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Before the approval of spot bitcoin ETFs such as iShares Bitcoin Trust (NASDAQ: IBIT), traders typically looked to Bitcoin miners and cryptocurrency exchanges like Coinbase Global Inc. (NASDAQ: COIN) to capitalize on rising Bitcoin prices.
When Bitcoin's price surged, so did the stocks of Bitcoin miners in the business services sector.
Positive Correlation Between Bitcoin Miners and Spot Bitcoin Prices
Bitcoin's impressive rally lifted several crypto-stocks. A clear positive correlation existed between bitcoin prices and bitcoin miners like Marathon Digital Holdings Inc.
(NASDAQ: MARA), Riot Platforms Inc. (NASDAQ: RIOT), Bit Digital Inc. (NASDAQ: BTBT), Cipher Mining Inc. (NASDAQ: CIFR), and TeraWulf Inc.
(NASDAQ: WULF). Typically, the momentum started with Coinbase, followed by Marathon Digital, Riot Platforms, and others in succession.
The logic was simple: as spot bitcoin prices rose, bitcoin miners would generate higher profits as the value of the bitcoins they mined increased.
This trend is similar to gold mining stocks rising when the spot price of gold climbs.
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As the bitcoin rally intensified, so did the miners, until an interesting trend emerged.
Negative Correlation Materializes
Around late February, as bitcoin prices reached yearly and all-time highs, the miners began to diverge. Interestingly, as bitcoin prices soared, the miners often opened with a price gap only to experience significant sell-offs after the markets opened.
Many traders initially believed the positive trend would continue, only to be surprised by the divergence.
They continued to add to their long positions in bitcoin miners, thinking they were getting a good deal as bitcoin prices continued to climb.
However, as bitcoin continued to reach new all-time highs, the bitcoin miners continued to decline without any sustained rebounds.
To complicate matters, COIN often continued to rise with bitcoin prices, while stocks like MARA, RIOT, BTBT, and other bitcoin miners continued to sell off.
The Day the Correlation Died
The divergence became so pronounced that it can be traced back to a specific date when the correlation essentially vanished: February 28, 2024. As bitcoin and COIN prices surged, the bitcoin miners plummeted.
This trend persisted through March 2024.
Traders attributed the divergence to potential earnings reports, rumors, or significant short sellers, but there is a logical explanation for the sell-off.
It is related to an event that occurs every four years called a halving.
Only 21 Million Bitcoins Will Ever Exist
Bitcoin has a limited supply, with only 21 million bitcoins ever to be produced. Once the 21 millionth bitcoin is mined, there will be no more.
This contrasts with fiat currencies, which can continue to print money, leading to inflation and a decrease in purchasing power.
Bitcoin avoids this by ensuring that only 21 million bitcoins will ever exist. Currently, there are only around 1.35 million bitcoins left to be mined.
What is a Bitcoin Halving?
To further control inflation, the creator of bitcoin, Satoshi Nakamoto, implemented the halving. Every four years, or 210,000 blocks, bitcoin reduces its payout rewards to miners by half.
The initial payout was 50 bitcoins, halved to 25 bitcoins on November 28, 2012, then to 12.5 bitcoins on July 9, 2016, and further halved to 6.25 bitcoins on May 11, 2020. On April 17, 2024, it will be halved again to 3.125 bitcoins.
Why Does This Matter for Miners?
Imagine you're a gold mining company and told that despite spot gold prices being at $3,000 an ounce, starting April 20, 2024, you will only receive 50% of that amount moving forward.
How would you feel? This is the scenario for bitcoin miners.
They will be earning 50% less than they are currently, facing a 50% reduction. Consequently, the market began to factor in the reality of lower proceeds for bitcoin miners starting on February 28, 2024.
Historically, bitcoin miners have experienced sell-offs after the halving event, as investors realized that revenues would be halved.
Eventually, the miners resumed a positive correlation months after the halving.
This could be the case again, but only time will tell.