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Miners express concerns about the potential demand to shut down inefficient mining equipment due to the decrease in block rewards. In less than a week, the block reward on the Bitcoin network will halve, dropping from 6.25 BTC per block to 3.125 BTC. This anticipated reduction has sparked worries about improving cost efficiency, which could render small-scale mining operations unprofitable. These concerns are not new and have surfaced before previous halving events. To address these changes, some mining companies have taken measures to strengthen their financial positions, deploy more efficient equipment, and diversify their revenue sources to better withstand the impending changes.
However, some observers believe these concerns are overstated. Historically, large mining companies have demonstrated their ability to adjust and thrive amidst the cyclical market fluctuations typically associated with halving events. They predict similar outcomes for the upcoming cycle, where initial disruptions may give way to a phase of price discovery driven by Bitcoin's increasing scarcity. This could lead to a rise in Bitcoin prices, helping offset the impact of reduced block rewards and potentially easing some financial pressures on miners, thereby restoring profitability to their operations.
Industry giants like Marathon Digital and Riot Platforms seem to have a distinct advantage in at least one category: their balance sheets hold over $1 billion in cash and Bitcoin each.
Chase White, a senior analyst at Compass Point Research & Trading, previously suggested that private miners lacking easy access to public market capital may be more likely to be forced to cease operations after each block reward halving.
While it's expected "everyone will have challenges," White added that miners with low or no debt, minimal energy costs, and equipped with the most efficient mining equipment are likely to weather the storm. Not all mining companies meet these criteria.
So, the question remains: which companies can emerge from the halving cycle intact or even stronger?
Past Financial Troubles of Miners
According to multiple sources, it's challenging to find major mining firms severely harmed by the last halving event four years ago. Assistant attorney Kayla Joyce from the law firm Holland & Knight noted that the 2024 halving event differs from those in 2016 and 2020. She predicts it could lead to a wave of consolidation and defaults in the now-mature industry.
However, she did not disclose which companies she believes are most at risk.
"The 2020 halving seemed to have a smaller impact because before the 2021 crypto bull market, the Bitcoin mining industry was smaller," Joyce told Blockworks. "Investors only started pouring money into the industry in 2021."
The industry-wide woes stem not primarily from the 2020 halving but from the cryptocurrency winter of 2022. This downturn occurred after mining enterprises accumulated significant debt in pursuit of aggressive growth plans.
Compute North, a cryptocurrency mining data center operator, filed for bankruptcy in September of the same year after raising $385 million in debt financing in February. The company's bankruptcy filing stated it owed at least $500 million to over 200 creditors.
Core Scientific followed suit with a bankruptcy filing in December 2022. The company stated that despite positive cash flow, it was insufficient to repay equipment financing loans.
The Texas-based company emerged from bankruptcy in January by converting equipment debt and convertible note holder debts into equity, reducing its net debt to $571 million.
Core Scientific's CEO told Blockworks last month that the company would be more "pragmatic" in its infrastructure growth strategy and more "opportunistic" in machine purchases.
Though Argo Blockchain did not go bankrupt during the 2022 bear market, the London-based firm indicated late last year that it was struggling to avoid running out of cash to sustain longer-term operations.
As of March 31, Argo mined 103 Bitcoins last month, holding digital assets worth the equivalent of 26 Bitcoins ($1.82 million). The company also completed the sale of its Mirabel facility last month for $6.1 million, using the proceeds to repay the remaining $1.4 million mortgage on the Mirabel facility and part of its outstanding debt to Galaxy Digital. Argo still owes Galaxy Digital $12.8 million, down from its initial $35 million debt balance to the company.
Argo Blockchain CEO Thomas Chippas stated in a release that the company had reduced its debt by $12.4 million in the first quarter. He added, "As the halving approaches, we will continue to focus on streamlining operations and running as efficiently as possible."
Assessing Hash Costs and Miners' Fate
Examining hash prices and hash costs of publicly traded mining companies, it's evident that some companies are in a more favorable position during halving than others.
Hash price considers Bitcoin price, network difficulty, block subsidies, and transaction fees, measuring the potential income miners can generate from a specific amount of hash rate. It correlates positively with Bitcoin price changes and negatively with Bitcoin mining difficulty changes.
While hash cost is similar to hash price, it offers a different perspective by measuring miners' costs.
As halving approaches, reducing hash costs (by deploying updated machines for efficiency or ensuring lower energy prices) has been a focus for companies in the field.
According to hash rate index data, Bitcoin's hash price on Monday was approximately $106 per petahash per second (PH/s). This figure considers intraday changes in price and transaction fees.
TheMinerMag's research director, Wolfie Zhu, pointed out that post-halving, the cost of computing power will halve, resulting in slightly over $50 per petahash per second more income. In this scenario, most mining companies would still mine at a profit, though much less than before.
Some publicly traded mining companies with higher hash costs have not accumulated much debt on their balance sheets. Companies like Greenidge, Terawulf, and Stronghold Digital, with higher debt-to-equity ratios, are at the lower end of the overall scale of hash cost. Hence, it appears that most public miners will survive post-2022's highly leveraged bear market during halving.
Despite Challenges, Companies Remain Confident
According to TheMinerMag's data, Bit Digital and Bitfarms had higher total hash costs than their competitors in the fourth quarter.
Bit Digital CEO Sam Tabar told Blockworks in an email that the company plans to double its mining machine scale by the end of this year and equip them with more efficient machines. The possibility of acquiring some managed infrastructure to lower production costs is also under consideration. Additionally, the company launched a business line focusing on supporting artificial intelligence workflows in October.
The Canadian miner agreed in November to purchase nearly 36,000 Bitmain machines as part of its so-called "transformative fleet upgrade." This process will help the company double its hash power and increase energy efficiency by about 40%.
Compass Point Research and Trading analyst Joe Flynn wrote in an April 9 research report that Stronghold Digital Mining was "relatively disadvantaged compared to other miners" during Bitcoin halving. Part of the reason is its limited debt and opportunities to enter the capital market. Stronghold's infrastructure and power supply are valuable because the company will need these resources to plug in the mining machines it has already ordered. He added that selling some infrastructure could boost Stronghold's stock price, which has fallen by about 48% year-to-date as of Friday morning. We ultimately believe its assets have value that can be realized through [mergers and acquisitions] as they are capable of covering [general and administrative expenses] and reducing Stronghold's high management fees as a currently small listed company."
Strong
hold CEO Greg Beard told Blockworks that if industry peers consider Stronghold an attractive acquisition target, such a deal would be "something worth considering." Generally, companies misunderstood by the public markets, possessing tangible properties and values that other listed companies can evaluate... often realize value in this way.
"I think many miners face challenges where if the structure of their power contracts is difficult, they are forced to purchase power at negative margins," Beard said.
While Stronghold is a potential target for acquisition post-halving, Applied Digital has become a seller in pre-halving transactions—agreeing last month to sell its Garden City, Texas factory to Marathon for $97.3 million. |
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Post time 22-4-2024 08:29:10