History shows that during bull markets Bitcoin (CRYPTO: BTC) Miners almost always perform better than the cryptocurrency itself. Yet Bitcoin miners have been hit particularly hard in recent months, as investors spot Bitcoin ETFs as a means to expose Bitcoin through the stock market, a role miners previously held. What makes matters worse is that Bitcoin recently underwent its fourth halving, an event that has reduced the block reward paid to miners by half, effectively reducing their main source of income.
For miners, without a significant price increase, they face a serious challenge to stay afloat and keep their stock prices high. While history has shown that halvings usually precede Bitcoin price increases, dragging many mining stocks along with them, investing in this sector is not easy. Before choosing a Bitcoin mining company for your portfolio, consider these three things.
1. Plans to grow production
Faced with a significant drop in revenues, one of the clearest strategies to offset the effect of the halving is to increase mining production. Therefore, investors should prioritize companies that have clear strategies and initiatives to scale up their mining operations.
This requires investments in additional mining hardware, infrastructure and operational resources. Investors should look for companies that demonstrate a commitment to expanding their mining capacity and have concrete plans for growing operations.
Typically, the easiest way to quantify how much a company plans to increase its capacity is to evaluate a metric known as the hash rate. Measured in exahashes per second (EH/s), the general idea is that the greater the hash rate, the more Bitcoins a company can mine. While researching a company’s potential is only part of the equation, investors should ensure they choose miners with clear plans to increase hashrate.
2. Efficiency is essential
While increasing production is essential to maximizing revenues, it is just as important, and arguably more so, to ensure that a company’s mining operations are efficient and cost-effective.
Bitcoin mining efficiency is closely related to the cost of electricity, one of the main costs for mining operations. Optimizing efficiency can be achieved in three ways.
First, there is access to cheap energy sources. With readily available energy at a low cost, companies can power more computers to mine Bitcoin.
The second factor is related to mining equipment. Like any computer, older models tend to consume more energy. In addition, they also require additional resources to prevent equipment from overheating. Companies that invest in new miners are better suited to keep costs down. Not to mention, they are also better at mining Bitcoins.
The third aspect comes down to pure business operations. Investors should focus on investing in companies that have proven experience managing maintenance costs, have minimal operating overhead and have few financial obligations.
Add it all up and just like the hash rate, there’s an easy way to measure the efficiency of any business. Nearly every company’s quarterly statements list the average cost required to mine one Bitcoin. In a perfect world, a company would have a high hash rate with a low average cost per Bitcoin mined.
3. Find an X-factor
The majority of Bitcoin mining companies share more similarities than differences. However, they all have a characteristic that makes them unique. Let’s call them X factors. These differentiators can play a crucial role in helping investors evaluate and differentiate between mining companies.
These X-factors can take different forms. For example, Riot Blockchain‘S (NASDAQ:RIOT) Its unique energy consumption model makes it stand out from the crowd. Riot, based in Texas, benefits from access to low-cost, low-cost energy. But Texas’ unique energy grid also gives it the ability to sell excess electricity back to the grid when the costs of mining Bitcoin would outweigh the potential profits.
In the same way, Marathon digital holdings (NASDAQ: MARA) stands out with the introduction of Bitcoin sidechains, which represents a strategic move to diversify revenue streams and expand business operations. Although still in its early stages, the potential for Bitcoin sidechains to generate additional revenue presents an exciting opportunity for Marathon and underlines the industry’s forward-thinking approach to innovation.
These X-factors are just two small examples, but they serve as essential considerations for investors looking to identify potential winners in the Bitcoin mining sector. By carefully evaluating each company’s unique attributes and assessing their implications for future growth and profitability, investors can make informed decisions and identify potential winners in the highly competitive Bitcoin mining industry.
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RJ Fulton has positions in Bitcoin and Riot platforms. The Motley Fool holds and recommends positions in Bitcoin. The Motley Fool has a disclosure policy.
The Halving and Bitcoin Mining: 3 Things You Need to Know Before Investing in This Explosive Industry was originally published by The Motley Fool
