Throughout 2023, Bitcoin mining stocks have been on a roll. Marathon Digital Holdings is up a remarkable 130% year to date. Riot Platforms is up an even more impressive 160%. No surprise here, but these two Bitcoin mining stocks are getting all the attention from investors right now.

But what if I told you that the best-performing Bitcoin mining stock this year was not Riot Platforms or Marathon Digital? Instead, it's Cipher Mining (CIFR 1.17%), which has skyrocketed in value by about 370% this year. Due to its relatively small size, Cipher Mining has flown under the radar of many investors. But should it be on yours heading into 2024?

A new investment thesis for Bitcoin mining stocks

Given that Bitcoin miners are most profitable when the price of Bitcoin is increasing, it's obvious why mining stocks are performing so well. Bitcoin is up about 70% this year, and that means the mantra for Bitcoin mining stocks in 2023 has been "bigger is better." The more mining facilities you have, the more mining rigs you have deployed, and the more Bitcoin you are able to mine, the better it typically is for your bottom line. When Bitcoin miners report monthly operational updates, the focus is almost exclusively on how much Bitcoin they've been able to mine.

However, this investment thesis for Bitcoin mining stocks could be starting to change. The next Bitcoin halving is scheduled for April 2024, and that landmark event is going to change what it means to be successful in the Bitcoin mining industry. In a halving event, the reward for mining a new block of Bitcoin falls by one-half. In other words, unless the price of Bitcoin rises or costs drop dramatically, Bitcoin miners are going to be making half as much money next year as they did this year. 

As a result, the emphasis is most likely going to shift to operational efficiency. The goal will be to become a low-cost producer. Analysts are already starting to warn that only the most efficient Bitcoin miners are going to survive. CNBC has called the halving an "extinction-level event" for the Bitcoin mining industry. It is quite likely that only the most operationally efficient miners with the lowest cost structures are going to make it. Everyone else is doomed to become a dinosaur.

Size vs. efficiency

And this is what makes Cipher Mining potentially attractive. In its latest research note for the Bitcoin mining industry, JPMorgan specifically pointed out that Cipher Mining has the lowest power costs in the industry. While JPMorgan put out underweight ratings for both Riot Platforms and Marathon Digital, it put out a neutral rating for Cipher Mining. The one knock against Cipher Mining was that it is "growth-constrained."

Translation: Cipher Mining is small. While Riot Platforms and Marathon Digital have market capitalizations of roughly $1.6 billion, Cipher Mining has a total market cap of less than $700 million. According to its latest operational report from September 2023, Cipher Mining has just 70,000 deployed mining rigs. By way of comparison, Riot Platforms has nearly 100,000 deployed mining rigs. Thus, it's easy to see why Cipher Mining has been overlooked in 2023. It simply can't produce as much Bitcoin as its larger rivals.

Invest in Bitcoin or Bitcoin miners?

The big question, of course, is what's going to happen in 2024. From my perspective, the Bitcoin halving is going to exert greater and greater pressure on Bitcoin miners to become as efficient as possible. The goal will be to produce Bitcoin at the lowest possible price. This is almost definitely bad news for Marathon Digital, which has the highest energy costs in the industry. But it could provide an opening for smaller, more nimble Bitcoin miners such as Cipher Mining.

However, given that investing in Bitcoin mining stocks is really just a leveraged bet on the future price of Bitcoin, one strategy might be to invest directly in Bitcoin. Yes, you are going to sacrifice some potential upside, but you also won't have to worry about picking winners in a highly competitive industry or trying to time each new Bitcoin cycle.

It really depends on your investment time horizon. If you are looking to maximize gains over a short- to medium-term time horizon, Bitcoin mining stocks could continue to outperform Bitcoin. But if you are a long-term investor, it might be easier and more profitable simply to invest in Bitcoin.