Report: Bitcoin mining stocks – extreme volatility and underperforming Bitcoin

Key Takeaways

• Bitcoin mining stocks have traded with significantly more volatility than Bitcoin itself
• Mining stocks have underperformed, as rising energy costs and increased competition has cut into profits
• Miners also overleveraged during the pandemic, purchasing new equipment with debt and holding onto Bitcoin stashes as prices fell
• Fees on the network rose with the Ordinals protocol and thus provided miners relief, but have since fallen back to normal levels

Anyone remotely interested in the cryptocurrency world will attest to the fact that Bitcoin is incredibly volatile. At one point in March 2020, it was $4,600. By November 2021, at the peak of the bull market pandemic, it hit $68,000. A year after that, it was back down to $15,500. And it is currently ticking along around the $27,000 mark.

As we said, volatile. And yet, there is something even more volatile: Bitcoin mining stocks. 

First, a quick explainer into Bitcoin mining for the uninitiated. For those familiar with how the industry works, you can skip this little introduction. 

Bitcoin miners are in the middle of what is a peculiar economic model. Miners act as “volunteers”, validating transactions on the Bitcoin blockchain. Because Bitcoin is a decentralised network, there is no central authority to maintain the blockchain, hence the need for these “volunteers” to validate transactions. 

I put quotation marks around the word “volunteers” because miners get paid for their work, so don’t really have a claim to the volunteer title. Vitally, miner revenue comes in the form of Bitcoin. This revenue stream is split into two streams – the block reward subsidy, which halves every four years, and transaction fees. 

The bottom line is that miners pay a cost to maintain the blockchain, in the form of energy/electricity, and receive revenue in return, in the form of Bitcoin.

Mining share price performance

Two things have been true about the performance of bitcoin mining stocks to date. The first is that they are extremely correlated with the price of Bitcoin itself. The second is that they have shown far greater volatility. 

The Valkyrie Bitcoin Miners ETF is a good way to demonstrate the performance of mining stocks. It was launched in February 2022 and allocates at least 80% of holdings to companies which derive at least 50% of their revenue or profit from…