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Dwindling Trading Volumes Indicate Bitcoin Mining Stocks are Oversold

Trading volumes for bitcoin mining stocks are at historically low levels, indicating these stocks are oversold by exhausted market participants.
Dwindling Trading Volumes Indicate Bitcoin Mining Stocks are Oversold
Source: Tradingview

Trading volume is a helpful indicator that, together with price action, can give us some ideas on whether a stock is oversold or overbought. Put simply, high trading volume indicates that the market has a strong conviction in the direction in which a stock moves. Opposite, low and declining trading volume suggests the market is exhausted and running out of market participants to keep pushing the stock in the current direction, and a trend reversal might be near.

Bitcoin mining stocks have been in a downtrend since November 2021. At the same time, their aggregated trading volume has substantially declined, particularly compared to bitcoin’s trading volume. This article analyzes how bitcoin mining stocks’ trading volumes have developed over the past year and also shows how trading volumes materially differ between the highest - and lowest-volume stocks.

Mining stocks’ trading volumes relative to bitcoin are at record-lows

Bitcoin mining stocks are high-beta bitcoin investments, allowing investors to leverage their bitcoin exposure. Since bitcoin mining investors can choose between investing directly in bitcoin or buying bitcoin mining stocks, we can gauge the relative investor interest in bitcoin mining stocks by comparing their aggregate trading volume to bitcoin’s volume.

Although the bitcoin price has trended downwards over the past year, the daily trading volume has been relatively stable at around $4 billion and has even seen a surge lately, with volumes reaching up to $15 billion on some days. Due to the price decline, the bitcoin-denominated volumes have increased considerably, indicating that investors have scrambled to get out of the asset due to a tighter macro environment and crypto market-specific contagion effects.

Source: Tradingview

Interestingly, while bitcoin’s trading volume has been substantial over the past year, bitcoin mining stocks have seen dwindling volumes. Mining stocks’ share of bitcoin’s trading volume has trended down since bitcoin’s all-time high and is only 2% currently. At the peak in November 2021, investors flocked into bitcoin mining stocks, leading their aggregated volume to soar to 44% of bitcoin’s spot volume.

Their extreme trading volumes compared to bitcoin’s in November 2021 indicate that these stocks were overbought, particularly considering how sharply their trading volumes fell in December after the bitcoin price started declining.

In the same way, bitcoin mining stocks’ current meager trading volumes relative to bitcoin indicate that the market is exhausted and running out of sellers. Investors seem to have forgotten they can buy bitcoin mining stocks to get exposure to bitcoin. This has led to depressed mining stock valuations and some great opportunities for contrarian investors who want to enter this market early.

The current low volumes of bitcoin mining stocks mean that it only requires a slight increase in demand for these stocks to see massive price increases. If market sentiment improves, there might not be enough sellers left to accommodate all the buyers, which may lead to rapid price increases. A bitcoin price rebound may be the catalyst of such improved sentiment. Remember, such a rebound will happen quickly, and the contrarian investors who got in the earliest will reap outsized rewards.

Trading volume is concentrated among a small number of bitcoin mining stocks

Not only are trading volumes for the entire bitcoin mining sector low right now, but they are also concentrated among only a handful of these stocks. Since November 2021, Marathon has been responsible for 46% of the total trading volume, followed by Riot at 27% and Hut 8 at 7%. Together, these three companies have made up 80% of the sector’s trading volumes over the past year.

Marathon’s average daily trading volume since November 2021 is $215 million, meaning the stock has good liquidity and can accommodate significant stock purchases without the price moving too much. On the other hand, some bitcoin mining stocks are very illiquid, with four stocks seeing less than $1 million in average daily trading volume since November 2021. These stocks are difficult for investors to purchase without suffering considerable transaction costs.

Source: Tradingview

As shown in the first chart, mining stocks’ share of bitcoin’s volume has substantially declined over the past year. This decline is caused by bitcoin’s volume staying relatively flat while bitcoin mining stocks’ volume has decreased. This decrease is best shown by looking at the current 7-day average trading volume of bitcoin mining stocks, as shown in the chart below.

Source: Tradingview

Although they have declined from the average over the past year, the trading volumes of the biggest bitcoin mining stocks by market cap are still significant. Therefore, these companies will be the most attractive to bigger investors who need certain liquidity to enter the market.

A bitcoin mining portfolio should ideally consist of a core component of companies with strong trading volumes and liquidity, and some smaller holdings in quality companies with lower trading volumes which may see outsized stock price increases if the bitcoin price rebounds.

Conclusion

Trading volumes can give hints on whether a stock is oversold or overbought. More specifically, we can compare the trading volumes of bitcoin mining stocks to bitcoin’s volume to get a feel for the relative investor interest between the two assets.

Relative to bitcoin, mining stocks have seen declining volumes over the past year, indicating that these stocks are oversold compared to bitcoin. A bitcoin price rebound is all it takes for buyers to return to the market, and then there might not be enough active sellers, which could lead to rapid price increases for these stocks.

Although the sector as a whole sees dwindling trading activity, some of these stocks still have decent trading volumes. The highest-volume stocks are the likeliest to be purchased by the more prominent investors, while the low-volume stocks may see the quickest gains if the bitcoin price rebounds.