Opinion: European crypto miners’ problems are North American miners’ gains

The Bible says that the rain falls on both the righteous and the unrighteous. James Joyce says that the snow is falling all over the country. But winter is not necessarily coming for all cryptocurrency miners.

High energy costs, caused by the war in Ukraine, are having an impact on cryptocurrency miners, most of whom trade in bitcoin. That much we know. But that effect is not uniform.

The European miners will be hit the hardest and through that, due to the peculiarities of crypto, it is the miners elsewhere who will end up benefiting.

It may yet be time to consider shares in publicly traded crypto miners.

Russia’s invasion of Ukraine has resulted in heavy Western sanctions against the aggressor. In retaliation, Russia, a major natural gas exporter, has limited the amount of the commodity it sends to Europe.

Petrol prices have risen. It has an impact on other types of energy as consumers try to find alternatives to expensive gas. It also has an impact on electricity prices because much of that power is generated from gas.

Energy is fungible to some extent, and shock to one type of it can reverberate to all types.

And this is how crypto miners are affected, because energy is their true game. They have little control over the price of the item they produce or the efficiency of their machines. Crypto mining requires huge amounts of energy and it is the price of the electricity that makes or breaks a mining operation.

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That price has become much higher in the wake of the Ukraine invasion, and many miners are struggling to deal with higher production costs amid a bear market.

But now it gets even tougher.

EU members must now make preparations to stop all crypto mining “in the event that there is a need for load shedding in the electricity systems,” the European Commission recently announced.

For European miners it is terrible. But if they are forced to shut down, due to the way mining works, the miners that are still operating end up being more profitable.

That’s because the mining rewards are fixed. Every 10 minutes or so, 6.25 bitcoins, worth around $130,000, are released onto the network. Each miner shares in these 6.25 bitcoins.

We have previously witnessed the phenomenon of miners winning when competitors leave, when in 2021 China said it would ban mining, and major Chinese miners shut down. In the wake of this, the “difficulty”, a measure of how difficult it was to make a profit, fell by 28 per cent.

The effect of that can be seen in the share prices of North American miners who were not forced to shut down.

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In the two months following the Chinese mining ban, shares of Toronto-listed Hut 8 Mining Corp. soared. by more than 160 percent. While it was actually during a crypto bull market, bitcoin only rose about 50 percent during the same period.

Could we see a repeat of that this winter?

It is hard to say. Crypto is in a bear market, confronting high central bank interest rates for the first time in its short existence. And every miner’s fate depends on its underlying commodity.

The situation in Europe is not set in stone either. Gas prices in Europe have fallen due to Germany’s admirable efforts to fill winter storage. The West may lose the stomach to continue helping Ukraine at such high costs. Russia may capitulate in the midst of its ill-fought war. Anything can happen.

But on the flip side, many of these mining companies have good power agreements that lock in the price for the long term. Many people in North America are little affected by soaring gas prices.

Additionally, bitcoin has already been hit hard. It has languished at its current price of around US$20,000 for more than two months – which was the peak at the last bull run of 2017.

Traditionally, with each market cycle, bitcoin crashes no further than the high it set in the last bear market, and that’s where we are right now.

For the investor brave enough, it’s certainly a play to make.