3 Things to Know Before Investing in This Explosive Industry

History shows that during bull markets Bitcoin (CRYPTO:BTC) miners almost always outperform the cryptocurrency itself. But in the last few months, Bitcoin miners have been hit particularly hard, as investors flocked to spot Bitcoin ETFs as a means of gaining exposure to Bitcoin through the exchange; this was a role miners had previously served. To make matters worse, Bitcoin recently experienced its fourth halving, which halved the block reward paid to miners, effectively cutting off their main source of income.

For miners, in the absence of significant price growth, they face a serious challenge in staying afloat and keeping their stock prices high. While history shows that halvings often precede increases in Bitcoin price and bring many mining stocks with them, investing in this sector is not easy. Make sure you consider these three things before choosing a Bitcoin mining company for your portfolio.

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1. Plans to increase production

Faced with a significant drop in revenue, one of the clearest strategies to offset the impact of the halving is to increase mining production. Therefore, investors should prioritize companies with clear strategies and initiatives to grow their mining operations.

This requires investment in additional mining hardware, infrastructure and operational resources. Investors should look for companies that are committed to increasing their mining capacity and have concrete plans to expand their operations.

Often the easiest way to gauge how much a company plans to expand its capacity is to evaluate a metric known as hash rate. Measured in exahash per second (EH/s), the general consensus is that the higher the hash rate, the more Bitcoin a company can mine. While investigating a company’s potential is only part of the equation, investors should make sure they choose miners with clear plans to increase hashrate.

2. Efficiency is very important

While increasing production is essential to maximizing revenue, ensuring a company’s mining operations are efficient and cost-effective is equally, and arguably more, important.

Efficiency in Bitcoin mining is closely linked to the cost of electricity, one of the most significant expenses of mining operations. Optimizing efficiency can be achieved in three basic ways.

The first is access to cheap energy sources. With energy readily available at low cost, companies can power more computers to mine Bitcoin.

The second factor relates to mining equipment. Like any computer, older models generally consume more energy. Additional resources are also needed to prevent equipment from overheating. Companies investing in new miners are better suited to keep costs low. Not to mention, they are more skilled when it comes to Bitcoin mining.

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The third issue concerns pure commercial activities. Investors should focus on investing in companies with proven experience in managing maintenance costs, minimal operational overhead, and little financial liability.

When you add it all up, there’s a simple way to measure each company’s efficiency, like hashrate. Almost every company’s quarterly earnings statements include the average cost of mining one Bitcoin. In a perfect world, a company would have a high hash rate with a low average cost per Bitcoin mined.

3. Find an X factor

The majority of Bitcoin mining companies share more similarities than differences. But each has some features that make them unique. Let’s call them X factors. These differentiating factors can play an important role in helping investors evaluate and differentiate between mining companies.

These X factors can take various forms. For example, Riot Blockchain’s (NASDAQ: RIOT) unique energy consumption model sets it apart from the crowd. Based in Texas, Riot benefits from access to cheap, cheap energy. However, due to Texas’ unique energy grid, there is also the opportunity to sell excess electricity back to the grid if the cost of mining Bitcoin outweighs the potential profit.

Similarly, Marathon Digital Holdings (NASDAQ: MARA) stands out for its launch of Bitcoin sidechains, which represents a strategic move to diversify revenue streams and expand its business operations. Although still in its early stages, the potential for Bitcoin sidechains to generate additional revenue presents an exciting opportunity for Marathon and underlines its forward-thinking approach to innovation in the industry.

These X-factors are just two small examples, but they serve as important considerations for investors looking to identify potential winners in the Bitcoin mining industry. By carefully evaluating each company’s unique characteristics and assessing their impact on future growth and profitability, investors can make informed decisions and identify potential winners in the highly competitive Bitcoin mining industry.

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RJ Fulton has positions in Bitcoin and Riot Platforms. The Motley Fool has positions in Bitcoin and recommends it. The Motley Fool has a disclosure policy.

Halving and Bitcoin Mining: 3 Things You Need to Know Before Investing in This Explosive Industry was first published by The Motley Fool.