Konstantin Tserazov: An Embedded Hedging Strategy Emerged in the Bitcoin Market

The Bitcoin market's recent plunge has taken many by surprise. Contrary to historical patterns, Bitcoin's value surged to unprecedented levels just before the latest halving event. This behavior deviates from the typical trend, where new price peaks are generally observed several months following a halving. The event that marks a 50% reduction in Bitcoin emission.

Obviously, the Bitcoin market has started to behave like a classical financial market in this way - "buy the rumors, sell the news." The price of the world's oldest cryptocurrency has already reflected the halving news in the early Spring.

Just the facts: Bitcoin lost 6.96% in June after it gained 11.07% in May.The current price has sparked the usual debate among investors, with many discussing the market's downward trend. It's worth noting that in 5 out of the last 7 years, Bitcoin has lost value in June.

For the last 7 years, the only year when July has been bearish for Bitcoin was 2019. At the start of July, many historical data tracking analysts anticipated a Bitcoin price revival. However, during the first week of July, the Bitcoin price dropped further and lost another 12.5%.

cryptocrash

At the beginning of the new week, on July 8th, #cryptocrash entered the top-5 most popular hashtags on social media that day. Traders have to watch how their presumptions about various support lines are crushed on a regular basis by wild market movements. The technical analysis of the market can comfort someone with its sophisticated tools applied, but its efficiency for Bitcoin investors often tends to be like tossing a coin to figure out the chances - 50%-50%.

Meanwhile, there is no need to be frustrated. An embedded hedging strategy has emerged in the Bitcoin market, and it's worth embracing. This is not about the wild trading game with altcoins, which, at the beginning of July, mostly lost more than Bitcoin itself. Bitcoin enthusiasts used to say that sometimes they would buy altcoins to churn extra money, which they would then put back into Bitcoins. This is not about hedging but about investing in highly speculative and unpredictable assets.

A Breakdown of the Hedging Strategy

Real hedging strategies in the world of Bitcoin mean that an investor first holds a certain amount of Bitcoins in their portfolio. For the past decade, Bitcoin's annual return on investment (ROI) has been 146%.

Some argue that the percentage of the investor's portfolio's assets allocated to Bitcoins must be just 1%. However, the figure of 1% of total assets in this portfolio seems too conservative, especially after the launch of Bitcoin ETFs on the largest world market, the U.S., and could be raised to at least 2%. In fact, the optimal allocation may be closer to the 10-year average inflation rate in the investor's home country.

We know that a typical investor's 60/40 portfolio, consisting of 60% stocks and 40% bonds, has not performed well. Over the last 20 years, this portfolio has generated only an average return of 7.6%. Moreover, a modified version of this portfolio, comprising 60% equities and 40% gold, has outperformed the classical 60/40 portfolio by less than 3%. In contrast, the annual return on investment in gold over the past decade has been a mere 42 times less than the return on investment in Bitcoin.

We see the real crisis of classical investment strategies. Bonds and gold still play a role, but they are no longer the key diversification anchor. Bitcoin and Bitcoin-related assets are increasingly taking on this role.

So, 60% of an investor's money can still be invested into stocks, trying to identify the best performers and rising stars. The remaining 40% of the portfolio can be split, with half still represented by government and corporate bonds with credit ratings of A- or above. From the remaining 20%, at least 2% can be invested into Bitcoin.

The 18% can be constituted of Bitcoin-related assets such as shares in Bitcoin ETFs and stocks of public miners. In July, 4 out of 19 Bitcoin ETFs in the U.S. have shown spectacular growth in YTD terms, about +48%, including BlackRock's iShares Bitcoin Trust, Fidelity Wise Origin Bitcoin Fund, ARK 21Shares Bitcoin ETF, and Bitwise Bitcoin ETF Trust.

Bitcoin Mining Stocks Performance

The cryptocurrency narrative has been dominated by the likes of Dogecoin and pixelated primates, but meanwhile, astute investors are turning their attention to U.S.-listed Bitcoin miners, a different corner of the digital asset landscape. These publicly traded companies have been quietly building a fortune, with their collective market capitalization skyrocketing to $23 billion by June. Moreover, they've been quietly outpacing Bitcoin's performance, a feat that Wall Street insiders would be wise not to ignore.

Furthermore, they're not merely unearthing digital gold – they're laying the groundwork for the future of artificial intelligence. Their growing influence within the cryptocurrency market is undeniable. A watershed moment occurred with the announcement of a partnership between Core Scientific and CoreWeave, an AI company. This partnership represents a huge 12-year deal between Core Scientific, a heavyweight in the mining industry, and CoreWeave, a cloud computing powerhouse, for a staggering 200 megawatts of computing power. So Core Scientific is positioning themselves as a major player in the AI computing space.

