Miners Remain Unfazed by Crypto Sell-Off, Expect More M&A
While some miners may face difficulty raising equity or staying as profitable, many feel confident they can navigate the current downturn.
The stocks of publicly traded crypto miners have slumped amid the recent sell-off in bitcoin and the broader market as the U.S. Federal Reserve prepares to raise interest rates. However, industry participants remain optimistic about the sector’s outlook and see the potential for consolidation among the miners.
Among the crypto-linked stocks, crypto miners are most exposed to the price movements of the digital assets they mine. Given the recent carnage in bitcoin and other cryptocurrency prices, some of the stocks have lost more than 50% of their value since their peak last year.
Viridi Cleaner Energy Crypto-Mining & Semiconductor ETF, an exchange-traded fund with heavy exposure to miners, has fallen more than 60% since its November peak. The slide coincided with the price of bitcoin, the largest cryptocurrency by market capitalization, at one point falling more than 50% since its November all-time high. The miners and overall market saw some relief heading into Wednesday’s U.S. Federal Reserve policy statements.
Moreover, with fear ruling investor sentiment, the access to capital that miners enjoyed last year has somewhat dried up, particularly for the companies that have recently gone public or are planning to do so. Most recently, bitcoin miner Rhodium Enterprises postponed its initial public offering that valued the company up to $1.7 billion due to market turbulence.
“Miners that are more dependent on equity may struggle now because the markets aren’t as bullish as they were,” said Matthew Schultz, executive chairman of bitcoin miner CleanSpark (CLSK).
Furthermore, the Bitcoin network’s hashrate and difficulty recently reached all-time highs, making it harder for miners to earn rewards for validating transactions. Meanwhile, hashprice, a measure of miners' daily revenue per terahash of computing power ($/TH/day), fell near $0.18 from its November peak of around $0.40/TH/day, according to data from Hashrate Index.
However, miners remain unfazed by the crypto market rout as most are still making healthy profits even as bitcoin hovers around $35,000 levels. “The current price of ~$30K does not have a significant impact on the economics of bitcoin mining given that the cost to mine a bitcoin for most industrial scale mining operations in North America is much less than that,” Schultz said.
While the miners that have higher costs are likely making less profit at the current bitcoin price, those profits are still not as low as in the most recent bear market that began in 2018. During that bear market, hashprice hit a floor of $0.07/TH/day according to Juri Bulovic, head of mining at Foundry. Foundry is a subsidiary of Digital Currency Group, which is the parent company of CoinDesk.
“That seemed to be the equilibrium level whereby the highest cost miners became unprofitable and were forced to shut down their operations, and lower cost miners remained operating profitably,” Bulovic noted.
Moreover, the recent correction seems to be less severe than previous major sell-offs, according to Fred Thiel, CEO of Marathon Digital (MARA), one of the largest publicly traded miners. In prior bear market cycles there was a 70% decline in the price of bitcoin in 2013 and about an 85% drop in 2018. One reason for this is that the current down market has more institutional investors investing in crypto-linked stocks, which reduces volatility over the longer-term, Thiel said.
To be sure, a prolonged bear market will have some negative impact on the market. The miners who have access to cheap power and newer, more energy-efficient mining computers will be able “rise to the top, while less efficient miners may feel some pain,” said CleanSpark’s Schultz.
Such a down cycle will also change investors' appetite for risky assets, limiting access to capital for public and non-public miners. “In this environment, I think you should expect to see a certain amount of consolidation in the mining space,” said Marathon’s Thiel.
In a relatively young industry with rising competition, expansion is one of the keys for miners to remain profitable. However, with limited access to capital, M&A will likely become more pronounced among cash-strapped miners to fund their growth or production goals. And miners that have orders for new machines but haven’t been able to deploy their rigs yet, as well as companies that don't have the capital to pay for the machines they have already ordered, could become attractive for potential buyers, Thiel said.
CleanSpark’s Schultz echoed Thiel’s assessment, noting that “if prices remain low, we expect to see consolidation surrounding miners that don’t have a sustainable energy strategy and favorable power purchase agreements.”
For longer-term investors, the recent pullback in the stocks of crypto miners might present a buying opportunity, said Wall Street investment banking firm DA Davidson’s analyst Christopher Brendler in a research note.
“We see this as a healthy correction reducing leverage and speculation without overly painful volatility,” he wrote. Brendler added that at their current valuations, crypto mining stocks have “materially better risk/reward” despite investors’ concern about how the companies will fund their growth plans.
“While access to capital to continue investing in growth is a concern, it is so much better now than even just six months ago, and we're optimistic about a near-term recovery in BTC,” Brendler added.
Marathon’s Thiel likewise remains bullish on the longer-term prospect of the mining sector and bitcoin as a whole, despite short-term volatility. “I’m still very optimistic about long-term growth prospects of the industry and bitcoin and for what all the good that bitcoin is going to bring to the world,” he said.
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