WGMI: Top 10 Holdings Tell The Tale (NASDAQ:WGMI)

With Bitcoin (BTC-USD) going virtually nowhere for six months and mining stocks struggling since July, it’s potentially a good time to find the right BTC proxy ahead of any potential seasonal breakout in both currency, as well as in cryptocurrency-related actions between now and the end of the year. In past cycles, we’ve seen miners generally deliver serious alpha when Bitcoin goes parabolic. Of course, this time may very well be different due to the existence of spot ETFs in the United States. Such products are meant to compete with mining companies for investment capital.

Annual performance

Since the beginning of the year, the price of Bitcoin is up just under 36%. Before the spot ETF conversion, the Grayscale Bitcoin Trust (GBTC) was one of the easiest ways to gain exposure to any growth in BTC. Those actions performed almost as well. Miners were much less convincing:

The Valkyrie Bitcoin Miners ETF (NASDAQ:WGMI) is actually down 6% year to date. It follows BTC, GBTC and other Bitcoin-proxy plays like MicroStrategy (MSTR) to a significant extent. In this article, we will go over the state of the mining sector and economy. We’ll look at the top holdings in the fund. And we’ll compare WGMI to two other crypto-stock ETFs that investors can choose from.

The health of the mining sector

Since mid-September, we are approaching a full fifth month since the block reward halving in April. To summarize, BTC is a fixed-supply cryptocurrency that is mined through proof-of-work consensus. For the cost of validating ledger transactions with electricity and equipment, miners are paid in BTC. In the future, this BTC incentive will have to come primarily from transaction fees. Currently, issuing new tokens is the main driver of mining revenue. However, since the supply of BTC is fixed, the issuance of new tokens cannot mathematically continue forever.

Every four years, we see that the mining reward from issuing new tokens drops by 50%. The most recent example of this was April 2024. The impact of these events is substantial. As long as the price of BTC remains the same – and actually decreased by half – miners see their cost of revenue practically double if they want to produce the same amount of BTC after the halving. Thus, many miners are trying to “cut their way out” of the decrease in BTC rewards, and the impact of this has been an explosion of the global hash rate:

Paradoxically, the more difficult it has become to generate BTC-denominated rewards from Bitcoin mining, the more we’ve seen machines continue to be turned on to compete for those dwindling rewards. Obviously, this is because the USD-denominated value of BTC generally increases over time. However, despite the increase in the USD price of BTC, the USD income generated from computing is currently at a minimum:

The chart above shows the five-year trend of the Bitcoin mining PH/s price. In early September, that price dropped below $40 PH/s per day. This is not a great sign if you are bullish on Bitcoin miners and speaks to the recent consolidation moves we have seen from companies like CleanSpark (CLSK).

Peers & Holdings

As far as I know, WGMI is the only ETF that is specifically structured to give investors exposure to the Bitcoin mining industry. However, there are additional funds that have both similar AUM to WGMI and similar holdings in Bitcoin mining stocks. These funds are the Fidelity Crypto Industry and Digital Payments ETF (FDIG) and the Bitwise Crypto Industry Innovators ETF (BITQ). For the sake of comparison, we will use each of these funds as WGMI peers.

Click to enlarge

Source: Seeking Alpha, Million Dollars

All three of these funds are actively managed with expense ratios that aren’t what I’d call too problematic given the turnover. WGMI has underperformed both the market and BITQ to date. In my opinion, the biggest difference between the funds is the concentration of the holders:

Click to enlarge

Source: Seeking Alpha

76.4% of WGMI is allocated to the top 10 positions and there are only 21 stocks in the fund. This is well below FDIG and BITQ. From a top 10 holding perspective, I actually don’t hate the portfolio construction approach I see given the mining economics I mentioned above:

I find these allocations quite interesting and indicate fund management that seems to be thinking about the future of the industry. At least five of the top seven companies in the fund are openly trying to build an HPC/AI computing segment in addition to BTC mining. Additionally, the industry’s largest company by market capitalization is only the fund’s eighth-largest holding. Thus, it would appear that a bet on WGMI is becoming as much a play for HPC data centers as it is for Bitcoin miners.

Closing thoughts

In this article, I have argued why I believe the Bitcoin mining space is experiencing a deteriorating economic situation. Thus, it’s no surprise to see most mining stocks and WGMI down year-to-date, even though Bitcoin and other Bitcoin proxies have performed quite well in 2024. As I see it, there are some ways out of this for Bitcoin. miners;

1. BTC price either has to increase exponentially, again,
2. Global exahash must fall as weaker miners throw in the towel,
3. transaction fees must replace supply issuance as the primary incentive for mining,
4. or companies simply need to turn to something else, such as AI/HPC

I suspect that almost everyone in this space is counting on #1 to come to fruition to some degree. And we’re clearly seeing push for number 4. Number 3 is unlikely in my opinion given the declining usage seen by daily active addresses on the chain. That leaves #2 as the most realistic path for industry leaders who aren’t branching out into other businesses.

There are questions that each individual investor must consider. Should investors buy WGMI and simply accept the possibility that some, or even many, of the companies in the ETF will fail over the long term? Should investors try to pick survivors individually? Or should we stay away from the sector? I won’t be presumptuous enough to answer this for you, as each reader may have a different strategy and pain tolerance. But I will say that I don’t think WGMI is the right way to play Bitcoin as a long-term investment.