Bitcoin miners have been disrupted for over a year and despite the BTC trading price of $24,000, the BTC mining stock could face challenges throughout 2023.
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Mining stocks often follow the price of BTC as it directly affects the company’s earnings. The stock declined sharply in the last quarter of 2022, especially in December. The slowdown following the FTX collapse was exacerbated by the bankruptcy filing of Core Scientific, the largest bitcoin mining company in the US.
During this period, other mining stocks such as Marathon Digital Holdings (MARA) showed a weak correlation with bitcoin prices in the chart below, suggesting that the December slowdown may have been overdone
MARA/USD Price Chart with MARA-BTC Correlation Coefficient Index | Source: TradingView
In early 2023, the negative trend was reversed with impressive gains in most mining stocks. The Hashret Index Mining Stock Index, which tracks the average price of publicly listed mining hardware and manufacturing companies, is up 62.5% today The positive price increase also restored the strong correlation between BTC prices and mining stocks.
However, the mining industry remains under stress, with lower profit levels expected over the long term. In the second quarter of 2022, the mining company financed operations by selling BTC from reserves, selling newly mined BTC, raising debt, and issuing new shares Unless the price of bitcoin rises above $25,000, the industry will likely witness some acquisition attempts or more treasury sales to repay debt.
Some mining companies operate at a loss
Currently, top mining companies have a negative price-to-earnings (PE) ratio, indicating that they are operating as net losers, making their share prices vulnerable to sharp declines
Riot Blockchain, Bitfarms Ltd., Hive Blockchain Technologies, Cleanpark Inc., Marathon Digital Holdings and Hut 8 Mining are the largest publicly traded bitcoin mining companies, accounting for more than 1% of the global hash rate share of the top 15 public mining companies total It is about 19%.
Market share of bitcoin mining companies according to hashrate. Source: TheMinerMag
Notably, most companies in the industry have PE ratios between 0 and 2, with the exception of Marathon, Hive, and Hut 8. This raises the alarm that these companies may be overvalued at their current valuations
Price-to-earnings ratio of top mining companies Source: CompaniesMarketCap.com
A net loss situation is no reason to reject a stock because the market is usually forward-looking. If one is long bullish on Bitcoin, mining stocks are the obvious choice. But this company has to survive through a bear market before it can reap the rewards of the next bull run.
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Bad debt and dilution hurt shareholders
Overleveraged or indebted firms that have interest liabilities to meet are especially stressed and prone to bankruptcy.
Marathon, Greenidge and Stronghold are owed more than $200,000 per unit of bitcoin mining, with Marathon owed up to $1.1 million per BTC mined. Marathon collateralized the loan with bitcoin in its treasury, and the firm’s 10,055 BTC is now worth about $235 million.
At the end of October, Marathon had $100 million in loans, which are at risk of being liquidated if the price of bitcoin falls below the ceiling value of the loan, e.g The company will have to sell some of its BTC.
Credit per BTC produced by a mining company. Source: TheMinerMag
In this regard, it is encouraging to note that Hive, Hut8, and Riot are mostly debt-free and essentially operate on an equity-capital basis. This reduces the pressure on interest rate payments on the debt and provides flexibility to raise funds or expand by absorbing some of the market share left from the now bankrupt mining operations
However, there is another way to raise money. Miners can dilute their shares instead of increasing their debt. Companies raise investments from public market investors in exchange for additional stock. This reduces the shareholder ownership ratio. Hut 8 Mining & Riot had diluted its holdings north of 40% by the second quarter of 2022. Hut 8 again trimmed it by about 15% in the third quarter of this year
Share dilution of public mining companies by the second quarter of 2022. Source: Hashrat Index
The need to raise funds has put these debt-ridden companies at risk of liquidation, and the additional dilution has also significantly reduced the value of investor holdings
Related: Bitcoin miners’ worst days may be behind us, but some major hurdles remain
Mandates of mining companies with respect to treasury holders
Mining companies profitp
