Mining Company Stocks: The Pros and Cons
Mining forms the backbone of blockchains that use computer nodes to reach consensus through the Proof-of-Work algorithm, powered by devices such as ASICs.
Mining secures the addition of blocks to the network, generates new coins within their preset issuance, protects blockchains from hacking, and maintains decentralization.
Investing in mining company stocks is an alternative for those who want to profit from cryptocurrency “mining” but don't wish to invest in setting up a mining farm and wait years (in the best-case scenario) for it to become profitable.
Companies providing PoW blockchains with network rewards started emerging in 2017 or earlier. However, a record number of registrations occurred between 2020 and 2022 when the crypto market experienced an upward trend, and solo mining difficulty reached its peak. Investors now have a choice of at least 20 stocks in this area, primarily listed on Nasdaq and the Toronto Stock Exchange.
The top mining company stocks include:
- Riot Blockchain (RIOT);
- Marathon Digital Holdings (MARA);
- Cipher Mining (CIFR);
- Canaan (CAN);
- Hut 8 Mining (HUT).
Advantages of Mining Company Stocks
Attractive aspects of mining company stocks include:
- Low entry barrier compared to solo mining;
- High liquidity;
- Low commissions;
- Potential for significant price growth.
In a bear market, a bundle of these securities would be much cheaper than cryptocurrency mining equipment. Additionally, using such equipment would involve electricity costs. Overall, setting up a mining farm is more complex than reviewing the issuer's financial statements and buying their shares.
High liquidity and low commissions enable investors to comfortably hold securities in the short and medium term. However, this advantage mainly applies to companies with a market capitalization of at least $1 billion.
According to Hashrate Index specialists, if BTC surges by 100%, mining company stocks may increase by approximately 200%. This correlation is evident in the charts. Bitcoin has risen by 69% since January 2023, while Riot Blockchain shares have increased by 185%. This characteristic of securities attracts traders who want to boost their profits from BTC positions.
Disadvantages of Mining Company Stocks
The main concerns that deter users from purchasing such securities are:
- High financial risks;
- Presence of a counterparty;
- Company's administrative expenses.
High potential profits come with equally significant possible losses. Every investor is aware of this rule. For example, when the market declined in 2022, mining company stocks plummeted by more than 90%.
Counterparty risks require you to trust the company's management and the data they provide.
Finally, issuers involved in Bitcoin and other cryptocurrency mining allocate a considerable portion of their income to administrative expenses (electricity payments, equipment repairs, ensuring proper working conditions, etc.). As a result, they significantly fall behind in terms of profitability when compared to Bitcoin and other popular digital currencies in the long run.
Mining company stocks occupy a notable position among financial instruments, but for most users, buying BTC is a more appealing choice. We also recommend looking into passive cryptocurrency “mining” methods, such as cloud mining.
Please note that we do not provide financial advice; this article is for informational and educational purposes only.
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