In 2023, Bitcoin (BTC 0.41%) mining stocks were some of the best investments you could make. The largest Bitcoin miners, such as Marathon Digital Holdings Inc. (NASDAQ: MARA) and Riot Platforms Inc. (NASDAQ: RIOT), were up triple digits for the year. As long as the price of Bitcoin soared, they stood to make money hand over fist, and investors rewarded them with rich valuations.
But in 2024, the situation changed. It's getting harder and harder to pick winners in the Bitcoin mining industry right now. Previous big winners like Marathon Digital and Riot Platforms are down as much as 20% for the year, and their future outlook is now uncertain. That has me thinking that investors should consider diversifying their risk by investing in a Bitcoin miner ETF instead.
Effect of the Bitcoin halving
A primary reason for the steep decline in market performance this year has to do with the Bitcoin halving, which some analysts predict could lead to a shakeout in the mining industry. In a Bitcoin halving, rewards paid out to miners for adding a new block to the Bitcoin blockchain are cut by 50%. That has huge ramifications, because it's a direct hit to top-line revenue. Miners are doing the same amount of work, but making only half as much money as they did before the halving.
The only Bitcoin miners that are likely to survive intact are those with the most powerful Bitcoin mining rigs, the lowest costs, and the lowest debt loads. That's why some of the biggest Bitcoin miners are now suffering. They either took on too much debt to acquire their Bitcoin mining rigs, or they have a bloated cost structure that's now a drag on operations. Given that the amount of money they are now making has been cut in half, it's no surprise that some are down 20% year to date.
Diversify your risk with a Bitcoin mining ETF
If you're adamant about investing in Bitcoin mining stocks, one possible solution is to diversify your exposure to the Bitcoin mining industry with an exchange-traded fund, or ETF. Rather than placing all your eggs in one basket, you can get exposure to a wide range of players within the industry. Some of these are miners, while others are tech companies that provide "picks and shovels" to the miners. For example, consider the Valkyrie Bitcoin Miners ETF (WGMI -0.84%), which has more than 20 different holdings. With this ETF, you can diversify your risk, spread out your bets, and let Valkyrie do all the heavy lifting.
In 2023, the Valkyrie Bitcoin Miners ETF was up more than 235%, making it one of the top ETFs of the year. That makes sense, because the market for Bitcoin miners in 2023 was going gangbusters. However, the picture is likely to get a lot murkier this year. As noted above, some of the biggest Bitcoin miners are likely to take a beating, so any Bitcoin mining ETF is likely to take a beating as well. In 2024, the Valkyrie Bitcoin Miners ETF is down 7%.
However, there are often "sneaky" holdings within any ETF that help provide some extra downside protection. For example, the Valkyrie Bitcoin Miners ETF holds a position in Advanced Micro Devices Inc. (AMD 1.85%) and a position in Nvidia Corp. (NVDA -0.29%). While those companies have exposure to Bitcoin miners, they are obviously not directly correlated with the Bitcoin mining industry.
Trade-offs when investing in ETFs
Just remember: There are always trade-offs involved when investing in any ETF. When the market is in a bullish cycle, you will sacrifice some upside potential because you have diversified your holdings. Sure, you'll have a lot of winners, but you'll also have some underachievers. Thus, it's up to you to decide whether to put a greater emphasis on upside potential or risk management. It's the classic risk-reward trade-off.
Image source: Getty Images.
When it comes to investing in Bitcoin miners, I've never been a big believer in the "set it and forget it" strategy. The market is just too cyclical. With a new Bitcoin halving every four years, there is the potential for new winners and losers on a regular basis. Thus, if you are risk-averse, it might make sense to consider an ETF instead.
