Mining companies in a bear market

So far, the mining industry is undoubtedly still in a bear market. As soon as the second quarter financial report came out, it was found that the Bitcoin assets of various companies were still being depreciated: MicroStrategy depreciated by $200 million; Marathon Digital depreciated by $127.6 million; Tesla depreciated by $170 million. But at the same time, MicroStrategy spent another $10 million to buy about 481 Bitcoins, and Marathon Digital added $100 million in loans last month. Different companies have very different attitudes towards the bear market, so what did mining companies do in the bear market? Is there any reference value?

Automatic shutdown

The bear market is coming, the market is sluggish, the price of coins is falling, and energy prices are rising, which makes it difficult for mining income to cover cost expenditures. For some miners who have difficulty paying electricity bills, they have to stop mining.

According to BTC.com data, the average network hashrate was 210 EH/s from May to June, and then dropped to around 200 EH/s. One reason is that miners shut down because it was difficult to operate, and another reason is that they shut down due to climate change. For example, the high temperature in Texas forced miners to give way to residents, and Argo Blockchain , Core Scientific , etc., all suspended operations.

(Source: BTC.com)

According to Satoshi Nakamoto's settings, the output of Bitcoin has a stable pattern - a block is generated every ten minutes, and the number of Bitcoins rewarded by the block is halved every four years. As of 2024, the reward for each block is fixed at 6.25 Bitcoins. From the market perspective, the value of the currency measured in US dollars is declining. But from the perspective of Bitcoin, the number of coins is stable.

When some mining machines are offline, the reduction in network computing power will also reduce the difficulty of mining. For miners who can continue to mine in a bear market, the bear market has accumulated enough experience so that they can stay ahead in the next bull market. So what we pursue is far more than "turning off machines to deal with the bear market."

BTC Cash Out

What if you want to continue mining but are short of funds? Mortgage or sell Bitcoin to cash out is a common way.

Of course, miners all hope to mine in mines with low electricity prices.

Looking at the electricity cost alone, the electricity cost of 3.4 cents per kWh at the Harding Mine mentioned in the previous North American Mining Column (XI): Introduction to Marathon Digital is already very low. However, from the operational situation, according to Marathon’s disclosure, the actual power generation of the Harding Mine was lower than the peak many times, and the power generation facilities had to be shut down later due to upgrades, and were forced to shut down again due to bad weather. Finally, for the consideration of green mining, Marathon plans to transfer the mining machines to other mines.

(Marathon Digital BTC production from January to June 2022)

Of course, there may be mining farms with extremely low electricity prices and high online rates, but such "magic sites" are often hard to come by. In order to solve the problem of operating expenses, mortgaging or selling part of Bitcoin is one of the common methods used by mining companies. However, with the advent of the bear market, the situation has changed.

In July, Arcane Research released a report showing that listed mining companies sold a total of 14,600 bitcoins in June, four times the output in May. The figure below shows the total amount of bitcoins sold by listed mining companies since January 2022. It can be seen that only a small amount of bitcoins were sold by them in the first few months, and mining companies actually tend to hold bitcoins - this practice is jokingly called "HODL" in the circle.

However, as the price of bitcoins continued to fall, financing became difficult in the market, and liquidity became increasingly tight, they had to sell more bitcoins to repay debts or pay electricity bills. Fortunately, the previous "HODL" behavior also ensured that there were coins available for sale, which brought flexibility to corporate operations.

(Source: Arcane Research)

For example, Core Scientific disclosed more than $200 million in machine mortgage debt in its first quarter financial report. The company subsequently sold $165 million worth of Bitcoin to repay part of the upcoming debt and to ensure daily operations. Bitfarms also sold 3,000 Bitcoins to repay a $62 million loan from Galaxy Digital.

Hut 8, Marathon and Hive Blockchain did not participate in this large-scale sale, but at the end of June, Marathon announced plans to sell some of its bitcoins in the future to pay for operating expenses.

Other miners who are reluctant to sell their bitcoins may choose to pledge their coins to get loans. However, when the price of the coin is lower than the margin call price line of the agreement, miners need to pledge more coins or sell them. According to CoinDesk, Blockfusion's cash reserves can last for about 6 months, but if the market does not improve, they will have to sell their bitcoins.

“Second-hand mining machines” are being sold off

Some mining companies are also acquiring mining machines.

Some miners use mining machines as collateral to obtain loans, similar to Bitcoin collateral, and are now forced to sell their mining machines. Some miners cannot find a mining site to put their mining machines on the shelves. Some of these idle mining machines come from forward futures orders that miners have ordered in the past. Now these mining machines can only be placed in warehouses and cannot be used for mining, and they still have to pay loans and site rents. If they fail to raise enough funds, they will be forced to sell their mining machines in order to stop losses in time. Therefore, in addition to new machines sold directly by manufacturers, "second-hand but brand new" mining machines have also appeared on the market.

At this time, companies with sufficient cash flow have an advantage, as they can purchase machines at low prices. According to data on mining machine trading platforms, when sellers need to liquidate a large amount of assets in a short period of time, mining machines are usually sold at 10%-25% of the price.

M&A

During the bull market in 2021, the highest price of Bitcoin exceeded $65,000, which attracted many new entrants. Including old miners, some of them ordered mining machines at high prices, and some leveraged themselves and carried out debt financing out of the expectation that the mining industry will continue to maintain rapid development in the future.

After entering the bear market, those mining companies that acted impulsively in the bull market, especially those that used the mined Bitcoins to pay for electricity as they mined, are now short of cash reserves due to the impact of falling currency prices. Even if they sell Bitcoins, they find it difficult to maintain operations and are caught in a tight spot.

It is reported that some mining companies that are in financial difficulties have called Core Scientific to ask if it is interested in acquisitions. Core Scientific also said that it is considering acquiring cheaper mining companies or developing other businesses through acquisitions.

Galaxy Digital is also planning to do so. Despite its net loss of $554 million in the second quarter, Galaxy Digital is still focusing on industry mergers and acquisitions. Founder and CEO Michael Novogratz said the company currently holds $1 billion in cash and intends to continue raising funds with an eye on M&A transactions.

The bear market will eliminate inefficient and highly leveraged mining companies, and will also give mining companies or capital with strong financial strength the opportunity to acquire assets at low prices. I hope you can gain something from understanding what the above mining companies have done.