Bitcoin mining shares in North America rise as companies assert their advantage

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Bitcoin symbol in a digital matrix microstructure – 3d illustration

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China’s vast expulsion from Bitcoin mining this year, coupled with its most serious crypto ban to date, is a clear inflection point in the nascent but growing Bitcoin space. Almost overnight, the criticism that “China controls Bitcoin” became moot, as the historic epicenter of Bitcoin mining died out and its pros packed their machines to move elsewhere.

In the ensuing fallout, North America, particularly the United States, became the dominant mining center in the world. Additionally, mining machine pre-orders and hashrate plans for 2022 indicate that won’t change anytime soon.

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Some models show that the United States alone has already captured 35% of the network’s hashrate. While this Cambridge Bitcoin Electricity Consumption Index data is flawed; it relies on IP address data, which may be unreliable due to VPNs and other IP scrambling technologies, and it is incomplete as it only pulls from four Bitcoin mining pools, which it doesn’t is probably close to the mark. At Luxor Technologies, we estimate that the United States currently operates 40% of the network hashrate.

The ban kicked off the biggest restructuring of the “hashrate” since the inception of Bitcoin (the hashrate is the industry term for the computing power used at any given time to secure the Bitcoin network) . With more than half of Bitcoin’s hashrate moved from China, the second half of 2021 has been a lucrative time for connected miners.

Nothing more than the major listed Bitcoin mining companies in North America. The top six in terms of market cap, for example, mined 79% more bitcoin in the third quarter than in the second quarter and 155% more than they mined in the first quarter. With competition reduced by China’s mining ban, they are producing more blocks than they would otherwise if Chinese miners, who previously made up 50 to 60 percent of the network, remained online. These miners also turned on new machines during the third quarter, increasing their hash rate.

And there is more to come. With a plethora of financing options made more readily available with the growing popularity of Bitcoin, these public companies are raising more money than ever to expand their operations. They will use that money to buy new machinery and build infrastructure that will make North America the dominant hashrate center for years to come.

Wider Context: How China Dominated Bitcoin Mining

China has always held an unwavering place as the world’s leading mining destination. Not only have the major mining rig manufacturers become dominant in the country thanks to their proximity to the silicon chip makers that specialized machines need to operate, but the Chinese region of Sichuan, rich in hydropower and abundant deposits. coal from Xinjiang and Inner Mongolia supplied miners. with cheap energy, making mining in the country incredibly lucrative.

Juggernaut as it was, the CCP’s warrants completely dismantled China’s once-booming bitcoin mining industry. When the crackdown began to fracture operations, Bitcoin’s hashrate collapsed, falling more than 50% from its peak of around 190 exahashs per second (EH / s) in May to a low of 69 EH. / s end of June. (“Exa” is a number that denotes 1 quintillion, and the hashrate is a measure of the number of “hashes” (that is, riddles to find the next block in the chain); so 190 exahashs per second means that the miners collectively make 190,000,000,000,000,000,000 riddles per second to mine the next block).

Bitcoin’s hashrate collapsed with China’s ban, but it is recovering thanks to North American miners

Luxor hashrate index

With so much hashrate disabled, Bitcoin’s difficulty has been reduced to make it easier to mine. The difficulty is an internal score which is algorithmically adjusted approximately every two weeks to ensure that Bitcoin blocks are mined into the target with an average of 10 minutes; if the hashrate increases during a period of difficulty, the difficulty increases, and if the hashrate decreases, then the difficulty decreases.

Of course, the hashrate bounced back as fast-moving Chinese miners ignited rigs elsewhere and mega-farms in North America and elsewhere ignited their own new machines. In fact, bitcoin’s difficulty has increased 8 times in a row, the longest succession of upward adjustments since the first half of 2018.

NOTE: Some sources have reported that Bitcoin’s hashrate has already recovered to the highs it set earlier this year, but this is not correct. The only way to measure the hashrate in real time is to calculate it by taking into account both the number of blocks produced in a given time period and the current mining difficulty (a metric that dictates how badly it is. difficult for miners to extract blocks). Sources claiming the hashrate rebounded to pre-ban China’s highs have relied on 1-day estimates, which can be skewed if blocks come out faster or slower than usual; a more precise measurement looks at the moving average over one or two weeks.

