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New All-Time High Hash Rate
Just two months ago, the 2022 expansion of the Bitcoin hashrate looked bleak. The price of bitcoin had plummeted, miners’ margins were being squeezed, large public miners were shedding bitcoin holdings, and it was a ripe time to review the state of miners’ capitulation to the market. Fast forward to today: the price has dropped from a massive bear market rally to $25,000, while the online hash rate has risen to a new all-time high of nearly 250 EH/s. The cut and scope and increases in the price of bitcoin have not affected the hash rate to increase this year. Hash rate has not really decreased since July in 30 days of growth.
The average hash rate reached 248 EH/s for the first time
Chart of our 22/10/21 – Public mining analysis
This is some of the best public data available to explain why bitcoin’s hash rate has exploded so much. They are the public miners who execute expansion plans. But that doesn’t mean large-scale mining companies haven’t faced additional pressures. Compute North, one of the largest operators of bitcoin mining hosting and data center services, filed for Chapter 11 bankruptcy a few weeks ago. They hosted miners for companies like Marathon Digital, Compass Mining and Bit Digital across 84 different mining entities. A major auction of most of Compute North’s existing assets, including mining containers, machines, and entire data centers, will take place on November 1, 2022.
In the Celsius collapse, Celsius Mining also filed for bankruptcy in July. That said, it’s clear from Compute North’s recent bankruptcy that the pressure is still on large-scale miners. They are not out of the woods yet and we have hesitated to call for the end of miner capitulation this cycle as the price has stagnated and the hash price (miner revenue divided by the hash rate) continues to face- se to strong headwinds with this level of expansion of the hash rate develops.
After reaching a new all-time high, mining difficulty saw a decent-sized negative adjustment of 2.14% just prior to this hash rate explosion over the past week. But this all seems to be short-term relief because as of now, the next expected difficulty adjustment looks like a positive adjustment of 13.5% at the time of writing. We haven’t seen this level of adjustment since right after the Chinese mining ban. This kind of adjustment would be bad news for the profitability of existing miners, as the price of hashish would come under more pressure.
Bitcoin mining difficulty continues to increase
It takes incredible operational excellence to continue to excel in the bitcoin mining industry for multiple cycles.
This is why equity investment related to bitcoin mining can be extremely lucrative (if you pick one of the winners) or downright disastrous.
In our December 21 piece last winter, we said the following:
“What you should gather from evaluating the performance of miners trading on the exchange with bitcoin itself is that due to the capital structure of their business and the valuations present in the stock markets, miners can and will likely outperform bitcoin during periods when the hash price rises significantly.
“However, in the long term, the revenue in terms of bitcoins for each mining company is guaranteed to decrease in terms of bitcoins, and because of the excessively large earnings multiples that companies currently trade at in the stock markets in a world of zero interest rate even bitcoin mining shares tend to zero over time in bitcoin terms (again due to equity multiples assigned in a fiat denominated rate world zero interest).
Since that time, the share prices of publicly traded mining companies have fallen significantly when measured against bitcoin itself.
When measured against bitcoin, public mining companies have fallen significantly
This should come as no surprise. Miners’ margins are being squeezed relentlessly as earnings dwindle, both in terms of bitcoins and dollars.
Since bitcoin’s all-time high, all but one of the publicly traded mining companies have underperformed the asset itself.
All publicly traded bitcoin mining companies have underperformed the asset itself
While mining-related stocks can certainly appreciate from their current low valuations, the advancement of mining machines and the economic incentives of mining almost guarantee that the hash rate will continue to rise further from from here
To quote a previous issue of ours,
“However, the dynamics involved in the valuation of publicly traded bitcoin miners are somewhat different. Unlike other ‘commodity’ producers, bitcoin miners often try to retain as much bitcoin as possible in the its balance sheet.Relatively, the future issuance of bitcoin supply is known in the future with almost 100% certainty.
“With this information, if an investor values these stocks in terms of bitcoins, an outperformance over bitcoin itself can be achieved if investors allocate during the correct time during the market cycle using a data-driven approach.”
In the future, mining-related stocks as well as ASICs will once again be poised to make a big return against bitcoin itself. We believe that the time has not yet come.
Relevant past articles
