Crypto Miners Prep for Extended Winter While Margins Contract

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Crypto miners are hunkering down for a possible squeeze as rising costs, swinging Bitcoin prices, and now a war in Ukraine threaten to erode the industry’s substantial profit margins. 

Companies are tapping debt markets, shoring up balance sheets and credit lines, and even filing to sell shares in order to raise more cash. Marathon Digital Holdings Inc.Hut 8 Mining Corp. are among the most recent companies to reach for planned stock sales, and a just-in-case move could prove prescient with the price of Bitcoin hovering around $41,000.

It’s a tough atmosphere that could see an industry shakeout, reminiscent of the 2018 bear market that saw the price of the world’s largest digital asset collapse to nearly $3,000. With Bitcoin prices now moving in the opposite direction of global processing power, the pressure is on. And while profit margins are still over 70% for the bigger players -- making Bitcoin mining one of the most profitable industries, comparable to luxury goods and pharmaceuticals -- leaders of some of the largest companies say they’re arming themselves against what-if scenarios.

“Since I took the helm 16 months ago, we’ve taken a balance-sheet first approach,” Hut 8 Chief Executive Officer Jaime Leverton said. “I started focusing on diversification knowing this business is cyclical and because we wanted to be sure we were better prepared for future compression.” 

The price of Bitcoin would still need to fall substantially for miners like Hut 8 to even consider significant operational changes or selling their coin stockpiles. But the magic number, known as a breakeven rate, varies by company. Hut’s breakeven rate stands just under $18,000 as of their most recent quarter, while Riot Blockchain Inc. has a rate of $10,000 and Marathon’s is as low as $5,000. Profit margins exceeded 90% at some companies when Bitcoin was at a record high, according to analysts.

Russian President Vladimir Putin’s invasion of Ukraine has cast a pall over global markets, already reeling from tightening monetary policy in the face of accelerating inflation. But it’s also thrown a curve ball to cryptocurrencies as the war has prompted speculation that digital assets could gain favor amid the uncertainty. Moving in lockstep with Bitcoin, shares of Marathon, Riot and Hut 8 have all stabilized this month after each had plunged more than 60% from highs in November.

Surging costs stemming from the war add to the pressure on breakeven rates, with electricity often accounting for roughly half of overhead expenses. At the same time, a potential drop in mining activity in Russia -- similar to when Beijing banned crypto mining and trading -- could allow the biggest mining companies to go on the offensive. In fact, Marathon CEO Fred Thiel said he is looking for signs of rigs going offline that could potentially lower the global network hash rate, a measure of all miners’ processing power. 

Read more: Bitcoin’s Price Tumble Tests Resilience of Crypto Miners

“In this crisis, we will likely see a slight dip in global hash rate. If you go back to last year, when the change in China happened, there was an almost 50% dip over a couple months before climbing again,” he said.

Global hash rates have been especially volatile since Russia’s invasion of Ukraine, according to BTIG analyst Greg Lewis, who observed a drop over the first weekend before rebounding again. He notes that Russia has a 15% share of global hash.

“Miners that keep working regardless of whether they are big or small do better when global hash rates decline,” Lewis said. For example, if global hash rates dropped by 50%, regardless of whether a miner owns 1% of global hash or a fraction of that, they would each see their share of hash, double.

When asked whether Bitcoin trading sub-$20,000 would force companies to chart a different course, away from their massive expansion plans this year or toward selling their Bitcoin stockpiles, Riot Blockchain chief Jason Les pointed to new tools made available over the recent crypto boom in addition the company’s well-capitalized balance sheet and relatively lower-cost operations. 

“We plan to continue on our existing expansion plans no matter what the market conditions are,” Les said. “As the industry matures, there are more and more tools at a miner’s disposal for financing.”

That’s the difference between past “nuclear winters,” when the price of Bitcoin has dropped sharply, and the next one, whenever that might be: new tools. Miners can secure credit lines purely backed by their digital assets. They can lend, stake and hedge to generate rewards from their coins, or protect them. Plus, a more mature and mainstream industry also allows miners to partner with companies in other industries, like gaming or energy. And they can explore new projects that allow them to mine Ethereum blockchain while getting rewarded in Bitcoin.

“Our Bitcoin holdings have become increasingly valuable as the market matured. A portion of our Bitcoin earns yield, which is pure Ebitda. We can use it as collateral to access debt markets if the need arises,” Hut 8’s Leverton said. “I know Michael Saylor made it famous, but we’re the OGs of hodling.” 

That means the biggest, diversified miners are hanging onto their coins, even as prices fall, and continuing to plug in new equipment, or “lighting up rigs” as they say, so they can mine more, at a faster clip. 

“For us, it’s pedal to the floor and growing,” Marathon’s Thiel said. Indeed, an early earnings report showed lower than anticipated Bitcoin production in November as a result of maintenance issues, but fourth-quarter cost to mine was better than expected.

— With assistance by Jialiang David Pan