More Bitcoin = more money for miners

But if we look at the profitability of miners in terms of BTC (what we call the price of the hash), we can see that the third quarter was a particularly lucrative time for miners compared to the second quarter. As you can see in the first graph, there is a clear reverse correlation between mining difficulty and hash price. Looking further down on the Coinmetrics chart, daily USD mining income rose in sync with the price of the hash thanks to Bitcoin’s rally from $ 30,000 to its new all-time high of $ 66,500.

Bitcoin mining difficulty against Hashprice in BTC

Luxor

Bitcoin mining revenues surged with price recovery

Coinmetrics

Daily income of miners in USD YTD (Source: CoinMetrics)

All of this also led to impressive gains for the shares of these publicly traded mining companies, which provided an average return of 217%. By comparison, bitcoin has only appreciated 97% this year. For comparison, the Viridi Cleaner Energy Crypto and Mining Semiconductor (RIGZ) ETF is up 76% since its launch in late July.

Perspectives and Implications: North American Miners Show Their Advantage

North American miners have rapidly expanded their operations this year, and they have no plans to release the accelerator any time soon.

Looking at publicly available data from SEC filings and investor presentations, many of North America’s leading publicly traded bitcoin mining companies expect to dramatically increase their hash rate under management in 2022. .

Current and expected hash rate of major North American miners

Luxor

The above companies are expected to increase their collective hash rate by 277%, from 17.83 EH / s to 67.34 EH / s. This growth will come from next-generation equipment that miners have pre-ordered and which is scheduled for delivery by the end of 2022.

Bitcoin market capitalization divided by current and estimated hash rate in 2022

Luxor Decision Points: Where Bitcoin Mining Stocks Fit In A Crypto Wallet

As bitcoin and bitcoin mining increasingly institutionalize and they are also accepted in mainstream financial circles as evidenced by the fact that Blackrock, Vanguard, Goldman Sachs, Susquehanna and many other weights Wall Street heavyweights hold shares of large mining companies (although often as a result of maintaining mutual funds that track the price of indices such as the Russell 2000 that include such shares).

I expect these companies to continue trading as a Bitcoin proxy for investors who want exposure without owning the entire asset. Mining companies, especially those with large bitcoin cash holdings, have played a de facto role as bitcoin funds of sorts; Hut 8, for example, holds 4,724 BTC on its balance sheet, and although its total hash rate is comparable to that of Bitfarms (which owns 2,300 BTC with a market cap of around $ 900 million), the market cap of about $ 2.1 billion from Hut 8 is the shutdown of Riot (which owns 3,534 BTC with a market cap of $ 2.8 billion but has almost twice as much hashrate as Hut 8).

Additionally, these stocks are unlikely to be much affected by the new Bitcoin futures ETFs that have just been launched. The restrictive nature of these products, the overhead costs associated with renewing monthly contracts, and expense ratios make them an imperfect competitor to Bitcoin or its associated mining stocks. In fact, you can see in the chart below that they have significantly outperformed the top two ETFs (ProShares Bitcoin Strategy ETF (BITO) and Valkyrie Bitcoin Strategy ETF (BTF), which have followed Bitcoin since its inception.

Major Bitcoin Mining Stocks Outperform New ETFs

TradingView

Even when spot market ETFs for Bitcoin are approved, investors will no doubt continue to view these stocks as hijacked investment vehicles for Bitcoin itself, and in the same way that gold diggers move in the same way. rising and falling with gold, they will follow the price of Bitcoin. Additionally, as these miners continue to mature by expanding their operations and increasing their revenue streams, taking advantage of this brief opportunity to gobble up market share, they will benefit from the fact that their valuations in the future will be more tied to their own. actual performance than us. ‘ve seen in the past.

That said, miners with more Bitcoin on their balance sheets are likely to experience larger declines in a bear market, as they are more exposed to bitcoin and, therefore, trade as a sort of replacement.

Bitcoin mined by large state-owned companies

Luxor

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