Are Bitcoin Miners Selling the Bottom? – Bitcoin Magazine
Buy low and sell high is one of the most fundamental components of investment advice in the history of financial markets. Bitcoin is now 10 months into its current bear market cycle, and many investors and companies that didn’t “sell high” are probably regretting it.
However, miners differ from all other market participants, because they are actually always buying (paying for electricity to earn more bitcoin) and, depending on their business strategy, always also selling (selling bitcoin to pay for capital expenditures and operating costs).
So how are miners doing in the current bear market? This article takes a look at some miners’ financial decisions over the last couple of years – during both the recent bullish and bearish periods for bitcoin – and evaluates where some improvements can be made to how the average miner decides to hold, sell or buy their bitcoin.
Cliff Notes On Bear Market Mining
Here’s a quick overview of the current state of mining economics – things are not good.
The hash price is down 69% so far in 2022, and with it goes machine profitability. Old hardware like Antminer S9s, for example, are so unprofitable now that the amount of total network hash rate they contribute has dropped from 30% to less than 5% this year, according to Coin Metrics. Difficulty continues to hit new record highs as more miners add more hashrate, and the latest downgrade was the first decline in months.
Some miners are also saddled with exceptionally large amounts of debt, according to the data compiled by Jaran Mellerud, mining analyst at Arcane Research. Some miners are even selling the purchase contracts for hardware that has not yet been delivered, while other miners, such as CleanSpark, are buying them at a discount. And in the last two months, two companies have filed for bankruptcy: Celsius Mining and Compute North.
Managing a Bitcoin Mining Treasury
One of the most important considerations every miner faces is whether to hold or sell bitcoin. Of course, other operational issues continue this before the miner starts earning coins for his work. But what to do with block rewards is the focal point of any mining strategy.
Some miners are hoarding as many as they can while they wait for the price to rise. These miners usually take out loans to finance their operating expenses. Or they become lenders themselves and make money from the coins they mine. Other miners sell every coin they earn and simply want to operate profitably with no exposure to bitcoin’s upside or downside. Most miners are somewhere between these two extremes – they keep what they can afford and sell what they need.
All of these decisions are made based on a miner’s financial management strategy, and each team has a different approach. Fortunately for readers, public mining companies broadcast these decisions to investors and the general public.
In the bull market, miners weren’t just building new facilities, hoarding bitcoin and announcing record purchases of hardware. Some of them even went out and bought bitcoin at market prices to add to their coffers. Marathon bought 4,812 BTC in January 2021. Argo Blockchain also bought 172.5 BTC in the same month. To say miners were bullish would be an understatement. Bitcoin is now trading about 30% lower than the lowest price point in January 2021. These miners did not “buy the top”, but it was relatively close.
In the bear market, miners sell a lot of bitcoin – in some cases even more than they mine, signaling their acute reaction to the bearish conditions by even liquidating their reserves. It is important to note that the total amount of bitcoin these companies sell is well into the thousands, but it is a very small amount compared to the daily trading volume of most liquid bitcoin markets. From Riot to Cathedra, both large and small bitcoin miners sold large amounts of their bitcoin holdings.
Bulls Of Last Resort
Instead of selling bitcoin at $20,000, wouldn’t a miner prefer to sell it at $69,000 – the all-time high? In theory this makes perfect sense. But in practice it is more difficult to carry out that preference. First, miners are not the most sophisticated market participants. For another, financial management strategies are still very simple (hold, sell or lend) and often incomplete. For example, many miners have ways to hedge against bitcoin’s price, but almost none of them can hedge against bitcoin’s hash price, which would be a much more valuable financial product.
It is also important to note that miners are supposed to be uber bullish even when others are not. Miners are in many ways Bitcoin’s bulls of last resort. Home miners demonstrate this in particular continues to min despite dire market conditions. Although miners would have a stronger balance sheet by selling more bitcoin at a higher price than they did months ago, their role for better or worse is to drive the price wherever it goes.
What will the next mining cycle hold?
In the years to come, bitcoin mining companies will surely improve in terms of financial management. Many companies will learn their lessons from the past two years and focus on better profit maximization strategies. Some of this may include hoarding fewer coins. After all, gold miners aren’t known for hoarding large amounts of the precious metal on their balance sheets.
It is hard to imagine bitcoin mining companies behaving differently in the future. But bitcoin miners have an almost mythical status in the industry. Bullish miners hoarding their coins is a psychologically reassuring thing for many market participants. Even small rumors of “miners are bearish” or “miners are selling” send waves of fear across social media. However, even if miners sell coins at a higher price, everyone would prefer to have well-capitalized miners at the bottom of the bear market than underwater, over-leveraged companies struggling to stay alive.
This is a guest post by Zack Voell. Opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
