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| Health, Wealth, and Happiness |
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| “Happiness depends more on the inward disposition of mind than on outward circumstances.” – Benjamin Franklin |
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In today's issue: Throughout this year's roller coaster market, bitcoin miners keep on mining.
Today, we take a look at the state of the bitcoin mining industry in 2023, with some surprising insights that will inspire you to take a closer look at this critical crypto industry. Read on. |
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| | | Must Read Today's most important story for crypto investors. |
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For investors who have staked their ETH to get the best staking rewards, there's a catch: you can't actually withdraw your ETH until the next major upgrade (called Shanghai), which may go live in 2023 or even later.
It's a little like putting your money in a high-yield money market fund but being unable to withdraw that money until some point in the future... if at all.
Fortunately, the Ethereum dev team is working hard on allowing ETH stakers to withdraw their staked ETH, with the feature going live on testnet soon.
Investor takeaway: While it will take time for the official upgrade to roll out to mainnet, the fact that devs are making staked ETH withdrawals such a priority is a good sign. Until then, it's also a good way to stay invested in ETH. Lockups can be good for long-term investors. |
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| Your Money is Growing Truth in numbers. |
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| Even at today's price, ETH has grown 7.5x in the last three years, and that's without staking rewards: |
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| Investor takeaway: Similar to a stock that grows and pays dividends, ETH potentially has two advantages: growth of the ETH itself and staking rewards. |
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Bitcoin Mining Stocks in 2023 by Anatol Antonovici |
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Overview: Crypto mining is becoming more sustainable according to a recentreport by the Bitcoin Mining Council. However, miners are struggling amid a bearish crypto market and increasing energy prices. Is this a good time to "buy the bottom" and invest in crypto mining stocks, or should you avoid them altogether? Here's what you need to know about the state of the sector:
Top Bitcoin Mining Stocks
The top publicly traded crypto mining companies today are Bitfarms, Canaan, Hive Blockchain Technologies, Hut 8 Mining, Marathon Digital Holdings, and Riot Blockchain. Some semiconductor blue chip stocks, such as AMD and NVIDIA, are also indirectly related to the mining sector, but they don’t directly engage in such activities.
These are all public stocks you can buy with a traditional brokerage account. No crypto is needed, but in line with crypto, all these mining stocks have underperformed compared to the broader market over the last 12 months. As of this writing, the S&P 500 declined about 15% over the past year, while Bit Digital, Bitfarms, Hive, Hut, and Marathon have dropped by about 90%. |
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| However, if we extend the timeframe to three years, most of these stocks have still shown generous returns. For example, Marathon (MARA) is up over 550% during that period. |
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The success of crypto miners in 2023 depends on the price recovery of bitcoin, especially after Ethereum has switched to proof of stake (PoS). This removed it from the universe of mineable cryptocurrencies.
Falling Prices and Rising Costs The performance of crypto mining stocks follows the price of bitcoin. That is the most important factor driving mining profitability. When the price of bitcoin falls, it becomes difficult for mining companies to secure revenue and income growth.
Another factor that puts additional pressure on mining profitability is the increase in electricity prices across the world driven by geopolitical tensions and inflation trends that hit energy markets. The World Bank’s energy price indexrose over 26% in the four months to April 2022 after surging 50% from January 2020 to December 2021. In the US, the Energy Information Administration (EIA)expects wholesale electricity prices to grow further by at least 20% in the coming winter. |
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Investment Thesis
Today, it's hard for individual investors to engage in bitcoin mining due to surges in difficulty levels and hardware costs. The best way to get exposure to the crypto mining market is to invest in public companies operating crypto mining businesses.
This is convenient for stock investors who would like to allocate small portions of their portfolios to digital assets.
Given most crypto mining companies mimic the short-term fluctuations of bitcoin, stock investors can get exposed to the crypto industry with mining stocks. They are traded on the NASDAQ and the NYSE, so it's easy to include them in any portfolio.
The potential of bitcoin continues to attract many investors, but the risks are high. If the US chooses to impose tight regulations on bitcoin trading, bearish pressure could extend.
However, if bitcoin manages to leverage its safe-haven asset status amid high inflation, the crypto market may recover rapidly in 2023, driving the share prices of crypto mining firms higher.
Who’s Investing?
Institutional investors fueled the crypto mining industry in 2021 when bitcoin rallied to its record high. In the case of Riot and Marathon, over 30% of shares are held by institutions, with common names like Vanguard Group, Blackrock, and Fidelity leading the charge.
Still, many institutions showed skepticism even when the crypto mining market was gaining momentum in 2021, and some of them may be closing their positions. As D.A. Davidson analyst Christopher Brendlersaid prior, “We admit traditional valuation metrics may not apply in this sector as future cash flows are exceedingly difficult to predict.”
Despite bearish pressure, many institutional investors think this is a great time to enter the crypto mining industry, with stocks being oversold for months.
This might be a generous discount ahead of yet another crypto rally. In mid-October 2022, Binance Poollauncheda $500 million lending project for private and public mining companies. Applicants were required to pledge security in the form of digital assets for loans ranging from 18 to 24 months.
Elsewhere, Grayscale Investments (the largest crypto asset manager in the world) islaunching a new fund seeking to buy mining equipment at lower prices. The fund will be open to accredited investors including family offices and hedge funds willing to invest no less than $25,000.
Bitmain co-founder Jihan Wu also announced plans for a $250 million fund to purchase distressed mining assets.
