The quadrennial bitcoin halving arrives next month and it’s widely expected to be a catalyst for bitcoin prices. Some say it already has been. It could also spark increased consolidation in the crypto mining industry.
Should mergers and acquisitions in the space trend higher, exchange traded funds such as the Bitwise Crypto Industry Innovators ETF (BITQ) could benefit. BITQ is passively managed and debuted in May 2021. The fund isn’t a dedicated crypto miners fund. However, a significant percentage of the fund’s 29 holdings are participants in that industry.
BITQ’s diversification is important. Just as market participants have priced in the upside for bitcoin ahead of the halving, they’ve factored in the downside for miners. Those stocks have struggled in recent weeks and it’s easy to understand why. Bitcoin halvings reduce the rewards earned by miners, meaning those companies will earn less bitcoin post-halving.
BITQ as Mining Consolidation Play
Like any other industry, there are haves and have-nots in the bitcoin mining space. Which is to say, some miners are better positioned to thrive post-halving than others. As Andrew O’Neill, managing director & co-chair of S&P Global’s Digital Assets Research Lab, noted in a recent interview with Talia Kaplan of CNBC, miners face different cost structures and not all companies in the industry have comparable cost bases on mined bitcoin.
Those varying cost elements coupled with the need to modernize equipment every few years could affect profitability for companies that have already struggled to get there. That could compel some of the sturdier miners, including some BITQ member firms, to pick off weaker rivals post-halving to bolster market share.
“I think we will see consolidation,” O’Neill said in the CNBC interview. “There’s clearly differentiation in terms of profitability levels. There is an advantage to scale. There’s also differences in terms of available funds as well as the ability to raise equity financing.”
He added that many bitcoin miners struggle to raise cash in debt markets because creditors view the business model as difficult to lend toward. It remains to be seen, but if some smaller miners find themselves in cash-starved positions following the halving and they’re not able to access capital markets, some of the more well-heeled miners residing on the BITQ roster could acquire those firms.
O’Neill also pointed out that prior halvings have been catalysts for bitcoin upside. If history repeats, shares of Microstrategy (MSTR) and Coinbase (COIN) could benefit. Those two stocks combine for more than 37% of BITQ’s weight.
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