The SEC’s recent approval of several spot bitcoin ETFs in the United States has emerged as a seismic event with far-reaching implications. Among the myriad sectors affected, the mining industry stands out as a focal point of interest.

This article delves into the intriguing relationship between the recently approved spot bitcoin ETFs and the mining landscape, exploring the potential shifts, challenges, and opportunities that miners may encounter in the wake of these financial instruments.

Bitcoin miners engage in fierce competition for a finite pool of block rewards. The key determinant for securing these rewards lies in maintaining a higher hashrate than fellow miners, a feat that demands significant capital investment. To procure the necessary funding, a noteworthy segment of the industry has gone public.

Capitalizing on favorable stock market conditions, numerous miners made the strategic decision to go public from 2020 and onward. Notably, the year 2022 experienced a considerable upswing in the public hashrate, enabling miners in the public domain to augment their share of total bitcoin production from 13.6% at the commencement of the year to 18.9% by its conclusion. Subsequently, growth in this sector has reached a standstill, with public miners contributing 23.3% to the overall bitcoin production as of December 2023.

Private miners, who vie for bitcoin block rewards alongside their public counterparts, often face challenges in accessing capital compared to their public counterparts. Historically, public miners have enjoyed superior access to capital, enabling them to expand rapidly and secure a larger market share. The ease of capital acquisition, therefore, serves as a competitive advantage for public miners over their private counterparts.

However, the landscape is expected to undergo a shift, as the competitive advantage of public miners in accessing capital is likely to diminish with the introduction of new bitcoin ETFs. The primary appeal for investors in public miners has been their role as bitcoin investment vehicles, allowing individuals to gain exposure to bitcoin through traditional investment avenues like stocks. This has been a compelling narrative, especially considering the limited availability of robust bitcoin investment options for traditional finance investors, leading many to invest in mining stocks, GBTC, or MicroStrategy for bitcoin exposure.

The recently launched spot bitcoin ETFs offers a more refined, cost-effective, and efficient method for gaining bitcoin exposure compared to mining stocks, GBTC, or MicroStrategy. Spot bitcoin ETFs feature lower administrative costs and directly track the price of bitcoin at a 1:1 ratio, distinguishing them from existing bitcoin investment vehicles. This development is anticipated to redirect capital away from established bitcoin investment vehicles, including mining stocks, and towards the new spot ETFs, heralding a shift in the investment landscape.

This phenomenon is currently underway. Following the approval of the ETF, both mining stocks and MicroStrategy experienced a notable decline on the subsequent day. As depicted in the chart below, leading mining stocks witnessed a substantial drop ranging from 10% to 20% upon the ETF's approval. Concurrently, during this timeframe, the bitcoin price itself recorded a 1% increase.

This discernible performance gap between the bitcoin price and publicly-listed bitcoin investment vehicles suggests that investors have already initiated a capital shift away from mining stocks and MicroStrategy and into the bitcoin ETFs.

Public miners will from now on face challenges in using the "bitcoin exposure" rationale to sway investors, prompting a shift in their marketing strategy. Instead, they will now positioning their companies as high-beta bitcoin investment vehicles, indicating a strong correlation to bitcoin but with heightened volatility. However, this approach is likely to falter in the long term, as investors can achieve purer high-beta bitcoin exposure by leveraging their bitcoin ETF holdings or investing in MicroStrategy, which already incorporates significant leverage. Bitcoin mining stocks are poised to struggle in delivering pure high-beta bitcoin returns compared to these alternative solutions.

Public miners will gradually adopt a trading pattern reminiscent of traditional commodity producers, aligning with their role as hashrate producers. Despite this evolution, the effects may not manifest immediately due to the ongoing bull market. We are anticipating one or two more extreme bull markets where public miners may yield exceptional returns and easily raise capital, but we expect the advantage of being publicly listed in the bitcoin mining industry to diminish over time.

In the fiercely competitive landscape of the bitcoin mining industry, a loss of advantage for public miners implies a relative gain for private miners. If public miners encounter challenges attracting investors, it could dampen their hashrate growth, presenting an opportunity for private miners.

Several factors are aligning to pave the way for a bitcoin bull market in the next two years. Firstly, the upcoming halving event will result in a reduction of the bitcoin supply. Secondly, there's the potential for increased demand as new capital typically flows in post-halving, a trend observed in the three previous cycles. What distinguishes the current scenario is the presence of numerous US-based spot bitcoin ETFs, which could significantly amplify demand. Consequently, these bitcoin ETFs have the potential to accelerate the impending bull market, exceeding initial expectations.

The ETFs are expected to attract substantial investments, necessitating the purchase of bitcoin from the market to meet their obligations. While the exact amount of bitcoin they'll acquire is uncertain, projections can be attempted. Drawing insights from K33 Research's ETF analysis, Canadian spot ETFs garnered 58,000 bitcoin in their initial four months of trading. Assuming that US-based ETFs, given their significantly larger market size and greater number (11 US-based ETFs versus two Canadian-based), could accumulate 20 times as much bitcoin in a similar period, the estimate would be 1,160,000 bitcoin. It's important to note that a considerable portion of this may not represent new demand but rather a transfer from cold storage or other inferior bitcoin investment vehicles, such as futures-based ETFs, public miners, or MicroStrategy.

It's crucial to acknowledge that our estimate is speculative, and uncertainties surround the actual figures. However, one certainty is that the heightened demand generated by the newly-approved ETFs will contribute to driving up the bitcoin price, given the fixed nature of its supply.

Using historical halving-years as a benchmark for predicting the potential bitcoin price in 2024, we could anticipate it reaching approximately $100,000. However, with the added impetus of spot bitcoin ETFs driving heightened demand, there is potential for the price to surge even further. A forecast of a $125,000 bitcoin price in 2024 doesn't seem far-fetched, primarily attributed to the influence of ETFs. This projection aligns with our bullish scenario, while our base case and bear case remain at $100,000 and $75,000, respectively.

An upswing in the bitcoin price naturally translates to increased profitability for mining. We posit that the majority of hashrate growth has already occurred, with a slowdown anticipated in the coming months. Currently, there is limited unprofitable hashrate on the sidelines that could be reactivated, given the relatively high mining profitability in the present period. Looking ahead to 2024, we may find ourselves in a situation where hashrate growth is constrained, coupled with a rapidly rising bitcoin price, resulting in a highly lucrative environment for miners. While the impending halving is expected to impact miners' revenues significantly, this is a known factor that can be prepared for.

The higher bitcoin price in 2024, partially driven by bitcoin ETFs, has the potential to more than offset the effects of the halving, making it a potentially super profitable year for miners.

As detailed in this article, the introduction of a bitcoin ETF promises to significantly enhance the prospects for bitcoin miners on multiple fronts.

To begin with, the endorsement from esteemed players in traditional finance, such as BlackRock, Fidelity, and the SEC, will give a significant boost to the credibility of miners.

Secondly, public miners may see a reduction in competitive advantages relative to their private counterparts, given the anticipated challenges in contend for capital with the bitcoin ETFs, leading to a slowdown in their hashrate expansion.

Lastly, and most importantly, the ETFs are poised to catalyze a potential surge in the bitcoin price, paving the way for a period of exceptional profitability for miners throughout 2024 and 2025.

The outlook for bitcoin mining has seldom been more promising. As outlined in this article, the recently launched ETFs harbor numerous positive implications for the field of bitcoin mining. We strongly recommend individuals to consider initiating their mining endeavors as early as possible, seizing the opportunity before the commencement of the anticipated bull market.

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