Why Bitcoin Miners Fell Like Stones Today

[ad_1]

What happened

Bitcoin miners took a nose dive Monday morning after a bad weekend and a tough Monday morning for Bitcoin (CRYPTO:BTC) and other cryptocurrencies. The market downturn has been going on for some time, but accelerated at the end of last week.

Hut 8 Mining (NASDAQ:HUT) fell 15.8% early and is down 6.5% at 1:30 p.m. ET. Hive Blockchain Technologies Inc (NASDAQ:HIVE) fell 17.6% and is currently down 8.2%, while Marathon Digital Holdings Inc (NASDAQ:MARA) fell 11.9% and is no longer just 1.2%, and Bit Digital Inc (NASDAQ:BTBT) plunged 17.9% and is currently down 9.8%.

Image source: Getty Images.

So what

There are two downsides to lower Bitcoin prices for miners. First, the bitcoin they mine is less valuable, which means their mining revenue and margins will likely drop if the price decline is prolonged.

Second, most mining companies have decided to keep Bitcoin on their balance sheets, further increasing their exposure to the Bitcoin price. It is this balance sheet exposure that can drive down valuations quite quickly.

No matter how you look at it, miners are tied to Bitcoin’s success and failure and with prices falling from Friday afternoon to early morning, it’s hard to see how they wouldn’t be affected. The question now is how long the price decline will last and whether a recovery in prices and trading activity will occur in 2022.

Now what

The chart below shows the general challenge for Bitcoin miners today. They had received high market valuations on the idea that profitability and cash flow would improve as Bitcoin rose and mining needs increased. But you can see below that they had yet to demonstrate much cash from operations in 2021.

HUT Cash from Operations Data (Quarterly) by YCharts

Now we see Bitcoin plummeting and that means deteriorating balance sheets, deteriorating cash flow, and this is at a time when many of these companies are expanding their mining operations as well.

I think ultimately Bitcoin mining will be a commodity industry and we are seeing some of the dynamics that occur regularly in commodities. When the money is good, investments flow in and capacity increases. When the bottom of the market falls, there are many financial stocks that weaken. We see the latter today and it could make for a tough first quarter for miners.

Stocks are bouncing back, but this reminds us that if you want exposure to Bitcoin, you can always just buy Bitcoin. Miners are a leveraged bet on the industry and they can turn south much faster than the underlying cryptocurrency.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

[ad_2]