Worried about this crypto crash? Avoid Crypto Miners

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Whether to buy Bitcoin (CRYPTO:BTC) or Bitcoin miners such as Marathon Digital (NASDAQ:MARA), Bit Digital (NASDAQ:BTBT) or CleanSpark (NASDAQ:CLSK) is a good question. Fool.com contributors Chris MacDonald and Jon Quast discussed the pros and cons of this approach in this January 19 episode of “The Crypto Show” on Backstage Pass.

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Jon Quast: We’ll go on and start talking about it here. This was a very, very interesting article that came out on Saturday about Bitcoin mining stocks. Specifically here I believe it is looking at Marathon Digital symbol, MARA and it is looking as well, let me just advance Bit Digital, symbol, BTBT and CleanSpark CLSK. CleanSpark is not just a bitcoin miner. They have these other products that are basically designed to make electrical systems more efficient. Mainly, I believe it’s off-grid power systems that help them be more efficient and they said, we can apply that and mine bitcoin more efficiently.

But, Anders, very interesting, the look he’s had on these companies and their stocks and their beta their relative volatility to the market, finding that, as you pointed out, they’re much more volatile than Bitcoin itself- same.

Chris MacDonald: We’ve touched on bitcoin miners, I know in previous shows, in terms of exposure to leverage on the underlying prices of cryptocurrencies like bitcoin. These top miners are bitcoin miners. Generally speaking, when the price of Bitcoin increases because these miners have high fixed costs and their costs are locked into dollars when the price of Bitcoin increases, their debt, which is denominated in dollars, decreases relative to Bitcoin and their income, which is denominated in Bitcoin, goes up. Their track record is much better when Bitcoins are up.

Depending on the direction in which Bitcoin is moving, these miners can often move in an amplified fashion. If you look at this slide here, then it’s interesting to look at Marathon with a beta of four, which basically means that if the market goes up 1%, Marathon could go up 4% on average and vice versa.

Bitcoin as I said, with the beta of zero, you don’t know which way it’s bound to go. It’s a little independent of the markets, which is more in line with what we expected. It is a low correlation asset. Some of these other cryptocurrencies have higher betas.

This goes back to our previous discussion, but looking at Bitcoin miners, you get this leveraged exposure to crypto prices. In good times, it’s great. In times of a bit more uncertainty like right now, these top miners see declines.

But that being said, you look at Marathon Digital with its three-year return, it’s over 2,000%. It’s pretty amazing and I think compared to others like Bit Digital, we’ll get to that a bit later. Compared to many other crypto miners, it has much better fundamentals. This would be my best crypto miner to review based solely on its US location and track record at this time.

There are differences between crypto miners. It’s a higher beta, which is interesting. If the market continues to fall, will Marathon plunge deeper? That remains to be seen. It has worked pretty incredibly for the past three years. It’s an area to watch right now, I think.

Quast: Yes, definitely. The beta does not predict where the price will go is a historical indicator. This is the historical trend so far. If history keeps repeating itself, that’s what you expect. The market is falling, we would expect Marathon to fall harder.

What’s interesting is if you read the article, Anders, he points out that most months with these companies, with these stocks, it’s not small moves. It was up or down 20% or more, like eight out of 12 months last year. There have been many months where it has gone up 20% or more, but there have also been several months where it has gone down 20% or more, very big swings.

For me personally, these bitcoin miners just haven’t been attractive investments for me, even though they have several. I don’t believe in Bit Digital, but certainly Marathon has largely beaten the market over the past three years.

The reason I don’t really like them is because you have the bitcoin risk in the first place, then you bring in a company that is the miner, and then you add execution risk on top. I don’t really see the point of it. I’m personally invested in bitcoin and that’s enough risk for me.

Chris MacDonald has no position in the stocks mentioned. Jon Quast owns Bitcoin. The Motley Fool owns and recommends Bitcoin. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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