Crypto miners are currently benefitting from investors’ desire to hedge against the macro environment and the rise of Ordinal Inscriptions. However, being highly volatile assets, they require due diligence, as Mike Venuto explained in this week’s Opto Sessions.
One theme of Mike Venuto’s recent appearance on Opto Sessions was his bullishness towards Bitcoin miners. Venuto is a cryptocurrency investing expert, and portfolio manager of the Amplify Transformational Data Sharing ETF [BLOK], which has gained 33.5% so far this year.
BLOK has a strict capping system which ensures that no individual stock is weighted above 5%, and that no segment above 25%. Given the current bull run for Bitcoin miners, the segment is pushing at the limits of these caps, with Riot Platforms [RIOT] and Galaxy Digital Holdings [GLXY.TO] the fund’s second- and fourth-largest holdings, respectively, with 4.64% and 4.45% weightings, as of 18 May.
“We had great trades on Riot and Galaxy. We came into the year with miners under 15%, and now they’re very close to 20%,” Venuto told Opto Sessions.
Asked which of BLOK’s segments could be the next to see a bull run, Venuto replied: “It’s always the miners.”
Why this bullishness? In essence, miners have the most exposure to gains in Bitcoin prices, and tend to experience more price volatility than the underlying asset itself.
“It’s very similar to gold. When things run, [the miners] run twice as hard as Bitcoin.”Bitcoin is up 65.6% year-to-date, while miners have had a much bigger surge — Riot Platforms is up 240.1%, and Galaxy is up 53.5%.
Bitcoin miners tend to be heavily equity financed, giving them a relatively high weighted average cost of capital (WACC). This is the main reason why they offer greater beta than Bitcoin itself. Of course, while this means miners outperform Bitcoin during bull runs, they also underperform it during bear periods.
There is also what Venuto calls a “math play” at stake with Bitcoin miners, around energy arbitrage. “We want to understand their energy contracts [before investing]. The really goodones aren’t Bitcoin maxis, they’re energy arbitragers.”
There are various tailwinds behind the miners’ bull run, with Venuto foregrounding two in particular: the ability of Bitcoin to hedge against macro conditions, and the rise of Ordinal Inscriptions...
“Anything that is delegitimising of the traditional banking system is a huge win for blockchain and Bitcoin,” Mike Venuto told Opto Sessions, echoing the sentiments of Michael Saylor, co-founder and executive chairman of MicroStrategy [MSTR]. For Saylor and Venuto, the ongoing regional banking crisis and the inflationary environment underlying them are major tailwinds for Bitcoin and cryptocurrencies.
“Bitcoin is a hedge to a banking crisis… a hedge to hyperinflation and an easy monetary policy,” Venuto told Opto Sessions.
Ordinal Inscriptions are effectively a means of bringing non-fungible tokens (NFTs) into Bitcoin by inscribing digital assets onto a satoshi (the smallest unit of a Bitcoin). In April, the daily record for Ordinal Inscriptions was broken four times.
Venuto calls Ordinal Inscriptions “free money for miners”, saying that, historically, miners could monetise their work by either selling new Bitcoins into the market or holding them and waiting for their value to rise.
“Now they're all of a sudden getting transaction fees, because people are using these inscriptions to do a lot of the things that more robust chains like Ethereum offer, like NFTs.”
The impact of Ordinal Inscriptions doubtless contributed to the Valkyrie Bitcoin Miners ETF [WGMI] hitting its 2023 high on 18 April. It is currently up 137.6% year-to-date.
Another miner in BLOK’s top ten holdings is Marathon Digital Holdings [MARA], which has a 3.73% weighting as of 18 May. Marathon’s stock is up 195% year-to-date, after having been boosted on 9 May by news that the company is opening a new mining facility in Abu Dhabi.
This international approach raises the spectre of miners moving out of North America. Venuto, however, doesn’t believe this is a risk, because of the eagerness of the state-level US government to keep the industry on-shore.
“They're not going offshore. Texas wants all of them,” he said.
“Bitcoin is a hedge to a banking crisis… a hedge to hyperinflation and an easy monetary policy.”
There is a risk with miners, however America’s largest, Core Scientific [CORZQ], has been undertaking bankruptcy filings as of December. While Venuto emphasises that Core’s issues are “trad fi, not de-fi”, they highlight the need for the due diligence that he applies when investing in crypto miners.
“We don’t own any miners that we haven’t been to the facilities to look at.”
Venuto says that the most important question he asks is: “Do they have a good chief financial officer and balance sheet?” These are the key determinants of a miner’s ability to ride out the inevitable crypto winters of the future.
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