What Determines Bitcoin Mining Profits
Bitcoin mining profitability is determined by a series of factors, the most important one being the price of bitcoin itself. The higher the BTC price, the better things are for the mining industry.
The cost of BTC mining differs from country to country,ranging from about $1,400 in Kuwait to a whopping $240,000 in Venezuela. The average potential cost across all countries is around $35,000 per mined coin as of August 2022.
The average mining cost for active mining companies exceeds the $20,000 figure per MacroMicro data, meaning when bitcoin sinks lower than that, it puts additional pressure on miners. |
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Average mining costs in USD (blue line). Source: MacroMicro
Besides the BTC price, other factors determining mining profitability include:
Hashrate The bitcoin network’s hashrate refers to the total computing power used by all miners. It reflects how secure the network is, showing direct correlation with the number of nodes competing and the computing power of hardware devices used to mine. |
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Bitcoin’s hash rate is accelerating, driven by increased computing power. (Source: Blockchain.com)
As of this writing, bitcoin’s total hashrate is over 270 terahashes per second (TH/s). That's up almost 75% year-on-year. In the prior month, the network exceeded the 300 TH/s figure for the first time on record.
This suggests miners are employing even more computing power despite a decline in crypto prices in 2022.
The mining companies with higher hashrate figures are capable of generating more bitcoin, which directly impacts their profitability. The more powerful their mining machines, such as Application-Specific Integrated Circuit (ASIC) devices, the better.
Difficulty Another factor for bitcoin profitability is the so-called mining difficulty. This is a relative measure that relies on the difficulty level at the launch of the network as the baseline reference. At the time, bitcoin naturally had the lowest mining difficulty, which is shown by the indicator as 1.
The measure has gradually increased over the years, driven by increased interest from miners who have employed more sophisticated and powerful hardware devices to compete for block rewards. As of November 2022, bitcoin’s mining difficulty is at an all-time high of 36.95 trillion. |
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Bitcoin’s mining difficulty is also accelerating, making it harder to compete. (Source: Blockchain.com)
The indicator doesn’t show short-term fluctuations. Instead, the network was programmed by Satoshi to adjust its difficulty level every 2,016 blocks. This occurs about every two weeks.
Every increase in the mining difficulty negatively affects the balance sheet of mining companies.
Electricity Mining companies try to build their sites in regions with low electricity costs, employing renewable energy technologies or reaching agreements with governments and municipalities for discounts. Lower electricity costs have a direct positive impact on profitability.
As per Digiconomist, every bitcoin transaction, on average, requires 1204.11 kWh. This equals the power consumed by a typical US household for over 41 days.
The annual consumption of the bitcoin network is 116.28 TWh as of this writing. This is equivalent to the power consumption of countries like the Netherlands or Pakistan.
While this is a huge bill for bitcoin miners to bear, it’s still 40% lower than in February-April 2022. |
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Bitcoin energy consumption is on the rise. (source: Digiconomist)
Bitcoin Mining Hardware Costs Hardware costs should also be considered when mining bitcoin, though they’re usually one-time amortized costs for the mining companies.
The best-performing mining machines are the latest generation of ASICs, which are designed specifically for mining cryptocurrency. Today, the best ASICs are the Antminer S19 Pro (110 Th/s), WhatsMiner M30S++ (112 TH/s), and Antminer KA3 (166 Th/s). The price per unit ranges from $3,000 to $10,000 depending on the model, seller, and shipping costs.
While it's difficult to make short-term predictions about the mining hardware market due to supply chain shortages and fluctuating crypto prices, the long-term analyst outlook is generally positive.
Investor Takeaway
Crypto mining firms have been in difficult situations for months, and the recent crypto market downturn has made things worse. We're likely seeing a shakeout, where only the strongest mining companies will survive.
Mining company Core Scientific (listed on the NASDAQ)warned at the end of October that it might file for bankruptcy by the end of this year if things don’t improve. London-listed Argo Blockchain voiced similar concerns, and US-based Compute North, one of the largest crypto mining data center operators, recently filed for bankruptcy with $500 million in liabilities.
Gaining exposure to the crypto mining sector is risky. Despite the prolonged crypto winter, however, the companies listed in this article have healthier balance sheets with the potential to survive until the next rally.
There are positives to investing in this sector now, as most crypto mining stocks come at discounted prices today. If bitcoin consolidates above $20,000 and attempts to go higher, we expect crypto miners to thrive.
If you're a traditional investor with no crypto exposure, investing in the crypto mining sector might be a great diversification approach, and now could be a great time to "buy the bottom."
Foundry, which provides financing for bitcoin and other mining equipment, said investors are waiting in queue to buy mining equipment at discount prices today. "We are fielding several calls a week from institutional investors looking to buy distressed mining assets,” the companysaid.
We think miners with reduced liabilities have the potential to survive the crypto winter and thrive next year. Miners with smaller crypto holdings relative to their market cap include Hive and Bit Digital (BTBT), which are more defensive. Elsewhere, miners with larger crypto holdings relative to their market cap include Hut 8 and Marathon.
As always, do your own research, and don't invest more than you're willing to lose. We recommend no more than 10% of your overall portfolio in crypto and crypto-related assets. |
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Bitcoin Market Journal is a daily newsletter that makes you a better crypto investor. It's created by John Hargrave, Nick Marinoff, Steve Walters, Anatol Antonovici, Ben Burn, Preetam Kaushik, and Daniel Joel.
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