The "Trump trade" may have electrified all corners of the cryptocurrency market, but some ways of speculating on digital assets remain better than others.
Following Donald Trump's victory in the presidential election, bitcoin has risen above $90,000 to a record high, bolstered by his pledges to end a hostile regulatory regime and build up a national crypto reserve. The rally has also powered the stocks of companies that "mine" bitcoin, such as Marathon Digital Holdings Inc and Riot Platforms.
Like gold, bitcoin derives most of its worth from the self-fulfilling notion that it is a store of value. Today, even bitcoin bulls often admit that real-world applications for crypto will likely develop elsewhere.
Also like the precious metal, new supply is created by miners -- in this case, companies that validate groups of bitcoin transactions, or "blocks." To prove their legitimacy, validators must solve a complex mathematical puzzle and they receive a "block reward" in exchange that currently amounts to 3.125 newly minted bitcoin.
For both bitcoin and gold, shares in miners are tightly linked to swings in the underlying commodity, making them a common venue for equity investors to gain exposure. Miners have the commodity in inventory -- MARA in particular. It held $1.7 billion in digital assets in September. Their revenues also surge whenever the value of their volatile output rises. Their costs vary less.
Oddly, though, stock prices of gold miners rise higher than the metal in bull markets but tend to even out in the long run, whereas bitcoin miners are less volatile than the cryptocurrency. The CoinShares Valkyrie Bitcoin Miners ETF is up about 40% this year even though the value of bitcoin has doubled.
One reason is that the yields of finding and exploiting new gold sources are hard to predict, whereas bitcoin's supply schedule is preprogrammed. Block rewards halve every four years and are set to reach zero in 2140.
Mining gets more expensive by design: The value of these rewards relative to the computational power needed to obtain them has gone from 0.02 bitcoin per terahash/second a day to less than 0.001 bitcoin between the end of 2019 and now, according to HashRateIndex.com.
To be sure, bitcoin miners have other sources of income. For one, they also charge fees on bitcoin transactions. Their overall revenues have recently jumped, leading profit margins to widen.
But this is because every bitcoin they earn has suddenly rocketed in price. Despite that, miners are grossing about $40 million a day compared with the $100 million they would have earned if block rewards hadn't halved in April, data by Blockchain.com suggests. In U.S. dollars, block rewards have gone from $141 per terahash/second per day to $58.
It isn't just because of "halvings," either. The difficulty of mining bitcoin automatically increases when the average time spent on a block falls below 10 minutes. This preserves the security of the network as computers become faster, but it also makes bitcoin slow and ill-equipped to be the alternative payments system many hoped it would become.
As a result, the rate of growth of bitcoin transactions keeps slackening even as speculative adoption of it surges. More payments are happening using workarounds that mostly bypass miners. This, plus intense competition, has also led transaction fees to decline.
And then there are rising energy costs. In 2023, global bitcoin miners used up as much electricity as Greece or Australia, according to International Energy Agency estimates. Trump has made big promises to them, including cheap energy, but spending so much on solving pointless math makes little sense. That is why rival cryptocurrency Ethereum switched to a different verification system in 2022.
Of course, market forces will eventually drive miners to charge higher transaction fees as block rewards evaporate. But this will turn them into low-margin intermediaries with an increasingly loose link to the value of bitcoin.
That is why miners' stocks may now be a poor way to bet on the cryptocurrency. They capture only a portion of the upside but are very exposed to the downside. Bitcoin hasn't yet shown that it has gold's staying power, and the current rally rests on flimsy foundations. It could revert to being just a digital Beanie Baby. Many miners -- such as Core Scientific, Inc., which emerged from bankruptcy in January -- are already rerouting computational power to service generative artificial intelligence instead.
Equity investors should think hard about throwing money at a useless asset. If they must, though, they should just hold the real thing, or at least one of the newly available spot exchange-traded funds.