Bitcoin miners are increasing. What it means for chip stocks.

Companies exposed to crypto, whether through ownership of digital assets or reliance on the crypto ecosystem for business, have benefited greatly. Coinbase (ticker: COIN) stock has risen 83% since the start of January and MicroStrategy has risen 124%.

Bitcoin miners have done even better. Among some of the most beaten names in crypto in 2022, they are now some of 2023’s biggest winners. Riot Platforms (RIOT) is up 270% so far in 2023, while Marathon Digital (MARA) is up 224%.

That makes sense because miners are at the heart of a process called “proof of work,” which powers the Bitcoin network. They use computers running on powerful chips – often stored with computers – to solve complex puzzles in a process that facilitates securing the network and processing transactions. Payments are in Bitcoin.

The difficulty of the puzzles, which affects how much energy is needed to solve them, is largely determined by how many miners participate in the process.

High energy costs, increasing competition and months of low Bitcoin prices — the biggest digital asset lost two-thirds of its value last year — put intense pressure on miners’ balance sheets in 2022. Shares in Riot Platforms and Marathon Digital plunged.

Argo Blockchain (ARBK) restructured in an attempt to avoid bankruptcy. Shares rose 35% in 2023. Others were not so lucky: Core Scientific
,

among the largest miners, filed for Chapter 11 bankruptcy protection late last year.

Although there are still risks – and competition continues to be high – cooling energy costs and rising Bitcoin prices have made the whole enterprise more attractive again, which explains the significant rise in cryptomining stocks. Argo

was upgraded to Buy from Hold last Friday by analysts at Compass Point, who also raised their target prices on Riot Platforms and Marathon Digital.

Because crypto miners rely on computer chips — typically application-specific integrated circuits, or ASICs — chip makers may look to an alternative way to play the trend. However, some of the biggest names in chips seem to have distanced themselves from mining as crypto’s shine has worn off over the past year.

Intel (INTC) announced this week that it is discontinuing production of its Bitcoin mining chip line, the Blockscale ASIC, just a year after its launch. The company, in a product discontinuation notice on its website, flagged that it would stop taking orders in October before stopping shipments next April.

Intel did not immediately respond to a request for comment.

Nvidia ( NVDA ) also seems to be pulling back. While the ASICs were widely used to mine Ether, the second largest crypto, in a similar way to Bitcoin mining, an upgrade last year to the Ethereum blockchain network largely rendered this process obsolete. Even before the “Merge” upgrade,

Nvidia took steps to make its chips less attractive to miners in an effort to support its core customers in artificial intelligence and gaming.

In an interview with The Guardian published last month, Nvidia’s chief technology officer said crypto “provides nothing useful to society.”

Manufacturers of two other popular ASIC chips used in Bitcoin mining, Bitmain and MicroBT, are both privately owned and based in China. A third, less popular type of chip is made from Canaan

(CAN), which is Chinese and listed on Nasdaq via American depositary receipts.

Shares of Canaan, which has a market capitalization of less than $500 million, are up 32% so far this year. Investors would be better off buying Bitcoin mining stocks.

Write to Jack Denton at [email protected]