Crypto Miners Are Digging Out of 2022 Rut

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Across the ETF universe as a whole, the best performing ETFs year-to-date are crypto ETFs, specifically crypto miners after weak performance at the end of 2022. The Valkyrie Bitcoin Miners ETF (WGMI) is at the top of the list, increasing by more than 70% since January 18. The Vaneck Digital Asset Mining ETF (DAM) currently sits in sixth place, returning over 57% year-to-date. Broader blockchain and crypto-equity ETFs were also in the top 15, including ETF Vaneck Digital Transformation (DAPP), Global X Blockchain ETF (BKCH), Bitwise Crypto Industry Innovators ETF (BITQ), the iShares Blockchain and Tech ETF (IBLC), and the Invesco Alerian Galaxy Crypto Economy ETF (SATO). Just a few months ago, the crash of FTX (discussed here) was seen by some as the end of the crypto industry, which obviously was not the case. What happened to Bitcoin prices, crypto stocks, and the crypto mining sector? This note explores why were attending a rally in 2023.

Crypto prices were in the high $60,000 range in 4Q21 and have been under pressure throughout most of 2022, averaging just under $30,000 for the year. First, inflationary pressures and rising interest rates have pushed investors away from risky assets, including Bitcoin and anything related to growth or technology (including blockchain and crypto stocks). This was compounded by several high-profile crypto events (e.g. Terra Luna, FTX). This year, however, investors are now a little more confident given weaker inflation readings and a less aggressive stance from the Fed. Many investors are now more willing to consider taking risks again, including crypto. For many long-term crypto investors, the initial shock of FTX’s bankruptcy has dissipated after more than two months, with falling prices reviving interest in the space.

In the crypto mining space, several other factors contributed to the rally. Just like the relationship between gold mining companies and the price of gold, crypto mining companies are also influenced by the price of Bitcoin (see the formula below provided by Hut 8 Mining). If the price of Bitcoin increases, miners earn more profit. But if Bitcoin price decreases then miners earn thinner profits at some point it may not even be profitable to operate mining rigs. With Bitcoin below $20,000 for much of late 2022, along with rising energy prices, miners were making extremely thin margins. Core Scientific (CORZ) and Argo Blockchain (ARB LN) announced that they would file for Chapter 11 bankruptcy in December, which added to the already negative sentiment in this space. Crypto mining ETFs like WGMI were down 83.5% in 2022 by the end of December (this ETF has an inception date of February 7, 2022). But in January, as positive news hit the broader economy, bitcoin prices and energy prices, things started looking up for miners. Argo Blockchain has announced that it will receive a $100 million investment from Galaxy Digital and avoid bankruptcy. Its stock price has rebounded more than 470% since its low in mid-December. With Bitcoin prices still barely above $20,000, crypto miners aren’t going to make the same profits as when Bitcoin was $60,000, but this rally proves the crypto mining industry isn’t dead and that miners can still maintain profitability in weak markets.

Annual mining profitability =

(miner hash rate / network hash rate) x (BTC price) x (block reward) x (blocks per year)

LESS

(miner price) + (electricity cost) + (company expenses)

Conclusion :

While the crypto rally is exciting for crypto investors, Bitcoin prices and crypto stock prices are still low over the long term. But this rally sparked renewed interest in the space and served as a good entry point for investors looking to return or add to their crypto and growth allocation. Investors who want to invest in crypto stocks may prefer to invest through an indexed product like an ETF, which not only diversifies single-stock risk, but also uses a rules-based methodology to weed out more illiquid securities.

The Alerian Galaxy Global Cryptocurrency-Focused Blockchain Equity, Trusts and ETPs (CRYPTO) Index is the underlying index of the Invesco Alerian Galaxy Crypto Economy (SATO) ETF.

For more news, insights and analysis, visit the Crypto Channel.

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