Why Bitcoin Mining Shares Dropped Like a Stone This Week

What happened

After some improvement in recent weeks, Bitcoin (BTC -1.44%) miners had a rough go of it this week. The value of Bitcoin is down 7.6% in the last week as of 12 a.m. ET on Friday, leading to a lot of lost value for miners and related companies.

According to data provided by S&P Global Market Intelligence, shares of Canaan (CAN -1.51%) has fallen 15.7% since Friday’s close, HIVE Blockchain (HIV -1.49%) is down 17%, Riot Platforms (RIOT -1.33%) has fallen 17.6%, Cabin 8 Mining (COTTAGE -0.29%) is down 16.9%, and Cipher Mining (CIFR -5.98%) has fallen 22.7%. But will the decline continue?

So what

You can see in the chart below how these companies are tracking the price of Bitcoin, at least in the short term. And with good reason.

CAN data from YCharts.

Whether you are mining Bitcoin or creating chips or other products for miners, the price of Bitcoin itself is very important. It is equivalent to the price of a commodity for miners in the commodity industry. If the price falls, the income also falls.

To make matters even more complicated, miners often keep the Bitcoin they mine on balance. This gives additional leverage to these companies, making volatility worse both when Bitcoin goes up and when it goes down.

The dependence on high Bitcoin prices is evident when you start looking at the net income of each of these companies.

CAN Net Income (TTM) data by YCharts.

They need Bitcoin to stay high to make money. If the return above $30,000 does not last, they can continue to lose money.

What now

What is not clear at this point is whether the Bitcoin rally will continue. There has been renewed interest in blockchain assets after the US began cracking down on some companies in the wake of SVB’s failure, but both could actually cause the US crypto industry to become even smaller.

Internationally, the news is better, with countries like the UK and Hong Kong creating rules that make crypto easier to own. It is possible that the US will follow a similar path eventually, given pressure from Congress, but that has not yet happened.

One of the biggest challenges for these miners is that the competition is much stronger than it has been in previous crypto cycles. Some other blockchains are faster, cheaper and less energy intensive, reducing the market opportunities for Bitcoin.

Combine that with miners’ dependence on the price of Bitcoin itself, and this is a tough business to generate long-term value. Most Bitcoin mining companies are just leveraged bets on Bitcoin, and investors looking for exposure to Bitcoin can simply buy the cryptocurrency themselves.

I haven’t been bullish on Bitcoin miners for a long time, and this week’s move is a good example of why. They carry more risk than Bitcoin and often only exaggerate the cryptocurrency’s features.