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Miners spend an average of $ 15,000 on each coin, JPMorgan estimates.
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The vertical drop in its price
Bitcoin
could force encryption miners to sell tokens to fund operations, further pushing digital currency.
In good times, cryptocurrency mining companies and the price of Bitcoin are locked in a virtuous circle.
The miners have giant warehouses filled with specialized equipment that keeps Bitcoin transactions buzzing and rewarding Bitcoin more for the job. Rising cryptocurrency prices mean that companies can sell fewer of these currencies to survive and invest more in mining equipment, making the Bitcoin network stronger overall.
These are not good times.
Since the beginning of May, the price of Bitcoin has dropped by almost half to about $ 20,600. The shares of some miners did even worse.
Marathon Digital Holdings
(ticker: MARA) is down 63% from May 4, while
Riot Blockchain
(RIOT) has fallen 58% and
Core Scientific
(CORZ) has fallen about 70%.
Miners face a triple set of problems that cannot be solved while cryptocurrencies remain dormant.
First, the price of Bitcoin at which companies continue to make money from running their own server farms – which seemed a distant concern when Bitcoin traded at $ 60,000 in November – now looks high. Although some miners have lower costs,
JPMorgan
estimates that the average production cost for a miner is about $ 15,000 per coin, just 27% below the current level of Bitcoin. Some smaller, higher-cost miners may have already reduced their operations.
Second, in the drunken period of last year, some miners made significant expansion plans. Marathon Digital, for example, revealed in May that its cash had shrunk by $ 150 million to $ 118.5 million at the end of the first quarter, largely due to investment in new mining activities.
Which leads to the third issue – the one that has bad consequences for the entire encryption market. Larger Bitcoin miners, who have access to the capital markets, may find it difficult to borrow money at reasonable interest rates or issue shares to maintain financing activities. Smaller, private Bitcoin miners may have no access to the capital markets at all. This leaves the sale of Bitcoin, something that some miners have meticulously avoided, as the best way to raise capital right now, and this could end up continuing to push the price of Bitcoin.
Analysts at Compass Point Research & Trading said in a note Tuesday that they expect Marathon to start selling its Bitcoin production, and possibly even coins from its balance sheet, to fund growth. A Marathon spokesman said the company had not sold Bitcoin since October 2020. “At the end of the day, Bitcoin is a liquid asset – a tool – that we produce with a fairly healthy profit margin and one that we can use if “We feel the need to do that,” he said.
Riot, analysts said, has been selling coins since March. On the plus side, analysts say they are still seeing uptrend in many miners’ stocks and have Buy ratings in Marathon and Riot.
“This bitcoin unloading has probably already weighed on prices in May and June,” JPMorgan analysts wrote in a note on Friday, adding that “there is a risk that this pressure will continue.”
For now, at least, companies that are critical to maintaining the operation of the Bitcoin blockchain may be the worst enemy of the badge price.
Write to Joe Light at joe.light@barrons.com
