Buying low and selling high is one of the most basic components of investment advice in the history of financial markets. Bitcoin is now 10 months into its current bear market cycle, and many investors and companies that didn’t “sell high” are probably regretting it.
Miners are distinguished, however, from all other market participants because they are actually always buying (paying for electricity to earn more bitcoins) and, depending on their corporate strategy, also always selling (selling bitcoins to pay for capital expenditures and operating costs). ).
So how are miners doing in today’s bear market? This article takes a look at some of the financial decisions made by miners over the past two years, both during bitcoin’s recent bullish and bearish periods, and assesses where some improvements could be made in how the average mining company decides to hold, sell or to buy. your bitcoin.
Cliff Notes on Down Market Mining
Here’s a quick summary of the current state of the mining economy: things aren’t great.
The price of the hash is down 69% so far in 2022, and with that goes the profitability of the machine. Older hardware like Antminer S9s, for example, aren’t as profitable now that the total amount of network hashrate they contribute has dropped from 30% to less than 5% this year, according to Coin Metrics. Difficulty continues to reach new record highs as more miners add more hashrate, and the latest downward adjustment was the first decline in months.
Some miners are also sitting on exceptionally large amounts of debt, according to the data compiled by Jaran Mellerud, mining analyst at Arcane Research. Some miners even sell contracts to purchase hardware not yet delivered, while other miners, such as CleanSpark, buy them at a discount. And the last two months have seen two companies file for bankruptcy: Celsius Mining and Compute North.
Managing a Bitcoin Mining Treasury
One of the most important considerations every miner faces is whether to keep or sell their bitcoin. Other operational matters proceed, of course, before the miner begins to earn coins for his work. But what to do with block rewards is central to any mining strategy.
Some miners hoard as many as they can while waiting for the price to rise. These miners usually take out loans to finance their operating expenses. Or they become lenders themselves and earn a return on the coins they mine. Other miners sell all the coins they earn and simply want to trade profitably without any exposure to the rise or fall of bitcoin. Most miners fall somewhere between these two extremes: keeping what they can afford and selling what they need.
All of these decisions are made based on a miner’s treasury management strategy, and each team has a different approach. Fortunately for readers, public mining companies relayed these decisions to investors and the general public.
In the bull market, miners weren’t just building new facilities, hoarding bitcoins and announcing record hardware purchases. Some of them even went out and bought bitcoins at market prices to add to their treasuries. Marathon bought 4,812 BTC in January 2021. Argo Blockchain also bought 172.5 BTC in the same month. To say the miners were optimistic would be an understatement. However, Bitcoin is now trading roughly 30% below its lowest price in January 2021. These miners didn’t quite “buy the top”, but it was relatively close.
In the bear market, miners sell a lot of their bitcoins, in some cases even more than they are mining, indicating their sharp reaction to bearish conditions even liquidating their reserves. It is important to note that the total amount of bitcoins sold by these companies is in the thousands, but it is a very small amount compared to the daily trading volume of most liquid bitcoin markets. From Riot to Cathedra, large and small bitcoin mining companies were selling large amounts of their bitcoin holdings.
Bulls of last resort
Instead of selling bitcoin at $20,000, wouldn’t a miner rather sell it at $69,000, the all-time high? In theory, this makes a lot of sense. But in practice, enforcing this preference is more difficult. For one, miners are not the most sophisticated market participants. On the other hand, treasury management strategies are still very simple (hold, sell or lend) and often incomplete. For example, many miners have ways to hedge against the price of bitcoin, but almost none of them can hedge against the price of bitcoin hash, which would be a much more valuable financial product.
It is also important to note that miners are assumed to be very optimistic even when others are not. Miners are in many ways Bitcoin’s bulls of last resort. Home miners especially demonstrate this continuing with mine despite dire market conditions. While miners would have a stronger balance sheet by selling more bitcoins at a higher price than months ago, for better or worse their role is to somehow push the price up wherever they go.
What does the next mining cycle call for?
In the coming years, bitcoin mining companies will surely become better at managing the treasury. Many companies will learn the lessons of the last two years and focus on better profit maximization strategies. Some of this could include accumulating fewer coins. After all, gold miners aren’t known for hoarding large amounts of the precious metal on their balance sheets.
It’s hard to imagine bitcoin mining companies acting any differently in the future. But bitcoin miners have an almost mythical status in the industry. Bullish miners hoarding their coins is a psychologically reassuring thing for many market participants. Even small rumors of “miners are bearish” or “miners are selling” send waves of fear across social media. Even though miners are selling coins at a higher price, however, everyone would rather have well-capitalized miners at the bottom of a bear market than underwater, over-leveraged companies struggling to stay alive.
This is a guest post by Zack Voell. The opinions expressed are entirely my own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.