Bitcoin mining stocks are under fire. It might be time to buy.

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The time of dreams

Investors are punishing Bitcoin mining stocks as cryptocurrency prices continue to fall. Bitcoin was trading down 4% on Thursday, to $ 48,300, and down 14% in the past seven days.

The decline in Bitcoin is dragging the broader crypto industry, particularly affecting miners. One of the biggest miners, Marathon Digital Holdings (ticker: MARA), lost 11.5% on Thursday, to $ 41.28. Riot Blockchain (RIOT) was down 9.4%, to $ 26.58, while Stronghold Digital Mining (SDIG) was down 6.9%, to $ 16.97.

Other factors are putting pressure on crypto as well, including unrest in the wider tech sector as investors take new risks into account, including the spread of the Omicron coronavirus variant and the Federal Reserve’s tighter monetary policies. .

Miners basically process transactions on the blockchain, earning or “hitting” Bitcoin in exchange for each block they successfully validate.

Barron’s recently wrote favorably about the industry, saying stocks appear to be cheap crypto bets. Shares were weak as Bitcoin prices fell, reducing the value of coins mined.

Stocks have also come under pressure as it becomes more and more difficult to mine or produce Bitcoins, reducing the number and value of coins per miner. The mining difficulty resets every 2,016 blocks, approximately every two weeks, ensuring that 144 blocks are mined daily, producing 6.25 Bitcoins per day. The difficulty has been rising since July and has increased by several levels since October.

The next reset is scheduled for December 11. It could increase the difficulty rate by 6%, believes Christopher Brendler, analyst at DA Davidson. This can make it more difficult for miners to meet Wall Street targets for coins produced in the quarter.

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Indeed, some minors seem to be well behind the objectives. Marathon mined 418 Bitcoins in October and 196 last month, for example. To meet Brendler’s forecast for the fourth quarter, the company is expected to mine 1,112 pieces in December, more than tripling production.

Marathon is adding mining machinery and plans to sharply ramp up production next year at a new facility in Texas. But Brendler doesn’t expect the company to produce more than 1,100 pieces in December.

Riot Blockchain, for its part, is expected to mine 391 Bitcoins in December to meet Brendler’s estimates in the fourth quarter, up from 464 coins mined in October. Hut8 Mining (HUT), a Canadian miner, is expected to mine 606 coins in December, more than double its November volume of 265 coins.

“As mining difficulties increase, we’ll see pressure on the December numbers,” Brendler says.

Price drops can, however, represent a buying opportunity. Most miners can be very profitable with Bitcoin at $ 50,000. The hash rate of the network, or the computational power spent on mining, usually decreases a bit as prices come down. The hash rate has been rising for months, but continued weakness in Bitcoin prices could slow its growth.

Another positive finding, according to Brendler, is that leverage may disappear from Bitcoin as prices correct. Stricter crypto tax rules are also coming, and traders may liquidate positions ahead of new reporting requirements which are expected to take effect in 2022.

“With underlying fundamentals so strong, especially against the outlook for a sustained pandemic, we are bullish on BTC here,” Brendler wrote in a note this week, referring to Bitcoin. “However, at current valuations, we see a significantly better risk / reward ratio in our mining stocks as there should be more potential in a rally in BTC.”

It maintained buy ratings on Riot, Marathon, Hut 8, Stronghold, Power & Digital Infrastructure (XPDI), and Argo Blockchain (ARBK).

Granted, stocks are still bets on Bitcoin and crypto more broadly. And sentiment will have to reverse for stocks to pick up.

“We’ve had tremendous growth within the group over the past year, and it’s creating a moment of friction in stocks,” said Devin Ryan, analyst at JMP Securities.

Valuations for miners look more attractive. If investors turn bullish on Bitcoin again, stocks should move forward.

Write to Daren Fonda at [email protected]

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