Summary There's a significant gap between the share price of the WGMI ETF and the current Bitcoin price. While Bitcoin miners may look like an appealing investment opportunity, investors should be aware of serious risks. The WGMI ETF looks interesting only if you bet on even more stretched bullish sentiment in the crypto space. Back in January, I initiated coverage of one of the newly-incepted Bitcoin ETFs, the Invesco Galaxy Bitcoin ETF (BATS: BTCO ) with a "Buy" rating. Since then, the BTCO gained +33% in just one month amid the rapid growth of Bitcoin itself. Now it's time to dive deeper and take a look at another Bitcoin-related ETF, Valkyrie Bitcoin Miners ETF ( WGMI ). In this case, I'm not so optimistic, as the upcoming Bitcoin halving event is beneficial for the Bitcoin price but not so positive for the mining industry. While there's a considerable gap between the WGMI ETF and Bitcoin price, this gap can narrow only in case if the market sentiment towards Bitcoin turns into a complete bullish craze. I assign a "Hold" rating for now due to the unattractive risk/reward profile of the WGMI ETF, but there are still factors that may drive the ETF's growth in the near term. WGMI ETF Overview The Valkyrie Bitcoin Miners ETF offers unique exposure to companies that are involved in the mining of Bitcoin. Bitcoin miners are the backbone of the Bitcoin network, required for processing transactions and ensuring the security of the network. Considering that the mining industry isn't that big, the WGMI ETF is a pretty concentrated ETF containing just 23 holdings, with Top-10 holdings representing over 84% of the ETF structure. Seeking Alpha Notable holdings of the ETF include CleanSpark (NASDAQ: CLSK ), an industry leader fully deserving the biggest share in the WGMI ETF. Interestingly, this ETF also includes Nvidia (NASDAQ: NVDA ), which is definitely not a Bitcoin miner and therefore can be only indirectly related to Bitcoin mining because the company sells mining chips . Another aspect I'd like to highlight is the high expense ratio and poor bid/ask spread of the WGMI ETF, which is unsurprising for niche ETFs like the WGMI. Seeking Alpha Bitcoin Halving Is A Double-Edged Sword For Miners The upcoming Bitcoin halving event in 2024 is poised to substantially impact the cryptocurrency market, particularly for miners. Halving, a pre-programmed event that reduces the reward for mining new blocks by half approximately every four years , aims to limit Bitcoin's supply over time. Every halving historically leads to an increase in the price of Bitcoin due to the reduced rate at which new BTC are generated, thereby constraining supply. Swanbitcoin Halving is a double-edged sword for Bitcoin miners. While it decreases the reward for mining, the potential price increase (assuming demand remains constant or grows) can significantly bolster mining profitability. However, the increased operational costs post-halving tend to drive industry consolidation, favoring larger, more efficient players. In the context of the WGMI ETF, this means that some industry players like CleanSpark will continue to perform well, and some companies, like HIVE Digital (NASDAQ: HIVE ), may struggle or even go bankrupt. Therefore, a cannibalizing effect of the post-halving consolidation may lead to mixed overall performance of the WGMI ETF. I strongly recommend reading this sector analysis made by a fellow contributor before considering the Valkyrie Bitcoin Miners ETF. All Hope For Sentiment Despite the resurgence of Bitcoin's price towards its historical highs, the Valkyrie Bitcoin Miners ETF has been trading lower than its 2022 levels. This disparity presents a compelling investment opportunity for risk-tolerant investors. Generally, the performance of companies involved in Bitcoin mining correlates with the price of Bitcoin itself, as higher prices can potentially lead to increased profitability for miners. The gap between the ETF's performance relative to Bitcoin can be attributed to several factors, including market sentiment, regulatory news affecting mining operations, or even investor skepticism towards ETFs based on the crypto industry. Since the inception of the ETF in 2022, the gap between the BTC price and the WGMI performance has only widened. TradingView Nonetheless, from a sentiment perspective, I still think there may be an upside for the WGMI ETF in the near term. Even though the sentiment now looks somewhat stretched, it's still far from the Bitcoin mania of 2021, when the Fear & Greed Index reached its historical high of 95 points. Alternative.me The halving event due to its extensive media attention may provide more fuel for the near-term growth of Bitcoin, with the WGMI share price catching up eventually. The Bottom Line The Valkyrie Bitcoin Miners ETF offers an interesting option for investors looking to get into the cryptocurrency space in a different way. Just like some investors prefer gold mining companies over gold as an asset class itself, a similar analogy can be applied to the WGMI ETF in relation to Bitcoin. However, investors should be aware that investing in anything related to crypto is usually extremely risky, so proceed with caution, size your position properly, and use stop-loss orders to limit a potential drawdown of a position.
