News
Halving and Bitcoin Mining: 3 things to know before investing in this explosive sector
Investing in Bitcoin miners can be profitable, but there’s more to know before adding them to your portfolio.
History shows that during bull markets, Bitcoin (Bitcoin -0.20%) miners almost always outperform the cryptocurrency itself. However, in recent months, Bitcoin miners have been hit particularly hard by the influx of investors Spot Bitcoin ETF as a means of exposing Bitcoin through the stock market, a role previously played by miners. To make matters worse, Bitcoin recently suffered its fourth halvingan event that cut the block the reward paid to miners by half, effectively cutting off their main source of revenue.
Miners, without a significant price increase, face a serious challenge to stay afloat and keep share prices high. Although history has shown that the halving usually precedes the Bitcoin price surge and drags many mining stocks with it, investing in this sector is not easy. Before choosing a Bitcoin mining company for your wallet, be sure to consider these three things.
Image source: Getty Images.
1. Plans to increase production
Faced with a significant drop in revenue, one of the clearest strategies to offset the halving effect is to increase mining production. Therefore, investors should prioritize companies that have clear strategies and initiatives to scale up their mining operations.
This requires investments in additional mining hardware, infrastructure and operational resources. Investors should look for companies that demonstrate a commitment to expanding their mining capacity and have concrete plans for growing operations.
Typically, the easiest way to quantify how much a company plans to increase its capacity is to evaluate a metric known as hash rate. Measured in exahash per second (EH/s), the general thinking is that the higher the hash rate, the more Bitcoin a company can mine. While it’s only part of the equation when it comes to finding a company’s potential, investors should make sure to choose miners with clear plans to increase hashrate.
2. Efficiency is key
While increasing production is essential to maximizing revenue, it is equally, and arguably even more important, to ensure that a company’s mining operations are efficient and cost-effective.
Bitcoin mining efficiency is closely tied to the cost of electricity, which represents one of the most significant expenses for mining operations. Optimizing efficiency can be achieved in three main ways.
The first is access to low-cost energy sources. With readily available low-cost energy, companies can power more computers to mine Bitcoin.
The second factor is related to mining equipment. Like any computer, older models typically consume more power. Additionally, they require additional resources to prevent equipment from overheating. Companies that invest in new miners are better suited to keeping costs low. Not to mention, they are also more capable when it comes to mining Bitcoin.
The third aspect boils down to pure commercial operations. Investors should focus on investing in companies that have a proven track record of managing maintenance costs, have minimal operating overheads and few financial liabilities.
Add it all up and, like the hash rate, there’s a simple way to measure each company’s efficiency. The average cost needed to mine one Bitcoin can be found in the quarterly reports of almost all companies. In a perfect world, a company would have a high hash rate with a low average cost per Bitcoin mined.
3. Find an X factor
Most Bitcoin mining companies share more similarities than differences. However, each one has some characteristic that makes it unique. Let’s call them X factors. These distinguishing factors can play a crucial role in helping investors evaluate and distinguish between mining companies.
These X factors can come in various forms. For example, Anti-riot blockchain‘S (REVOLT 1.17%) the unique energy consumption pattern sets it apart from the crowd. Located in Texas, Riot benefits from access to cheap and affordable energy. But thanks to Texas’ unique energy grid, it also has the ability to sell excess electricity back to the grid when the cost of mining Bitcoin would outweigh the potential profits.
Likewise, Digital marathon entries (MARA 2.64%) is notable for the introduction of Bitcoin sidechains, which represent a strategic move to diversify your revenue streams and expand your business operations. While still in its early stages, the potential for Bitcoin sidechains to generate additional revenue represents an exciting opportunity for Marathon and highlights its forward-thinking approach to innovation in the industry.
These X-factors are just two small examples, but they serve as essential considerations for investors looking to identify potential winners in the Bitcoin mining sector. By carefully evaluating each company’s unique characteristics and evaluating their implications for future growth and profitability, investors can make informed decisions and identify potential winners in the highly competitive Bitcoin mining industry.