Cryptocurrency mining companies outperform bitcoin

The awakening of bitcoin mining companies

A surge in the price of bitcoin sent the cryptocurrency company’s stock on track for its best monthly performance in a year. index MVIS Global Digital Asset Mining Index, the top 20 publicly traded cryptocurrency miners, is up 64% year-to-date, significantly outpacing bitcoin’s 28% gain. It’s also the best month for the index since its inception in late 2021, contrasting with last year’s 88% decline.

Performance of the MVIS Global Digital Assets Mining Index

For example, the stock price BitfarmsOne of the leading BTC mining companies recorded a 140% increase in the first two weeks of January 2023, after Marathon Digital Holdings An increase of 120%. Hive Blockchain Technologies saw its stock nearly double in value over the same period.

the Luxor Hashprice Index, which aims to measure what a miner can earn from the processing power used by the Bitcoin network, has grown by 21% this year. This partly reflects larger rewards due to the increase in the price of bitcoin.

Companies in the Bitcoin mining industry remain in dire straits

In recent months, cash-strapped miners have cut their borrowing after taking on a lot of debt financing to grow during the 2021 boom, then suffering weakness in 2022 and, for some, a lack of structuring in the process. especially with his recent bankruptcy Basic Science (BlackRock put a few million on the table to try to save him).

Indeed, the 2021 bull market saw a significant increase in the mining industry’s borrowing from the Bitcoin network, which adversely affected its finances during the subsequent bear market. For example, the Bitcoin network’s top 10 mining debtors collectively represent approximately $2.6 billion in debt.

The main debtors of crypto-mining
Hashrate index

Even worse, the debt/equity ratio for some companies in the industry has exploded. A leverage ratio of two or more is considered risky in most industries. The table below shows the extremely high leverage ratios that some major bitcoin miners are currently sporting.

Public bitcoin mining companies with the highest leverage ratios.

Hashrate index

Given that more than half of the 25 public bitcoin miners have extremely high debt ratios, the mining sector could potentially face major restructuring and bankruptcy filings if the market does not sustainably rise. Although some companies will shut down or slow down operations to cut costs, this will help more established miners expand their empires by buying up the competition’s equipment and facilities.

Volatility has reached its climax

If we look at the performance of major crypto-mining companies during the bull market of 2020-2021, the observation is clear, they clearly outperformed bitcoin.

Crypto mining vs bitcoin performance for 2020-2021

Performances like Marathon Digital showing a 2,300% increase versus 346% for Bitcoin are stratospheric for some. On the other hand, if we look at what happened in 2022, during the bear market, the trend is reversed.

Crypto mining vs bitcoin performance since 2022

Major cryptocurrency mining companies outperformed bitcoin in the 2022 bear market, with many falling around -95%. So the story remains similar over time, with an outperformance from digital asset mining companies when bitcoin rebounds, as in early 2023, and an underperformance from them when the digital currency launches.

So we have to Before you throw your heart and soul into buying shares of crypto-mining companies, ask us a few questions:

New methods of investment are emerging

Previously, it was difficult for institutions and professionals to get “easy” exposure to digital assets, but today there are many investment options. ETF Bitcoin Futures, crypto mutual funds, a proliferation of exchange platforms and perhaps soon a Spot ETF. Alternatives that may now entice these investors to gain exposure to bitcoin at the expense of mining companies. On the other hand, some believe that if the wild rise and adoption of bitcoin continues, these companies will become mainstays of the network and therefore reap huge profits.

Exposure on Bitcoin

The heart of these companies’ business is closely tied to the price of bitcoin. As we’ve seen before, mining companies have so far shown little resilience in the face of digital currency volatility. In other words, these mining experts must have a strong heart to speculate on the price. Investing in these companies is relatively risky from a long-term perspective. These companies would be in a very bad position, especially since the global regulatory context is still uncertain regarding the regulation of cryptocurrencies, and if bitcoin were to fall sharply after unfavorable regulation.

Exposure to energy costs

These companies are highly dependent on electricity and especially the energy consumption of mining equipment. Even if they turn to renewable energy solutions (hydro, geothermal, solar, wind, etc.), these companies will need to find more and more energy to meet the goal. hash rate higher and higher to increase productivity. We are still not immune to regulations against the initiatives of these mining companies, especially for the sake of increasing energy waste.

Crypto regulation

The future is uncertain, not to say opaque. The regulatory framework is quite different from one country to another. On the one hand, take El Salvador, which has made Bitcoin the official currency of the country and launched initiatives in favor of cryptocurrency mining, and on the other hand, China, which has simply banned cryptocurrency mining in its territory. at the same time, it developed its own central bank digital currency. Although cryptocurrency mining is not banned on the Old Continent side and in Uncle Sam’s country, the regulatory framework remains unclear. Therefore, we are not immune to the regulatory blow.

Bitcoin philosophy

Bitcoin purists and maximalists invest directly in the digital asset for the features it offers: decentralization, transparency, freedom from censorship, security, independence… In other words, putting value back into the hands of a centralized company does not reflect the philosophy of Bitcoin and its enthusiasts. . Incidentally, Bitcoin was started by Satoshi Nakamoto after the 2008 financial crisis as an anarcho-capitalist response to a “corrupt and manipulable financial system”. In this sense, pro-bitcoins and those who will become pro-bitcoins are unlikely to enchant their wallets in these mining companies.

So we understand that it is not easy for mining companies to predict the future. Although they have shown stratospheric performances that attract many speculators, it seems relatively risky to have a long-term investment strategy right now.

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