Crypto miners have decoupled from bitcoin, but this presents opportunity

JPMorgan Chase & Co (NYSE:JPM, ETR:CMC)’s respected chief executive Jamie Dimon may be something of a cryptocurrency permabear, but some analysts at the Wall Street institution have a positive read on the state of the bitcoin mining market right now.

Bitcoins’ price has taken a tumble recently, just as the hotly anticipated Halving event approaches later this week when bitcoin’s distribution rate will be cut in half as part of a four-year cycle.

Nonetheless, the world’s largest cryptocurrency remains 50% higher year to date, though this is not reflected in the price of bitcoin mining stocks.

Nasdaq-listed Iris Energy, Riot Platforms and Marathon Digital Holdings are all currently down by more than a third year to date.

In London, Argo Blockchain has lost two thirds of its value, while Toronto-listed HIVE Digital Technologies (TSX-V:HIVE, NASDAQ:HIVE) is also down by a third.

There is a universal theme when looking at these companies’ respective stock charts; they all took a nosedive following the US Securities and Exchange Commission’s approval of spot-bitcoin exchange-traded funds in early January.

Could this suggest that newly launched bitcoin ETFs from the likes of BlackRock, Fidelity, Grayscale, VanEck and others have replaced bitcoin miners as pure-play bitcoin investments?

Perhaps, but fintech analyst Reginald L. Smith at JPM said that bitcoin mining stocks still have “attractive relative valuations”, specifically Riot and Iris.

Hashing it out

“We estimate US-listed miners, which account for ~21% of the network hashrate, currently trade at ~1.6 times their proportional share of the four-year block reward opportunity, representing the lowest level since November 23,” said Smith, though this is still a touch above an average of 1.5x since January 2022.

In simpler terms, bitcoin miners’ valuations are comparatively cheap compared to what they are expected to earn from future mining rewards.

‘Hashrate’ refers to the amount of computing power being applied to the bitcoin network. Miners compete with each other to claim a larger portion of this hashrate to receive more daily bitcoin rewards (i.e. more revenue).

The competitive nature of bitcoin mining naturally rewards miners with greater processing power.

Per Smith’s analysis, Iris and Nasdaq constituent CleanSpark have increased their hashing power since the end of February, while Toronto-listed Hut 8 and Marathon have decreased theirs.

CleanSpark’s strong year-to-date performance (currently up by 35%), however, means it doesn’t make the cut right now as a value play.

However, the potential for future returns on bitcoin mining stocks hinges on whether the market will return to them as pure-play bitcoin investments at a time when the largest asset managers in the world are offering spot-bitcoin linked ETFs for a fractional management fee.

One benefit among the bitcoin miners, however, is their ability to adapt and diversify. HIVE Digital Technologies is a good example of this- it has been leveraging its vast processing power to make in-roads into the rapidly expanding artificial intelligence sector, which is expected to drive data centre demand to unprecedented heights.