With the price of Bitcoin down 70% from its all-time high, the profitability of Bitcoin mining (what miners call “hashprice”) is at its lowest level since the fourth quarter of 2020, just before the last market bullish is in full swing.
Adding an insult to prejudice, energy prices are rising in all areas, so the main cost of a Bitcoin miner is rising regardless of its energy mix while the price of the commodity they are producing (BTC) is going down.
Pressure is leading public bitcoin miners to sell their BTC inventory in a declining market and cut their hashrate projections. Private miners are doing the same, and many are also selling Bitcoin mining machines in a further attempt to free up capital and cover costs / debts.
Cryptographic winter is here and Bitcoin miners are going into cockroach mode to survive the worsening mining economy.
Broader context: Bitcoin miners go from the best year to withstand the threat of the market
2021 has been the most lucrative year for Bitcoin miners so far. Altogether, they raised $ 16.75 billion in 2021, compared to $ 5 billion the previous year and $ 5.44 billion in 2018. In North America, this boom was partly catalyzed by China’s mining ban, which led to to invest dollars and most of the mining industry from China to the mainland. . The ban has also taken half of the Bitcoin hashrate offline, and reduced competition has led to an exclusively profitable summer for connected miners.
The bullish market has also sparked an expansion frenzy, as old and new miners have sought to take advantage of rising BTC prices and a low interest rate environment in a race to grow and take advantage of economies of scale.
Many miners went into debt to finance new equipment when these ASICs were always priced high. Some examples include the purchase of ASIC for $ 870 million from Marathon and the purchase of 112,000 S19 series machines by Core Scientific last year. (It is worth noting that these funding agreements continued in 2022 as well).
Perspectives and Implications: Bitcoin miners sell BTC to stay agile
All that has changed with the bear market. Now, as the price of Bitcoin continues to fall, Bitcoin miners have to pay off debts, ASIC futures orders and other costs they incurred during the bullish market. Many resorted to the sale of shares in BTC that they minted or bought in the bullish market to pay the costs.
This Arcane chart shows the percentage of production sold by listed miners each month, comprising approximately 20% of the total hashrate. There was a massive jump in May, which saw miners sell virtually everything they earned.
When we include chain analysis to take a look at private miners as well, we see that they have collectively sold about 25k BTC since early June (or about $ 640 million considering the average BTC price of $ 25,600 in June). Given that bitcoin produces 27,000 coins a month, this means that the mining industry has already sold almost the equivalent of a month’s production. As a result, the sale is a combination of newly minted coins and BTC reserves, although the exact mix per miner will vary.
In addition, miners are beginning to liquidate ASIC miners that they cannot use to free up cash flow. In early May, a next-generation miner like the Antminer S19 sold for about $ 7,100. Now, we see them priced as low as $ 3,100, and all the signs lead to even lower prices. (For reference, an Antminer S19 sold for approximately $ 2,000 in late 2020).
Decision points: where can investors find value in the bear market?
Bitcoin miners, both public and private, will need to improve from a capital perspective to survive the bear market and be cautious about future expansion plans. There will also be labor reductions, but they are unlikely to be headline numbers similar to large stock market layoffs because miners employ smaller workforces.
In fact, some of the largest public miners are already pulling back their year-end hashrate estimates as operating costs increase and revenues decline, such as Core Scientific, Riot and Bitfarms.
Investors should look for value in public bitcoin miners conducting lean operations. That is, those with lower debt levels and lower operating costs will fare better in the next bear market than those who assumed too much debt last year.
Investors can use approaches such as the Enterprise Value / ASIC Value Ratio, a new metric devised by Luxor’s Hashrate index team. With this metric, the business value (EV) of a firm combines the equity value of a firm e debt. When we evaluate EVs along with the value of a miner’s active machine, it shows us which mining stocks are traded at a higher value compared to their productive assets (the mining machines). This allows investors to measure what they are paying per share for both exposure to the productive assets of a Bitcoin miner (their machines). and liabilities. It is better for a miner to have a lower value because that means he is less leveraged.
The EV / ASIC value ratio is replacing the previous industry standard, the Price / ASIC Value ratio, which only compared market capitalization to hashrate. This provided an incomplete picture of a company’s financial health, which has now been remedied. Readers can see the difference below. For example, two companies with very high EV / ASIC values compared to their Price / ASIC value numbers are Marathon and Core Scientific. This suggests that they could see financial strain in the future (Core Scientific, for example, had to sell a large part of its stakes in BTC to cover the agreements on some of its loans). On the other hand, two companies that perform well under this new metric are Riot and Cleanspark, which indicates healthier or less taxed balance sheets.
Finally, it is useful to compare the EV / ASIC ratio with the stock performance of each company so far this year. While it’s hard to assign causality, it may not be a coincidence that Riot and Clearspark are outpacing Marathon and Core Scientific this year.
Sure, these numbers don’t provide a complete picture of a company’s financial health and prospects, but it’s a healthy breakthrough.