Bitcoin Hash Rate Increases. Implications for Stocks – Bitcoin Magazine
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New Hash Rate All-Time High
Just two months ago, the 2022 extension in the Bitcoin hash rate looked bleak. The bitcoin price had fallen, miner margins were being compressed, major public miners were dumping bitcoin holdings and it was a ripe time to look back at the state of miner capitulation in the market. Fast forward to today: the price has come down from a massive bear market rally to $25,000, while the hash rate coming online has exploded to a new all-time high of nearly 250 EH/s. The chop and range and rally in the bitcoin price has not affected the hash rate from ripping higher this year. Hash rate hasn’t really gone down on a 30-day growth basis since July.
Average hash rate reached 248 EH/s for the first time
Diagram from spring 10/22/21 – Public Miner Analysis
It’s some of the best public data available to figure out why the bitcoin hash rate has exploded so much. There are public miners who carry out expansion plans. But that doesn’t mean major mining companies haven’t faced further pressure. Compute North, one of the largest data center operators and hosting services for bitcoin mining, filed for Chapter 11 bankruptcy just weeks ago. They housed miners for companies such as Marathon Digital, Compass Mining and Bit Digital across 84 different mining units. A major auction of the bulk of Compute North’s existing assets will take place on November 1, 2022, including mining containers, machines and entire data centers.
In the Celsius collapse, Celsius Mining also filed for bankruptcy back in July. That said, it’s clear from the recent bankruptcy of Compute North that the pressure is still on large-scale miners. They are not out of the woods yet and we have been hesitant to call for an end to miner capitulation this cycle as the price has stagnated and the hash price (miner revenue divided by the hash rate) continues to face strong headwinds with this level of hash rate expansion coming into play out.
After hitting a new all-time high, mining issues saw a decent-sized negative adjustment of 2.14% right before this explosion in hash rate this past week. But that appears to be short-term relief, as as of now, the next projected difficulty adjustment looks like a vicious 13.5% positive adjustment at the time of writing. We haven’t seen that level of adaptation since right after the Chinese mining ban. That kind of adjustment will be bad news for existing miners’ profitability as the hashish price will come under further pressure.
Bitcoin mining difficulty continues to rise
It takes incredible operational skill to continue to excel in the bitcoin mining industry over multiple cycles.
This is why bitcoin mining-related stock investments can either be extremely lucrative (if you pick one of the winners) or downright disastrous.
In our piece on December 21 last winter, we said the following:
“What you should learn from evaluating the performance of listed miners against bitcoin itself is that due to the capital structure of their business and the valuations present in the stock markets, miners can and likely will outperform bitcoin during periods when hashish prices rise significantly .
“However, over the long term, earnings in bitcoin terms for each mining company will surely decline in bitcoin terms, and due to the far too large earnings multiples that companies currently trade at in stock markets in a zero-interest world, even bitcoin mining stocks are trending to zero over time in bitcoin terms (again, due to the equity multiples assigned in a zero-interest fiat-denominated world).”
Since that time, the stock prices of publicly traded mining companies have declined significantly when measured against bitcoin itself.
Measured against bitcoin, public mining companies are significantly down
This should come as no surprise. Mining margins are relentlessly squeezed as earnings decline, both in bitcoin and dollars.
Since the all-time high in the bitcoin price, every publicly traded mining company has underperformed the asset itself, bar none.
Every publicly traded bitcoin mining company has underperformed the asset itself
While mining-related stocks can certainly appreciate from their current depressed valuations, the advancement of mining machines and the financial incentives for mining pretty much ensure that the hash rate will continue to rise further from here.
To quote a previous issue of ours,
“However, the dynamics involved in evaluating publicly traded bitcoin miners are slightly different. Unlike other ‘commodity’ producers, bitcoin miners often try to keep as much bitcoin on balance as possible. Relatively speaking, the future supply issue of bitcoin is known in in the future with almost 100% certainty.
“With this information, if an investor values these stocks in bitcoin terms, significant excess returns against bitcoin itself are achievable if investors allocate at the right time during the market cycle using a data-driven approach.”
In the future, mining-related stocks as well as ASICs will once again be poised for large excess returns against bitcoin itself. We don’t think that time has come yet.
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