Bitcoin mining stocks often follow the BTC price because it directly influences the company’s profits. These shares suffered sharp falls in the last quarter of 2022, especially in the month of December. The recession after the FTX collapse worsened with the bankruptcy filing of the largest US-based Bitcoin mining company, Core Scientific.
During this time, other mining stocks, such as Marathon Digital Holdings (MARA) in the chart below, exhibited a weak correlation with the Bitcoin price, suggesting that the December downturn was likely overdone.
The negative trend reversed in early 2023 as most mining stocks posted impressive gains. The mining stock index Hashrate Index, which tracks The median price of publicly traded mining and hardware manufacturing companies is up 62.5% year-to-date. The positive price increase also restored the strong correlation between the BTC price and mining stocks.
However, the mining industry remains under stress, with low profit levels expected for extended periods. Since the second quarter of 2022, mining companies have financed operations by selling BTC from reserves, selling newly mined BTC, raising debt, and issuing new shares. Unless the Bitcoin price consolidates above $25,000, the industry is likely to see some takeover attempts or more treasury sales to pay off debt.
Some mining companies are operating at a loss
Currently, the price-earnings (PE) ratio of the major mining companies is negative, suggesting that they are operating at a net loss, making their share prices vulnerable to sharp declines.
Riot Blockchain, Bitfarms Ltd, Hive Blockchain Technologies, Cleanspark Inc, Marathon Digital Holdings, and Hut 8 Mining are the largest publicly traded Bitcoin mining companies with more than 1% of the global hashrate share. The top 15 public mining companies have a combined share of around 19%.
In particular, the PE ratio of most companies in the industry is between 0 and 2, except for Marathon, Hive and Hut 8. This raises alarm bells that these companies could be overvalued at their current valuations.
A net loss position is not a reason to reject a stock because markets tend to look to the future. If one is bullish on Bitcoin for the long term, mining stocks are obvious choices. However, these companies must survive the bear market before paying off the next bull run.
Shareholders suffered losses from bad debts and dilution
Overleveraged or indebted companies, which have to meet their interest obligations, are particularly stressed and vulnerable to insolvency.
Marathon, Greenidge, and Stronghold all have debt of over $200,000 per Bitcoin mining unit, with Marathon’s debt as high as $1.1 million per BTC mined. Marathon collateralized its loans with Bitcoin in its treasury. And the firm now owns 10,055 BTC worth around $235 million.
In late October 2022, Marathon took out $100 million in loans, which is at risk of being liquidated if the price of Bitcoin falls below the loan threshold value. For example, if the loan threshold is 150%, the company will be forced to sell some of its BTC to pay off the loans if the price of Bitcoin falls below $15,000.
In this regard, it’s encouraging to see that Hive, Hut8, and Riot are mostly debt-free and essentially run on equity capital. This reduces the pressure to pay interest rates on debt and provides flexibility to raise funds or expand by absorbing some of the market share left by now-bankrupt mining operations.
However, there is another way to raise funds. Instead of going into debt, miners can dilute their shares. Companies raise investment from public market investors in exchange for additional shares. This reduces the shareholder ownership ratio. Hut 8 Mining and Riot had diluted more than 40% of their shares in the second quarter of 2022. Hut 8 diluted around 15% of the shares again in the third quarter of the same year.
The need to raise money has exposed these indebted companies to liquidation risks, while excessive dilutions have also significantly reduced the value of investors’ holdings.
Related: The worst days of Bitcoin miners may be over, but some key hurdles remain
Mining company mandates on treasury holdings
While mining companies are fighting for profitability, they are determined to preserve their Bitcoin treasury levels. Despite suffering losses since the second quarter of 2022, Marathon was able to maintain its treasury holding levels.
At the same time, Mining Hut 8 uses a more aggressive policy in selling its mined BTC. This has led to a sharp increase in their holdings since mid-2022.
While others like Riot and Hive have resorted to using their BTC treasury to cover operational and expansion costs. Hive holdings have dropped significantly since Q3 2022, from 4,032 BTC to 2,348 BTC. Hive relies on expanding its mining fleet and cutting costs to sustain itself.
Clearly, Bitcoin mining companies remain vulnerable to the BTC price, debt liquidations, and shareholder losses due to excess dilution. According to on-chain analyst and founder of Crypto Quant ki young juBy 2023, entities will take over entire mining companies with the ability to buy them at a discount.
While it won’t affect the price of Bitcoin much, mining stocks are still under threat of sizeable losses.
The views, thoughts and opinions expressed here are those of the authors alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
