Hedge funds raise bets against bitcoin miners
Hedge funds have increased their short positions against shares of cryptocurrency miners, betting that more will go to the financial brink after the collapse of the FTX exchange.
With the price of bitcoin down by nearly two-thirds this year and the cost of the power miners need to run their energy-intensive computers soaring, hedge funds are betting that some companies’ business models are still far from viable.
Bearish investors have bet that the implosion of Sam Bankman-Fried’s FTX will further deepen the malaise for a corner of the crypto market that expanded rapidly last year, often with borrowed money, hoping to profit from high prices of tokens such as bitcoin.
Miners, who use a network of powerful computers to solve cryptographic calculations in return for new tokens, face the constant need to upgrade their technology and are also highly dependent on the price of the cryptocurrencies they sell.
“Because crypto is trading way below where it was before, and they [miners] have a lot of expenses, it’s not clear they’ll ever be able to turn a flat margin,” said Chris Crawford, chief investment officer at Crawford Fund Management in Boston, which runs a hedge fund for Eric Sturdza Investments and has shorted some crypto. miners. Shorting means betting that prices will be lower in the future.
Short interest in U.S. group Marathon Digital, one of the biggest U.S.-listed miners, surged again last month to more than 36 percent of outstanding shares in the weeks after FTX collapsed, according to Nasdaq data.
Last year, Marathon paid its former CEO Merrick Okamoto just under $220 million in stock. This was driven by awarding him shares based on the company’s market value, which is heavily influenced by the bitcoin price. And in October of this year, it paid him $24 million to settle a dispute over past stock awards.
The company has repeatedly been loss-making. This year it has fallen well short of its own production targets set last year of mining 55 to 60 bitcoins per day and predictions of generating mining profits of between $86.5mn and $103.6mn a month.
Investors had already stepped up their bets on Marathon over the past year and have been rewarded as the company’s shares have plunged 86 percent.
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The funds have also more than doubled their stake in Stronghold Digital Mining – whose shares are already down 96 per cent this year – to almost 10 per cent of the shares since the start of the year.
Short interest in Greenidge Generation has increased from under 1 percent to 4.7 percent, while Hut 8 Mining and Riot Blockchain, the largest US-listed operator, have also attracted more attention from short sellers this year.
Already hard hit by the bear market in risky assets this year, crypto prices fell further last month following the dramatic failure of FTX, once valued at $32 billion, whose former CEO Sam Bankman-Fried was arrested in the Bahamas this week after US prosecutors filed criminal charges.
“The profitability of miners is a discussion that comes up every time bitcoin is down – and then perceived as a problem for all crypto,” said Anders Kvamme Jensen, co-fund manager of the AKJ Digital Assets fund.
“Bitcoin mining misses the whole point behind digital assets: after all, the goal is to decouple from the traditional world and all its players, and not go into reverse by camping on the power grid,” he added.
