Falling down cryptocurrency illustration concept shows the graph falling down with the symbol of bitcoin that shine on the dark background for creating the financial background.

getty

With Bitcoin’s price down some 70% since its all-time high, Bitcoin mining profitability (what we miners call “hashprice”) is at its lowest level since Q4 2020–right before the last bull market went into full swing.

Adding insult to injury, energy prices are rising across the board, so a Bitcoin miner’s primary cost is going up regardless of its energy mix while the price for the commodity they are producing, (BTC), is going down.

The pressure is driving public bitcoin miners to sell their BTC inventory into a down market and trim their hashrate projections. Miners in the private realm are doing the same, and many are also selling Bitcoin mining machines in a further bid to free up capital and cover costs / debts.

Crypto winter is here, and Bitcoin miners are going cockroach mode to survive worsening mining economics.

Broader Context: Bitcoin Miners Go From Best Year Yet to Bear Market Threat

2021 was the most lucrative year for Bitcoin miners yet. They collectively raked in $16.75 billion in 2021, compared to $5 billion the year prior and $5.47 billion in 2018. In North America, this boom was partly catalyzed by China’s mining ban, which drove investment dollars and the bulk of China’s mining industry to the continent. The ban also took half of Bitcoin hashrate offline, and the reduction in competition led to a uniquely profitable summer for plugged-in miners.

The bull market also stirred up a frenzy of expansion, as old and new miners alike sought to take advantage of BTC’s soaring prices and a low interest rate environment in a race to grow and take advantage of economies at scale.

Plenty of miners took on debt to finance new equipment when these ASICs were at all-time high prices. A few examples include Marathon’s $870 million ASIC purchase and Core Scientific’s purchase of 112,000 S19 series machines last year. (It’s worth noting that these financing deals have continued into 2022, as well).

Outlooks and Implications: Bitcoin Miners Sell BTC to Stay Nimble

All of that has changed with the bear market. Now, as Bitcoin’s price continues to drop, Bitcoin miners are having to pay down debts, ASIC futures orders, and other costs that they incurred during the bull market. Many have turned to selling BTC holdings that they minted or bought in the bull market to pay for costs.

This chart from Arcane shows the percentage of production sold by publicly-traded miners each month, which comprise approximately 20% of total hashrate. There was a massive jump in May, which saw miners sell off virtually everything they earned.

Public bitcoin miners sold their entire May harvest

Arcane Research

When we include on-chain analysis to get a look at private miners as well, we see that they have collectively sold some 25k BTC since the beginning of June (or roughly $640 million given June’s average BTC price of $25,600). 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 selling is a combination of newly minted coins and BTC reserves, though the exact mix per miner will vary.

BTC Supply Held by Refined Set of 1-Hop Miners

Coinmetrics

Additionally, miners are beginning to liquidate mining ASICs that they can’t put to use to free up cash flow. At the start of May, a new generation miner like the Antminer S19 sold for roughly $7,100. Now, we are seeing them priced for as low as $3,100, and all signs lead to lower prices still. (For reference, an Antminer S19 sold for roughly $2,000 at the end of 2020).

Decision Points: Where Can Investors Find Value in the Bear Market?

Bitcoin miners, both public and private, will have to get lean from a capital perspective to survive the bear market and be judicious about future plans for expansion. There will also be reductions in manpower, but they are unlikely to be headline numbers akin to major exchange layoffs because miners employ smaller workforces.

Indeed, some of the largest public miners are already walking back their end of year hashrate estimates as operational costs rise and revenues decline such as Core Scientific, Riot and Bitfarms.

Crypto miners are reducing hash rate projections for 2022

Luxor

Investors should look for value in public bitcoin miners which are running lean operations. That’s to say, those with smaller levels of debt and lower operational cost will fare better in the coming bear market than those who took on too much debt last year.

Investors can use approaches like the Enterprise Value / ASIC Value Ratio, a new metric devised by Luxor’s Hashrate Index team. With this metric, a company’s enterprise value (EV) combines a company’s equity value and debt. When we evaluate EV next to a miner’s active machine value, it shows us which mining stocks are trading at higher value compared to its productive assets (the mining machines). This allows investors to gauge how much they are paying per share for both exposure to a Bitcoin miner’s productive assets (their machines) and liabilities. It is better for a miner to have a lower value because that means it is less leveraged.

The EV/ASIC Value Ratio is replacing the previous industry standard, the Price/ASIC Value raito, 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 portion of its BTC holdings to cover the covenants on some of its loans). On the other hand, two companies that perform well under this new metric are Riot and Cleanspark, indicating healthier or less encumbered balance sheets.

The EV/ASIC metric is favorable to Riot and Cleanspark

Luxor

Finally, it is helpful to compare the EV/ASIC ratio to each company’s stock performance so far this year. Although it is difficult to assign causation, perhaps it is not a coincidence that Riot and Clearspark are outperforming Marathon and Core Scientific this year.

Clearspark and Riot are outperforming Marathon and Core Scientific

TradingView

Of course these numbers do not provide an entire picture of a company’s financial health and outlook, but it is a healthy step forward.

Source: Tradingview