By David Khalif
Bitcoin (BTC) continues to make headlines in 2022, and interest in the asset does not seem to be going away anytime soon. Many people are aware that they can invest in Bitcoin directly, but much less is known about the opportunity to invest in the Bitcoin miners that run the network. Bitcoin miners are the necessary backbone to the Bitcoin protocol as they help validate and secure transactions on the blockchain. These miners not only produce Bitcoin at a discount to the prevailing market price, but many of them are also holding this Bitcoin on their balance sheets. Today, many Bitcoin miners are publicly listed and available for purchase in many traditional retirement accounts. While investing in Bitcoin miners can carry the same volatility and risks as investing in Bitcoin itself, they could outperform Bitcoin in the long term.
Here are three reasons that Bitcoin miners are an important consideration for your portfolio:
1. Bitcoin miners are constantly dollar cost averaging into Bitcoin
Bitcoin mining companies can acquire Bitcoin in an incredibly cost-effective way due to their operations. A Bitcoin mining company has key expenses related to building out infrastructure, purchasing special computers, and electricity spend on keeping machines running. These inputs when managed correctly allow top operators to mine Bitcoin at an average cost of around $6,000 to $10,000 per coin, and they are mining new coins every single day. These miners are using their scale and access to cheap power to effectively ‘mint’ Bitcoin at a 75% discount to the current market price of $45,000. Today, 18.9 million Bitcoin are outstanding, and the total supply of Bitcoin will only be 21 million. The Bitcoin miners of today are continuously competing for higher market share of the remaining 2.1 million Bitcoin yet to be mined.
2. Most public Bitcoin companies are not selling
Due to the significant supply constraint of Bitcoin, many companies have committed to a strategy of holding all of their mined Bitcoin as opposed to selling it, resulting in massive Bitcoin positions on their balance sheets. As a result, their share prices are increasingly geared to the price of Bitcoin. This may offer investors in Bitcoin miners greater upside potential than simply owning Bitcoin, due to the miners’ significant ownership of Bitcoin, as well as their operational exposure to it. Furthermore, investors in mining companies may find that over the long term, they could own more Bitcoin by proxy for every dollar invested in mining stocks, than they would by purchasing Bitcoin directly. While many miners in the space have committed to this strategy of holding, some miners have chosen to sell their Bitcoin every day. An investor more interested in cash flow may find the difference between management teams’ decision to hold or sell Bitcoin to be a crucial aspect of investing in the miners.
3. Bitcoin Miners are similar to the payment processors of today
In addition to receiving new Bitcoin, the miners also receive and collect transaction fees on the network paid by users who transact with Bitcoin. Investors can think of transaction fees for Bitcoin miners as similar to companies like Visa, Mastercard, and Capital One. If Bitcoin transaction volume continues to increase, it will naturally allow for an increase in fees paid out to the miners who validate the network. Although transaction fees are not the bulk of rewards that miners receive today, there is a chance that as the network grows the transaction fees will also scale. Investors considering an allocation towards Bitcoin mining companies will have exposure to this tailwind of Bitcoin network usage.
As investors consider their options it’s important to highlight that owning Bitcoin directly offers qualities that other investments like mining companies can’t, specifically related to its use as a currency to purchase goods and services. Exciting developments across the world in the past year have led to increased optimism for Bitcoin being used by more people globally. While holding crypto directly can potentially be a solid long-term investment, investors may find enhanced upside potential by considering the miners as opposed to simply owning Bitcoin.
David Khalif is the Head of Operations at Viridi Funds, a registered investment advisor providing crypto-related investment products. The Viridi Cleaner Energy Crypto-Mining & Semiconductor ETF (“RIGZ”), is the first actively-managed ETF that invests solely in the crypto mining vertical consisting of companies that utilize energy sources to secure the bitcoin network. RIGZ uses proprietary valuation metrics to identify mining companies that are believed to have a strong prospect for growth, in addition to utilizing clean energy sources, in a tax-efficient manner. Follow him on twitter @DavidKhalif.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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