Bitcoin mining stocks are far riskier than Bitcoin itself

Key Takeaways

• Bitcoin mining stocks have underperformed Bitcoin heavily over the last year

• Greater competition among miners and higher amounts of energy required means margins are thinner

• Rising electricity costs and lower value of Bitcoin have also hurt miners immensely 

• Greater number of variables beyond merely the price of Bitcoin means mining stocks have been trading with greater volatility

It’s a tough time to be a Bitcoin miner. This piece will succinctly break down how and why, as well as delving into why I believe mining stocks are far riskier than just investing in Bitcoin itself. Let’s get to it. 

Mining competition is higher than ever

Firstly, the competition within mining is higher than ever before. The beauty of the blockchain is that we can see all sorts of statistics regarding the Bitcoin network in real-time. One of these is the difficulty adjustment. For the uninitiated, the difficulty adjustment is a mechanism by which the difficulty of mining changes to ensure the new supply of Bitcoin released via mining remains consistent (at approximately ten-minute intervals).

In other words, as more miners join the network, the difficulty increases so that Bitcoin is released at the same pace as prior. The same holds true the other way around – difficulty falls if miners stop operating. 

As the below chart shows, Bitcoin mining difficulty recently smashed through the 50 trillion hash mark for the first time ever. Only three years ago, that number sat at 14 trillion.  

This is great for the Bitcoin network: the more miners, the more secure the network. For the miners themselves, however, that means greater energy amounts are needed to complete this now-more-difficult assignment of validating transactions on the network. 

Oh, and there is a double whammy. As you may realise if you have turned on a light, charged your phone or boiled a kettle in the last year, the price of electricity has skyrocketed around the world. The next chart shows the rise in electricity costs in the US, which according to the Cambridge Electricity Consumption Index, has the highest amount of miners (the nation is responsible for 38% of the network’s hash rate). 

This means that higher amounts of energy are needed to mine, and the cost of that energy has also increased drastically. 

People are using Bitcoin less 

So, we…