Is It Better To Invest In Bitcoin Or Bitcoin Miners?

On the one hand, bitcoin itself is the superior asset because it is the purest exposure to the Bitcoin network. On the other hand, Bitcoin miners are publicly traded corporations that raise capital, buy machines, and hire employees to convert fiat currency into bitcoin. Presumably, if these miners are successful in their business, they can do this efficiently and earn abnormal returns, at least compared to Bitcoin. And even though every miner may not beat Bitcoin, some surely can.

To examine this, let’s consider the risk and return from a 2024 investment into Bitcoin against Bitcoin miners. I’m going to calculate the annual return over 2024, defined as a purchase on January 1, 2024, and a sale on December 31, 2024. So, the holding period is one full year, with no trading in between. For risk, I will use annual volatility, which is the standard deviation of log daily returns over a rolling one-year window.

Note that an alternative, possibly more conventional, approach to measuring risk and return is to use Sharpe ratios, which is a ratio of abnormal return over a risk-free rate divided by daily volatility. I prefer my method for two reasons. First, Sharpe ratios give you a single number, whereas I’m going to give you risk and return separately so you can see it in a graph. Second, the average daily return is the mean of the daily return over the year, but I’m more interested in holding the asset for the entire one-year horizon.

If you drew a roughly straight line between the lower left and upper right corner, you would get the capital market line, the amount of extra return the market would give for an extra increase in risk. Note that no miner lies in the northwest region of BTC-USD, i.e., no Bitcoin miner offers a higher return with less risk. A few miners offer greater returns but with substantially more risk, and most of the publicly traded miners offer a strictly worse return than Bitcoin with greater risk.

Why is this happening?

Bitcoin experienced a halving in May of 2024. This cut the block subsidy from 6.25 bitcoin per block to 3.125 bitcoin per block. This is the automated, scheduled reduction in bitcoin issuance every 4 years, the most important feature of Bitcoin that guarantees its scarcity and predictability.

For Bitcoin itself, the halving is uniformly positive because it decreases the future supply of bitcoin. Since most people seek bitcoin because it is scarce, this leads to increased demand, which results in a higher price and therefore greater annual return. This core feature has been in place for Bitcoin after each of its halvings.

For Bitcoin miners, there are two effects in place. The first is the positive effect of this higher greater price emerging from the greater demand post-halving. But the second effect moves in the opposite direction. The halving literally cuts the revenue of each Bitcoin miner in half, per unit of hash power expended. There is no other industry in the world where revenues for the entire industry fall by 50% after a specific moment in time. As you can see from the stock prices of the major miners in 2024, most of the stock prices suffered after the May halving.

There is the more fundamental question of whether it is better to invest in a commodity or a company that mines that commodity. Let’s look at gold as an example, which is immune to the pre-scheduled supply shocks of Bitcoin. Below is a graph of the 2024 return volatility of gold, represented by a gold ETF (GLD), against the returns and risks of several of the major gold miners.

Notice that again there are no gold miners that offer greater returns with less risk. Only one offers greater returns with much more risk, and most offer worse returns with more risk.

There is likely a broader sentiment here. Competition in the mining industry, in either Bitcoin or gold, will erode the returns from the corporate equities relative to the commodity. But as with competition, some miners will win, which in 2024 was BTDR for Bitcoin and NVA for gold. For 2024 at least, with both Bitcoin and gold, it was better to invest in the underlying commodity, which offered a higher return per unit of risk, relative to the companies that mine those commodities.

Let’s take a look at how Bitcoin compares against Bitcoin miners over a longer horizon. To do this, I will use a framework I have developed called Worst-Case Analysis. I plot the worst return from investing in Bitcoin versus Bitcoin miners. The worst return for any holding period is the return if the investment was purchased at the highest possible price and sold at the lowest possible price. For example, I compare all possible purchases and sales for a 1 year horizon, and the worst return is the one with the highest purchase and lowest sale. I then do this for all possible holding periods.

As you can see, Bitcoin’s worst return (the top orange line) is almost uniformly better than all the miners. It is also noteworthy that all the worst return from all miners increases in holding period, which confirms that greater returns accrue from holding for a longer time.