With Bitcoin (BTC-USD) having gone virtually nowhere for six months and mining stocks struggling since July, it’s potentially a good time to find the right BTC proxy plays before any potential seasonal bump in both the coin and crypto-related equities between now and the end of the year. In past cycles, we’ve seen miners generally offer serious alpha when Bitcoin is going parabolic. Of course, this time may very well be different due to the existence of spot ETFs in the United States. Such products figure to compete with mining companies for investment capital.
Year To Date Performance
Since the beginning of the year, the price of Bitcoin is up just under 36%. Prior to spot ETF conversion, the Grayscale Bitcoin Trust (GBTC) was one of the more straightforward ways to gain exposure to any rally in BTC. Those shares have performed nearly as well. The miners have been much less convincing:
The Valkyrie Bitcoin Miners ETF (NASDAQ:WGMI) is actually down 6% year to date. It trails BTC, GBTC, and other Bitcoin-proxy plays like MicroStrategy (MSTR) to a significant degree. In this article, we’ll go over the state of the sector and mining economics. We’ll look at the top holdings in the fund. And we’ll compare WGMI to two other crypto-equity ETFs from which investors may choose.
Mining Sector Health
As of mid-September, we are approaching a fifth full month since the block reward halving in April. To summarize, BTC is a fixed-supply cryptocurrency that is mined through proof-of-work consensus. For the cost of validating ledger transactions with electricity and equipment, the miners are paid in BTC. In the future, this BTC incentive will have to come primarily from transaction fees. Currently, new token issuance is the primary driver of mining revenue. However, since the BTC supply is fixed, new token issuance can’t mathematically continue forever.
Miner Revenue (Bitcoin Magazine PRO)
Every four years, we see the mining reward from new token issuance drop by 50%. The most recent example of this was April 2024. The impact of these events are substantial. So long as the price of BTC remains the same – and it’s actually down since the halving – miners see their cost of revenue essentially double if they want to produce the same amount of BTC post-halving. Thus, many miners try to ‘scale their way out’ of declining BTC rewards, and the impact of that has been an explosion in global hash rate:
Paradoxically, the more difficult it has become to generate BTC-denominated rewards from mining Bitcoin, the more we’ve seen machines continue to be turned on to compete for those dwindling rewards. Obviously, this is due to the USD-denominated value of the BTC generally increasing over time. Yet, despite the rise in USD price of BTC, the USD revenue generated from compute is currently at an all-time low:
USD Hashprice (Hashrate index)
The chart above is showing the five-year trend in price per PH/s from Bitcoin mining. In early September, that price fell below $40 PH/s per day. This is not a great sign if you’re bullish on Bitcoin miners, and speaks to the recent consolidation moves we’ve seen from companies like CleanSpark (CLSK).
Peers & Holdings
As far as I am aware, WGMI is the only ETF that is specifically structured to provide investors exposure to the Bitcoin mining industry. However, there are additional funds that have both a similar AUM to WGMI and similar holdings in Bitcoin mining stocks. Those funds are the Fidelity Crypto Industry and Digital Payments ETF (FDIG) and the Bitwise Crypto Industry Innovators ETF (BITQ). For the sake of comparison, we’ll use each of these funds as WGMI peers.
| WGMI | FDIG | BITQ | |
| Inception | 02/07/2022 | 04/19/2022 | 04/27/2021 |
| Expense Ratio | 0.75% | 0.39% | 0.85% |
| AUM | $114.5 | $91.0 | $115.5 |
| Dividend Yield (TTM) | 0.33% | – | 1.47% |
| YTD Price Performance | -5.56% | -8.11% | 3.28% |
Source: Seeking Alpha, $ in millions
All three of these funds are actively managed with expense ratios that aren’t what I’d call overly problematic given the turnover. WGMI has underperformed both the market and BITQ year to date. In my view, the biggest difference between the funds is holder concentration:
| WGMI | FDIG | BITQ | |
| Number of Holdings | 21 | 39 | 35 |
| Assets in Top 10 | 76.4% | 51.7% | 58.6% |
| Turnover | 74% | 53% | 61% |
Source: Seeking Alpha
76.4% of WGMI is allocated to the top 10 positions, and there are just 21 stocks in the fund. This is well below FDIG and BITQ. From a top 10 holdings standpoint, I actually don’t hate the approach to portfolio construction that I’m seeing, given the mining economic issues I mentioned above:
WGMI Top 10 (Seeking Alpha)
I find these allocations to be quite interesting and indicative of fund management that appears to be thinking through the future of the industry. At least five of the top seven companies in the fund are openly trying to build an HPC/AI compute segment in addition to BTC mining. Furthermore, the top company in the industry by market capitalization is only the 8th largest holding in the fund. Thus, it would appear that a bet on WGMI is becoming just as much of a play on HPC data centers as it is Bitcoin miners.
Closing Thoughts
In this article, I’ve made the case for why I believe the Bitcoin mining space is facing a deteriorating economics. Thus, it is not a surprise to see most mining stocks and WGMI down year to date, even as Bitcoin and other Bitcoin-proxies have performed quite well in 2024. As I see it, there are a handful of ways out of this for Bitcoin miners;
- the price of BTC either has to rise exponentially, again,
- global exahash has to come down as the weaker miners throw in the towel,
- transaction fees need to take the place of supply issuance as the primary mining incentive,
- or the companies need to simply pivot to something else like AI/HPC
I suspect almost everyone in this space is banking on number 1 coming to fruition to some degree. And we’re clearly seeing efforts for number 4. In my view, number 3 is unlikely given the declining usage seen through daily active addresses on the chain. That leaves number 2 as the most realistic path forward for the industry leaders who don’t pivot to other businesses.
There are questions then for each individual investor to consider. Should investors buy WGMI and simply endure the possibility that some, or even many, of the companies in the ETF may fail long term? Should investors try to pick survivors individually? Or should we be staying away from the sector entirely? I won’t be presumptuous enough to answer that for you, as each reader may have a different strategy and pain tolerance. But I will say I don’t think WGMI is the right way to play Bitcoin as a long-term investment.
