Ecoinometrics - Bitcoin miners: where are the opportunities?

Refining criteria for betting on miners.

A couple of weeks ago we looked at the Bitcoin miners stocks as a potential source of asymmetric bets with more upside than Bitcoin itself.

If you haven’t read it yet go back and check it out. Because our conclusion was that while there is a lot of upside in theory, you would need to pick a subset of all the miners to make sure the expected value is greater than betting on Bitcoin directly.

Today we follow up on that by refining our criteria for which Bitcoin miners are the best candidates for this asymmetric bet.

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Bitcoin miners: where are the opportunities?

If you expect Bitcoin to do a 5x to 10x over the next 5 to 10 years then given the institutional capital flowing in the space you’d expect that at least some miners will 100x.

Now if you want to take this bet the problem is that you don’t want to spread your capital too much. As of today there are about 13 investable miners stocks you might put your money on.

If on average those 13 miners stocks 10x at the same time as Bitcoin does then there is some basis for investing by spreading your money evenly among them. But obviously you might as well buy Bitcoin if this is all you get. 

So what you really want is select a subset of those 13 miners whose average growth will be some multiple of Bitcoin’s growth over the same period. Say 50x when Bitcoin 10x or 100x when Bitcoin 10x. Depends on what kind of returns you are looking for.

Which means we’d like to select a subset of the miners stocks using some criteria so that you are more likely to achieve high multiples compared to a simple Bitcoin bet. 

One approach for doing that is to do two things: 

• Try to avoid picking stocks that are likely to be losers.

• Try to avoid stocks that have less growth left in them.

Ok, but how? Here is one attempt at doing that.