Bitcoin Mining ETFs Under Pressure As Falling Profits Weigh On Miners

JPMorgan's latest Bitcoin Mining Monthly report reveals certain challenges for the cryptocurrency mining sector, raising concerns for Bitcoin mining ETFs.

February saw Bitcoin's price drop 5% to an average of $95,300, with a further decline to $89,700 by month-end. This marks a 13% decrease from January.

This downturn had a direct impact on mining companies, with the total market cap of 14 U.S.-listed miners plunging 22%, erasing $6 billion in value. As these stocks tumbled, ETFs heavily weighted in Bitcoin miners, such as Valkyrie Bitcoin Miners ETF WGMI, Bitwise Crypto Industry Innovators ETF BITQ, and Global X Blockchain & Bitcoin Strategy ETF BITS, likely faced significant drawdowns.

WGMI lost more than 20% last month whereas BITQ lost around 17% during the same period. Meanwhile, thanks to a significant allocation in short-term Treasury Bills, BITS has managed to mitigate its monthly dip to about 2%.

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Mining Profitability Erosion And ETF Risks

Beyond price declines, mining economics weakened, which could pressure ETF returns. Daily block reward revenue per exahash (EH/s) fell 5% month-over-month (m/m) to $54,300, while daily block reward gross profit declined 9% to $29,500 per EH/s, month-over-month, which is about the gross margin of 54%. This squeeze impacts the balance sheets of public mining firms, many of which are core holdings in Bitcoin mining ETFs.

Despite lower revenues, competition among miners remained intense, found JPMorgan. The average network hashrate increased 3% to 810 EH/s, reflecting higher mining participation despite declining profit margins. Mining difficulty rose 2% from January, though it eased slightly later in the month.

However, for ETFs, the key concern is whether higher hashrates signal strength or financial strain, miners may be forced to expand operations just to maintain revenue levels. This may lead to increased power costs and potential liquidity issues.

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Stock Performance And ETF Exposure

The total market cap of the 14 tracked miners stood at $23.1 billion, down 22% from January, according to JPMorgan. Among individual stocks, Core Scientific was the best performer, falling only 9%, while Greenidge Generation GREE plummeted 36%, making it the worst performer. Other notable declines included Riot Platforms RIOT and Marathon Digital MARA down 19% and 23%, respectively. Incidentally, the last two stocks make up a significant portion of several mining ETFs.

If mining stocks continue trading at depressed levels, Bitcoin mining ETFs could experience further weakness, especially if Bitcoin's price remains under pressure.

Potential Opportunities For Mining ETFs

While February's downturn raises red flags, some investors may view Bitcoin mining ETFs as a long-term opportunity at current valuation levels. Historically, mining stocks have tended to correlate with Bitcoin's price movements, meaning that any future Bitcoin rebound could boost these stocks and their associated ETFs. Additionally, the recent sell-off may allow ETF investors to accumulate positions in beaten-down miners at a discount before the next upward cycle.

However, risks remain. Many miners rely on high Bitcoin prices to stay profitable, and with revenues and gross profits significantly below pre-halving levels, smaller players with higher energy costs could struggle, leading to further ETFs underperformance if these firms continue to decline.

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