Bitcoin ETFs will clobber these three crypto stocks

Spot Bitcoin exchange-traded funds launched in the US this morning — a historic moment that made it easier than ever for investors to gain exposure to the top cryptocurrency.

But Bitcoin’s victory may end up being detrimental to crypto equities such as Coinbase, Marathon Digital, and MicroStrategy, according to analysts from Maple Finance and North Rock Digital.

The crux of the problem: These stocks have historically tended to act as proxies for traditional investors seeking Bitcoin exposure without using Bitcoin futures ETFs.

Now that Bitcoin spot ETFs are available in the US, these investors are likely to “rotate away from these less-than-ideal instruments and into the spot Bitcoin exposure they initially desired,” the analysts said.

Bitcoin went up 6% today to push past the $49,000 mark, before slumping back down to $46,000. MicroStrategy is down 4%, Coinbase 5%, and Marathon a whopping 14%.

And each company is dealing with its own set of unique challenges.

Intrinsic headwinds

“Coinbase is a good business no doubt but the ETFs bring a lot of new competition to the playing field,” Quinn Thompson, head of capital markets and growth at Maple Finance, told DL News.

The SEC’s ETF blessing has set the stage for a price war among the different fund managers. Cathie Wood’s Ark Invest is set to charge zero fees for the first year, while BlackRock is offering 0.12% for the same period, and rising to 0.25% after that.

Coinbase has told DL News that it is not worried about competition, despite analysts questioning the exchange’s high retail transaction fees.

Coinbase traded over $2.2 billion worth of Bitcoin in the last 24 hours, according to CoinGecko — a figure comparable to the inflows expected for the ETFs.

“Some estimates are calling for $2 billion to $4 billion of inflows to the new Bitcoin ETFs in the first few days of trading,” Thompson said. “This is a serious level of encroachment on a previously large moat in the US.”

Bitcoin mining companies like Marathon, meanwhile, have to contend with the upcoming halving — a mechanism by which the Bitcoin network slashes Bitcoin mining rewards by half. Scheduled every four years, the next halving is currently expected in April.

With Bitcoin block rewards halved, miner revenue will plunge — while their huge energy costs will remain the same, or even keep climbing.

“The halving poses a serious risk to profitability that can only be solved by either much higher prices — over $75,000 by my estimations — or much higher transaction activity and fees — at least double or triple from current levels,” said Thompson.

“It’s likely the higher cost producers will face some difficulties in the months following the halving,” he added.

While Marathon is one of the largest Bitcoin mining companies in the world, it also has some of the highest power costs in the industry, according to an October note from JPMorgan.

“This will force [miners] to issue more equity to extend their runway and dilute existing shareholders. It’s a tried and true playbook they continually run and should not surprise people,” Thompson said.

“Gold ETFs and gold miners both exist in public markets, and people invest in them for different reasons. If those can coexist, why wouldn’t Bitcoin ETFs and Bitcoin miners?” Charlie Schumacher, Marathon’s vice president of corporate communications, told DL News.

“Overall, we view this event as very positive for the industry as it is likely to bring more people into the space, therefore growing the size of the pie for everyone,” Schumacher added.

MicroStrategy’s stock, for its part, currently trades at a significant premium for the underlying book value of the business, the report said — referring to the value of the operating company in addition to the value of the 189,150 Bitcoins it holds.

However, the uncertainty surrounding MicroStrategy potentially unloading their Bitcoin holdings, combined with co-founder Michael Saylor’s recent sale of company stock — and the risk of additional downside pressure on it — makes the investment riskier than simply gaining exposure through a Bitcoin ETF, the analysts said.

The report compared MicroStrategy to Grayscale’s Bitcoin Trust, which also traded at a premium for years “only to reverse and trade at a discount when the asset fell out of favour due to better alternatives and worsening sentiment.”

Coinbase and MicroStrategy did not immediately return requests for comment.

Updated at 16:06 CST with comments from Marathon.

Tom Carreras is a markets correspondent for DL News. Got a tip about ETFs, crypto stocks, and Bitcoin? Reach out at tcarreras@dlnews.com