Bitcoin Mining Stocks Crash After Bitcoin ETFs Approval

Bitcoin ETFs are funds that track the price of bitcoin and trade on stock exchanges like regular stocks. They allow investors to buy and sell shares of a fund that holds bitcoin, without having to deal with the technical aspects of buying, storing, or securing the cryptocurrency themselves. Bitcoin ETFs also provide investors with exposure to the performance of bitcoin, without being affected by its volatility or regulatory uncertainty.

The SEC has been reviewing several applications for bitcoin ETFs since 2019, but has only approved one so far: the VanEck Bitcoin Strategy Fund (NASDAQ: XBTF), which started trading on Thursday. The fund tracks the performance of bitcoin futures contracts traded on CME Group (NASDAQ: CME), which are agreements to buy or sell bitcoin at a specified price and date in the future. The fund charges an annual fee of 0.95% and has an expense ratio of 0.25%.

The SEC’s approval of the VanEck Bitcoin Strategy Fund was seen as a major milestone for the crypto industry, as it signaled that the regulator was becoming more comfortable with allowing more innovation and competition in the crypto space. However, it also sparked a wave of selling pressure among some investors who had previously invested in bitcoin mining stocks.

Why did Bitcoin Mining Stocks Drop?

Bitcoin mining stocks are companies that use specialized hardware and software to solve complex mathematical problems that verify transactions on the bitcoin network and earn rewards in new bitcoins. These companies are essential for maintaining the security and functionality of the network, as well as generating new bitcoins for circulation.

Bitcoin mining stocks have been among the best performers in 2023, as they benefited from several factors such as:

• The increasing demand for bitcoins from institutional investors, corporations, and retail users.
• The rising difficulty level of mining, which requires more computing power and electricity to mine new bitcoins.
• The halving event in May 2023, which reduced the reward for mining new bitcoins by half from 6.25 to 3.125 bitcoins per block.
• The launch of several new products and services by mining companies, such as cloud mining contracts, data centers, blockchain solutions, etc.

However, these factors may not be enough to sustain their growth in 2024 and beyond. Some analysts argue that:

• The halving event may have already priced in its effects on profitability and revenue growth for mining companies.
• The increasing difficulty level may eventually lead to lower returns for miners due to diminishing marginal returns.
• The rising competition from other cryptocurrencies that offer faster transactions, lower fees, or better scalability than bitcoin.
• The regulatory uncertainty around cryptocurrencies at both national and international levels.

These factors may create headwinds for mining companies’ profitability and valuation in 2024 and beyond. Moreover, some investors may prefer investing in spot bitcoin ETFs over mining stocks for several reasons:

• Spot bitcoin ETFs offer more transparency and liquidity than futures-based ETFs or direct ownership of bitcoins.
• Spot bitcoin ETFs have lower fees than futures-based ETFs or direct ownership of bitcoins.
• Spot bitcoin ETFs have higher tax efficiency than futures-based ETFs or direct ownership of bitcoins.

These reasons may attract some investors who want to gain exposure to bitcoin without having to deal with its technical aspects or regulatory risks.

How Did Bitcoin Mining Stocks Perform?

Bitcoin mining stocks were among the worst performers on Thursday after their prices plunged by double digits. According to data from Yahoo Finance, Marathon Digital Holdings (NASDAQ: MARA), Riot Platforms (NASDAQ: RIOT), Bitfarms (NASDAQ: BITF), Iris Energy (NASDAQ: ISE) ,and CleanSpark (NASDAQ: CLSP) all lost more than 10% each on Thursday.

Marathon Digital Holdings was down by nearly 13%, Riot Platforms by almost 16%, Bitfarms by more than 13%, Iris Energy by about 9%,and CleanSpark by about 7%. These losses were much larger than those seen by other sectors such as technology , energy , consumer discretionary ,and health care .

The table below shows how these five major mining stocks performed on Thursday compared to their previous closing prices: