Bitcoin Mining Wars, Time to Buy The Miners?

👇1-11) The Bitcoin network appears to be doing much better than initially feared after mining rewards were cut in half on April 20. The Bitcoin halving coincided with the launch of Runes, which allows users to mint tokens on top of the Bitcoin network, generally meme-coins.

👇2-11) This temporarily raised Bitcoin transaction fees after the halving, as Runes generated over $135m in fees in the first week after the halving. Not only did Bitcoin miners benefit from those extra fees, but it also increased the difficulty of Bitcoin mining, which only started to decline in early May.

👇3-11) A higher difficulty signals that competition is fierce and winning mining rewards has become more complex. At the same time, daily miners' revenue dropped from $70m to just $30m. Expectations were that the hash rate would see a significant setback as inefficient miners would be forced to switch off machines.

👇4-11) Bitcoin miners’ revenue has marginally increased to $35m, which still signals a small distress signal to investors. Share prices of Bitcoin miners were expected to decline, as they did. But now something interesting is happening – as we explain below:

👇5-11) Because Bitcoin miners have increased their BTC holdings into the run-up to the halving and as Bitcoin prices have remained firm, they are in better shape than initially expected. The listed miners have increased their holdings from 39k BTC in December to 48k, hence a revenue buffer of $700m.

👇6-11) Before the halving, we shared our analysis that Bitcoin mining shares tended to decline (or consolidate) for approximately 50 days after the 2020 halving but then started to rally. While one example is hardly statistically significant, it nevertheless provides a roadmap.

👇7-11) If history is any guide, then we could see mining shares perform better (from next week or the week after) by June 9. We are noticing a large gap between Bitcoin and the share prices of Bitcoin miners. When observing the chart below, buying Marathon at $20 is similar to buying Bitcoin at 38,000.

👇8-11) If Bitcoin starts to trade above 70,000—as expected due to declining US inflation—then those share prices might trade significantly higher. Considering that Bitcoin mining shares have declined, on average, by -20% year-to-date while Bitcoin has rallied +60%, investors might prefer to have upside convexity to Bitcoin rather than delta-one exposure through the Bitcoin ETFs.

👇9-11) Surprisingly, the difficulty of the Bitcoin network has started to increase again, while the total hash rate (TH/s) is trading at near all-time highs. Both indicate that Bitcoin miner distress is minimal. Instead, it shows that the network is doing much better than it was initially feared.

👇10-11) Estimates for May are that miners are mining 30-40% less than during the month before the halving—better than the 50% decline due to the halving. Maybe Bitcoin miners will come out on top of this year’s halving. Bitcoin mining shares might be undervalued.

👇11-11) Mergers and acquisitions (friendly or unfriendly) are picking up in the sector, and large players like Riot appear to have built a large war chest to take over smaller competitors (Bitcoin mining wars). Shareholders in acquisition targets tend to benefit when large players come to hunt. This might be the case here again.