Activity % gain year to date
    Bit Digital (BTBT) Bitcoin mining, treasury management, digital asset staking, AI 338%
    Hut 8 Mining Digital asset mining, outsourced mining service, data centres, maintenance 128%
    Bitfarms (BITF) Canadian-based Crypto coin and token mining with operations in several countries 450%
    Marathon Digital (MARA) Bitcoin mining, with a large store of BTC reserves 438%
    Riot Platforms (RIOT) Bitcoin mining and data centre hosting 359%
    HIVE Digital Technologies (HIVE) Mining bitcoin, Ethereum Classic, among others  135%
    Microstrategy (MSTR) Holds the largest reserves of BTC of any company. It offers business intelligence, mobile software and cloud-based services. The stock price is correlated to BTC. 293%
    Bitcoin 150%

    Crypto-related stocks are most heavily concentrated on the Nasdaq exchange, and the above table is just a sample of the more interesting ones. Some are pure bitcoin miners, others mine a range of coins, and more than a few (such as Bit Digital) have diversified into treasury services, outsourced mining, and data centre hosting (such as RIOT). MicroStrategy holds the largest reserves of BTC of any company in the world and is seen as a proxy for BTC.

    Mining production

    Riot Platforms reported that it mined 1 106 BTC for the September 2023 quarter, bringing its total production for the year to nearly 5 000, with an average cost to mine of $5 537 per BTC, making it the lowest-cost producer in the industry. Production was up 6% on the same quarter in 2022, fattening its working capital to $442 million.

    Marathon Digital increased BTC production by 467% in the September quarter compared to the same quarter in 2022, pushing revenue up 670%. Production was lifted by a boost in mining capacity from a 27-megawatt hydropower project in Paraguay, and this helped bring long-term debt down by 56%. For the first time in two years, combined cash and BTC holdings exceeded debt at the quarter’s end.

    Bit Digital mined 403 BTC for the September quarter, a 27% increase from the prior quarter. The company has nearly 47 000 bitcoin miners in Iceland and 730 Ether (ETH) miners, and recently secured extra mining equipment, clean electrical power, and hosting capacity to boost production.

    Read:
    Cryptoverse: Bitcoin miners make money ahead of ‘halving’
    Bitcoin miners draw from Iceland’s surplus of renewable energy

    Hut 8 Mining, despite its 128% stock price increase since January, suffered a $14.7 million drop in revenue for the September quarter, mainly due to an increase in bitcoin mining difficulty and Ethereum’s switch to proof-of-stake from the previous energy-intensive proof-of-work. The company mined 330 BTC during the quarter and has more than 9 300 self-mined BTC held in custody or pledged as collateral.

    Bitfarms stock price had an astonishing run in 2023, up 450% since January, with revenue of $35 million in the September quarter, though a net loss of $19 million. “We executed plans to opportunistically expand farms with low-cost hydro power in Québec and Latin America, while we continued to prudently strengthen balance sheet liquidity preparing for the next BTC Halving,” said Geoff Morphy, CEO of Bitfarms. The company has $47 million in cash and 703 BTC, valued at $29 million at current prices.

    HIVE Digital Technologies produced 801 BTC in the September quarter, generating revenue of R22.8 million. This was a 6.6% year-on-year decrease in production due to higher mining difficulty – a sign that more miners are competing for the roughly 900 BTC available daily. The company says it was careful not to borrow from predator lenders as some of its competitors had, which undoubtedly contributed to its “sluggish” 128% stock price gain during the year.

    Read: Bitcoin miners sold more tokens than they minted during October’s crypto rally

    MicroStrategy, the Nasdaq-listed business intelligence company, is perhaps better known for its huge stockpile of 158 400 BTC, worth $6.6 billion at current prices. It paid a total of $4.69 billion for this haul at an average price of $29 586 per bitcoin. MicroStrategy’s co-founder Michael Saylor is an enthusiastic evangelist for bitcoin and established a policy of converting US dollar reserves into BTC as a way to protect against what he argues is the inevitable depreciation of fiat currencies. A year ago, he suffered ridicule when BTC was trading below $20 000, but his strategy has been roundly vindicated by the subsequent rally in BTC prices.

    Over five years or more, BTC has outperformed the likes of MARA and RIOT with less volatility.

    “That said, during that period, there were times the stocks had much higher returns, but selling would have been required to lock those gains in. If holding, Bitcoin has been the better-performing asset,” says Mitchell.

    Read: Cryptoverse: Bitcoin defies its doubters in 2023

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