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  5. MISC: Hello Peter, With the bitcoin halving, the operating profits decrease for the miners but the price of the product increases. [Miscellaneous]
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Q: Hello Peter,

With the bitcoin halving, the operating profits decrease for the miners but the price of the product increases. As well, the asset value of their inventory increases.
Smaller miners get squeezed out? Sell the smaller miners or wait for them to be bought out at a premium ?
In what proportion would you invest in bitcoin etf and bitcoin miners?
Would you suggest holding a full position in bitcoin and the miners?
Too many questions but I look forward to you helping me sort it out.
Regards
Rajiv
Asked by Rajiv on March 18, 2024
5i Research Answer:

The bitcoin halving will essentially cut miner margins in half, however, historically the 'halving' event is positive for the price of bitcoin as there is less sell pressure, and thus the increasing price of bitcoin helps to offset the margin pressure on miners. Most miners are indeed holding bitcoin on their balance sheets today, which helps to bolster balance sheets in events like the halving.

Smaller miners who have less access to the capital markets for debt financing, or have outdated, less efficient mining rigs, can see more pressure on profits, thus there is more downside potential in the smaller mining names.  

We expect to see some of the smaller miners selling machines following the halving, as it is unprofitable immediately following the halving. We could likely see larger miners picking up these machines at a discount. While there could be some consolidation in the industry, this bitcoin cycle is different from the last for miners in that most miners hold bitcoin on their balance sheets today, whereas this was not the case at the last halving in 2020. We feel this sets up even the smaller miners much better today as lots of small miners have market caps close to the value of their bitcoin holdings, which helps to keep them well-capitalized in events like the halving. 

Bitcoin has proven to be a much better store of value than the bitcoin miners, historically, however, the miners offer more upside potential (beta) in a rising, bull market. While we cannot personalize responses, we would prefer to hold a significantly larger portion in spot bitcoin through the ETFs than bitcoin miners, but a small holding in the miners can offer upside potential in a risk-on rally. Position sizing is unique for each investor, and these assets are highly volatile and uncertain.