Mining Hash Price Bear Market
Hash rate is down over the last month, hash price is near all-time lows and public miner equity continues to underperform bitcoin.
Hash Price Bull And Bear Markets Review
In today’s issue of Bitcoin Magazine Pro, we are giving an update on the state of the mining industry. In our Miner Equity Performance Cycle issue, released on May 24, we covered the concept of hash price bull/bear markets and the effectiveness of using it as a tool for evaluating investment into bitcoin mining, in public markets as well as for physical ASICs.
Let’s revisit the concepts covered in May’s issue (excerpt from Miner Equity Performance Cycle),
Investing in Public Bitcoin Miners
Investing in publicly traded bitcoin miners carries risks that buying bitcoin itself does not, due to the operational risk as well as the reality that public equities trade at multiples of future expected earnings. During environments where Treasury yields rise significantly, this causes earnings multiples to fall, which is why equities as a whole have performed poorly over the course of 2022.
However, the dynamics involved with evaluating publicly traded bitcoin miners is a bit different. Unlike other “commodity” producers, bitcoin miners often attempt to retain as much bitcoin on their balance sheet as possible. Relatedly, the future supply issuance of bitcoin is known into the future with near 100% certainty.
With this information, if an investor values these equites in bitcoin terms, significant outperformance against bitcoin itself is achievable if investors allocate during the correct time during the market cycle using a data-driven approach.
When is the optimal time to invest in publicly traded bitcoin miners?
An extremely simple framework for investors is:
Hash price bull market = Bitcoin miners outperform bitcoin
Hash price bear market = Bitcoin miners underperform bitcoin
So let’s revisit where we are today. Over the last 30 days, hash rate has fallen by 4.96% to a seven-day average figure of 206.69 EH/s, with two of the last three difficulty adjustments coming in negative.
As the price of bitcoin has cratered in recent weeks, hash price (daily miner revenue per terahash) has fallen with it, now at $0.086, nearing the all-time low figure $0.070 set in the summer of 2020.
As stated previously, hash price and the valuation of mining equipment/operations are extremely correlated. If you expect hash rate to appreciate relative to the price of bitcoin over a given period of time, it is not an attractive time to buy bitcoin, and vice versa.
Shown below is hash price since the start of 2022, with the value of publicly traded miners denominated in bitcoin shown in the bottom pane.
Notice a correlation?
Similarly, we can display a chart of major publicly traded miners since the 2021 bitcoin all-time high, with every single entity underperforming bitcoin itself during the time frame.
It looks likely that the pressure on publicly traded miners will continue, as margins get squeezed further due to the relocation of unprofitable hash that has unplugged in recent months. Only when the price of bitcoin is once again outpacing the hash rate will miners significantly outperform the asset itself (which should be the entire point of investing in miners in the first place).
Similar to the poor performance of publicly traded mining entities, the prices of ASIC miners have begun to fall in dramatic fashion, as one could expect during a market downturn. Using Hashrate Index’s ASIC pricing index, prices are now below what they were after the China ban, across miner efficiency tiers.
This comes at a time when miners have outstanding collateralized loans backed by their ASICs and bitcoin holdings. As one example, Bitfarms recently highlighted their $37 million equipment financing facility with NYDIG that’s separate from their financing agreement for $32 million with BlockFi. Miners face a time where cash flow is needed the most and there’s no doubt that all bitcoin treasury holdings and ASICs fleets are on the table if miners need to sell as capitulation pressures rise.
Compass Mining CEO and CFO Resign
An interesting development arose in the mining industry yesterday when it was announced that both the CEO and CFO of Compass had resigned, effective immediately. The move did not look like one of strength for the hosting company, which allows users to buy and host ASICs with the firm.
With questions about the firm’s financial standing in question, users of the company have begun to question whether their miners are safe. We don’t bring up the situation with Compass to highlight their failures or inadequacies in particular, but rather to demonstrate that it is now the period of the market cycle where inefficient miners, operations and businesses begin to drop like flies as the growth and the margins seen during the previous bull market rapidly dissipate.
This is true for hosted miner products (such as Compass) as well as public and private miner operations. Hash price has made new lows with each and every bitcoin cycle, and we do not expect this cycle to be any different. Only the strong will survive.
In regards to hosting companies with potentially shaky financials, we advise subscribers to carefully read user agreement documents to understand the legal nuances around their investment. Similar to the concept of “not your keys, not your coins,” we suspect there might be an instance in the future where market participants learn:
Not your machines, not your hash.
Do you have an opinion on Blockware Solutions as a hosting company, compared to Compass?