The case for buying Bitcoin mining stocks has fundamentally changed in 2024. Here's what you need to know.
In 2023, Bitcoin (BTC 2.08%) mining stocks were some of the best investments that you could make. Fueled by a skyrocketing price for the cryptocurrency, the largest miners -- such as Riot Platforms(RIOT 4.89%) and Marathon Digital Holdings (MARA 6.22%) -- recorded triple-digit percentage gains. The higher Bitcoin's price went, the more money these miners made, and the more attractive they became as investments.
So, with the crypto rallying yet again this year, are Bitcoin mining stocks still a buy? To answer that question, it's important to take into account two huge catalysts that did not exist last year: the launch of the new spot Bitcoin exchange-traded funds (ETFs), and the Bitcoin halving event in April. Let's look at both.
The spot Bitcoin ETFs
In the first two months of 2024, the launch of the new spot Bitcoin ETFs added fuel to the Bitcoin rally, making every company in the crypto's ecosystem more attractive. If the price of the digital coin is booming, then it makes sense to load up on companies that are highly leveraged to that price.
Image source: Getty Images.
That logic largely explains why mining stocks performed so well during February. For the month, Riot Platforms rose 30%, Marathon Digital was up 46%, and CleanSpark(CLSK 1.85%) was up 108%. According to the investment firm Bernstein, mining stocks are still the single best way to play the crypto rally.
But is this momentum really sustainable for the rest of the year? Last year, investors didn't have the spot Bitcoin ETFs, and thus they did not have a direct way to invest without dipping their toes into the crypto market.
So instead, they found proxy stocks -- companies that mirror the price of Bitcoin due to its importance in their core business model. They absolutely loved the idea of investing in Bitcoin miners, which make money literally by creating new bitcoins.
From my perspective, this proxy-stock effect is going to wear off in 2024, as more and more investors deploy their money into the spot Bitcoin ETFs instead. This is what we are already starting to see. After a strong February, the past 30 days have been absolutely disastrous. In that time period, Riot Platforms is down about 30%, Marathon Digital is down 25% and CleanSpark has fallen 8%.
As long as the ETFs continue to set a torrid pace in terms of new investor inflows, that's bad news for Bitcoin proxy stocks.
The Bitcoin halving
The other big catalyst is the halving event, now scheduled on or about April 20. The rewards paid out to miners for adding a new block to the Bitcoin blockchain will be slashed in half.
That's obviously bad news for miners, which make nearly all of their money from mining and selling new bitcoins. Unless Bitcoin's price doubles, then they stand to either have lower profit or lose money this year. The supply reduction is controlled by the crypto's algorithm, and there's nothing the miners can do about it.
For that reason, there is growing concern that there will be a wrenching shakeout in the mining industry, where only the strong will survive. There are enormous fixed costs in running mining operations, so the emphasis will be on finding the leanest, most efficient miners that can squeeze the most performance out of their Bitcoin mining rigs.
One miner that seems to have the best chance of emerging unscathed from the halving is Riot Platforms, which is known for running a lean ship and carrying no debt on its balance sheet.
And don't forget about CleanSpark, a much smaller mining operation that focuses on using clean energy to mine Bitcoin. For the year, CleanSpark is up more than 50%. During that fabulous February, when all Bitcoin mining stocks were up, CleanSpark was up an impressive 108%.
As a result, CleanSpark is one of the companies recommended by Bernstein as part of its "buy Bitcoin mining stocks" strategy for 2024.
Should you buy Bitcoin mining stocks?
While I can understand the temptation to double-down on the most successful mining stocks, the halving is a particularly precarious time for miners. It directly affects how much money they can make. So, even if you're investing in the leanest, meanest mining operation with the cleanest energy possible, you're still facing enormous headwinds for the rest of 2024.
For that reason, I can't recommend mining stocks at this time. The new Bitcoin ETFs have made these stocks much less attractive as a proxy play. And next month's halving is almost certain to lead to a shakeout of the top players, with uncertain consequences for even the best-run mining companies.
Dominic Basulto has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