Now, let's look at the wild ride of Bitcoin mining company stocks. The shares of Core Scientific were relisted on January 24th this year. On the first trading day, they faced a drop of 40.5%. However, since then, they have skyrocketed by 85.4%.

The most spectacular success occurred with TeraWulf, whose capitalization has gained 132.5% since the start of the year. Other stars include Iris Energy (+110.2%), CleanSpark (+45.5%), Hut8 Mining Corp (+23.6%), Bitdeer Technologies Group (+17%), and Cipher Mining (+13.8%).

However, not all public Bitcoin miners have demonstrated a rise: Bitfarms (-8.25%), Marathon Digital (-14%), Bit Digital (-15.6%), HIVE Digital Technologies (-26.2%), Riot Blockchain (-37.6%), and London-based Argo Blockchain plc, whose shares are listed on the Main Market of London, lost 68.1%. Its ADRs, as well as those of Canadian Bitfarms and Hut 8 Mining, are tradable in New York. The stocks of Bitfarms and Hut 8 Mining are primarily listed on the Toronto Stock Exchange. Among Canadian Bitcoin mining-related stocks, there are also SATO Technologies Corp (-44.6% YTD), Digihost Technology (-39.8%), and DMG Blockchain Solutions Inc (-18%).

The Framing is a Key

Almost all mentioned Bitcoin miners are expanding their activities in 2024. Riot Platforms, Bitfarms, CleanSpark, and Cipher Mining boosted their hashrate in June. The US Bitcoin mining sector increased its share of the world Bitcoin production to almost 21% in June, up 2% just for one month.

At the same time, some public Bitcoin miners are facing a sell-off from stock traders. What went wrong with these companies? The framing is key. A success story on the stock exchange is not only about facts and figures but also hinges on the skill of Investors Relations corporate departments to communicate essential data to investors and inspire them, tuning into their dreams and expectations. It's not least important than the corporate hash rate and Bitcoin actual production, fleet efficiency, and the electricity price for 1 kWh.

Anyway, most stocks of Bitcoin miners are slated to rise in the near future, so there is a case for nuanced selected shares in the portfolio. Such a portfolio is possible to give a huge investment return.

AI Boom and Bitcoin Mining Stocks

The AI boom is a very thrilling case when we start thinking about the data centers Bitcoin miners possess. Forget gold rushes, Wall Street's eyeing a new frontier: repurposed Bitcoin data centers. Soaring AI demand needs massive data centers, mirroring the miners' insatiable appetite for energy. Investors are scrambling to fill the AI infrastructure gap, and existing Bitcoin data centers are a perfect fit. Core Scientific's mega-deal with CoreWeave is a prime example, and the phone's ringing off the hook for other miners.

This high-performance computing play will imminently create a M&A frenzy in the Bitcoin mining sphere, fueled by limited data center options and surging AI demand. Bitcoin's recent halving has squeezed miners, making them hungry for new revenue streams. Investment funds see an opportunity to scoop up these distressed miners and turn their data centers into AI havens. But not all Bitcoin miners are created equal. Some will stick to pure Bitcoin mining for now.

Anyway, the stocks of Bitcoin miners will be in rising demand since they reflect one of the perfect business models: investments into innovative equipment (Bitcoin miners) and mining of one of the innovative hedge assets, Bitcoin. The largest Bitcoin miners effectively cope with expenses. The average tag for mining Bitcoin, after sparking just a few days after the April halving, is now on a declining trend. The more powerful Bitcoin miners stay in the game with the average cost of Bitcoin production less than $42,000. Other players can be bought out.

At the Dawn of a New Era

The AI boom, with the interest in data centers created by Bitcoin miners, means that the demand for relevant equipment gets an additional boost. This understanding only strengthens the case for setting up an investor's portfolio in which the stocks of Bitcoin miners must have their place.

Actually, we are at the dawn of a new era of stock stars. The famous Magnificent 7 has already played its role in financial history. Those tech grands that quickly understand that they must rush into M&A in the Bitcoin mining sphere will withstand the looming drastic correction of S&P 500 and Nasdaq Composite.

Now we have a historical Google moment. Recall that in 1998, Yahoo! refused to buy Google for just US$1 million. The public Bitcoin mining stocks are still too undervalued and still have a big promise, so there is no reason to drop such an opportunity to invest in them. There is no doubt that before the next Bitcoin halving occurs, we will see the first $1 trillion-valued Bitcoin miner. Most of those who sell Bitcoins and Bitcoin miners' stock end up regretting it. They are left to rebuy at a higher price.