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  1. Crypto Channel
  2. Crypto Miners Dig Themselves Out of 2022’s Rut
Crypto Channel
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Crypto Miners Dig Themselves Out of 2022's Rut

Roxanna Islam, CFA, CAIAJan 20, 2023
2023-01-20

Out of the entire ETF universe, the best performing ETFs YTD so far are crypto ETFs—more specifically crypto miners following weak performance in late 2022. The Valkyrie Bitcoin Miners ETF (WGMI) topped the list, increasing over 70% YTD as of January 18. The Vaneck Digital Asset Mining ETF (DAM) is currently in sixth place, returning over 57% YTD. Broader blockchain and crypto equity ETFs were also in the top 15 including the Vaneck Digital Transformation ETF (DAPP), the Global X Blockchain ETF (BKCH), the Bitwise Crypto Industry Innovators ETF (BITQ), the iShares Blockchain and Tech ETF (IBLC), and the Invesco Alerian Galaxy Crypto Economy ETF (SATO). Just a couple of months ago, the FTX crash (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 equities, and the crypto mining sector? This note explores why we’re seeing a rally in 2023.

Summary Chart One

Crypto prices were in the high $60,000 range in 4Q21 and have seen pressure throughout most of 2022, averaging just under $30,000 for the year. First of all, inflationary pressures and higher interest rates were causing investors to shy away from risky assets, including Bitcoin and anything growth or tech-related (including blockchain and crypto equities). This was worsened by several high-profile crypto events (e.g., Terra Luna, FTX). This year, however, investors are now somewhat more confident given weaker inflationary readings and a less aggressive Fed stance. Many investors are now more willing to consider taking risk again—including crypto. For many long-term crypto investors, the initial shock of the FTX bankruptcy has worn off after over two months with lower prices revitalizing interest in the space.

Summary Chart Two

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In the crypto mining space, several other factors contributed to the rally. Much like the relationship of gold mining companies to the price of gold, crypto mining companies are also leveraged to 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 the price of Bitcoin decreases, then miners earn thinner profits—at a certain point it may not even be profitable to run mining rigs. With Bitcoin under $20,000 for much of the end of 2022, along with rising energy prices, miners were making extremely thin margins. Both 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 to look up for miners. Argo Blockchain announced that it would receive a $100 million investment from Galaxy Digital and would avoid bankruptcy. Its stock price rebounded by over 470% since its low in mid-December. With Bitcoin prices still barely over $20,000, crypto miners aren’t going to make the same profits they did when Bitcoin was $60,000, but this rally proves that the crypto mining industry isn’t dead, and miners can still maintain profitability throughout weak markets.

Annual mining profitability =

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

LESS

(price of miners) + (cost of electricity) + (corporate expenses)

Summary Table One

Bottom Line:

While the crypto rally is exciting for crypto investors, Bitcoin prices and crypto equity prices are still low on a long-term basis. But this rally has created renewed interest in the space and has served as a good entry point for investors looking to get back or add to their crypto and growth allocation. Investors who want to invest in crypto equities may prefer to invest through an index-linked product like an ETF, which not only diversifies away single-stock risk, but also uses a rules-based methodology to eliminate more illiquid securities.

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

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

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