03/15/2024 0 Comments

1. Crypto miners poised to dig a little deeper

Bitcoin euphoria is back. So what would Sam do? Enterprising shopkeeper Samuel Brannan coined it in by selling kit to prospectors who rushed into California during the 1850s gold rush. It was nice business: gold pans, retailing at 20 cents before 1849, were soon going for $8.

Fast forward a couple of centuries to the bitcoin rush: the bitcoin price has almost tripled in the past year to about $73,500 and miners that hatch the tokens are riding the wave. Marathon Digital Holdings is up by a similar magnitude; Riot Platforms is up nearly 60 per cent.

Mining coins, as with any commodity, requires top dollar kit (in this case vast computing capacity) and plenty of energy — more, reckons the Cambridge Blockchain Network Sustainability Index, than Egypt or Poland. 

It also — again as with oil or anything else dug out of the ground and seabed — requires an end price above the cost of production. Estimates for the production cost of bitcoin sit around the mid-$20,000s, leaving miners comfortably in the money right now: daily mining rewards hit a record $79mn on March 11, according to Blockchain.com data.

For sure, bitcoin will not rally forever and mining is a brutal business; many players have been wiped out. Of the dozen or so listed names, mainly in North America, only three have market caps above $1bn. Mining rigs are inherently more expensive as efficiencies improve and three big manufacturers — Bitmain, Canaan and MicroBT — dominate.

Ongoing threats include environmental concerns that the industry is guzzling electricity, and more regulatory scrutiny. The EU’s Markets in Crypto Assets will start taking effect towards the latter half of the year; in the US half the CFTC’s actions last fiscal year were taken against digital assets. Meantime, competition is growing, not least from states like the UAE and Bhutan and wealthy (usually industrial) families.

The recent greenlighting of ETFs, which have attracted over $70bn in inflows in barely two months, is more nuanced. Investors could use these as a proxy for miners, making them a substitution rather than additional demand.

More immediate is next month’s “halving”, an event carried out every four years or so and designed to mimic supply constraints in the real world. Miners will have to work twice as hard for the same money as the number of bitcoin rewards drops from 6.25 to 3.125 — or put another way, all else being equal, production costs will double to about $50,000.

Yet things are unlikely to be quite so dire. For one, well-funded miners spend the run-up buying more efficient kit. Note: more than a few hold bitcoins themselves, ensuring deep pockets.

At the other end, some miners will simply fold or be bought; see, for example, Marathon’s $179mn purchases at the end of last year. JPMorgan estimates a 20 per cent drop post-halving in the hashrate, a measure of computing power brought to bear. Other miners, such as Bitdeer, are getting into manufacturing rigs themselves.

Miners, sensitive to lobbyists and wallets, are also getting savvier about energy costs, increasingly turning towards renewable energy and taking on stranded electricity from producers. Japan’s Tepco is one such provider. Countries such as Ethiopia and Paraguay are also selling excess capacity to miners.

Still, investors might recall that Brannan’s nous was all about timing. Today, those gold pans can be had for a mere $5.95.

2. Crypto miners are pulling in more money than ever as bitcoin shatters records

Bitcoin’s record-breaking spree is spurring windfall profits for cryptocurrency miners, with industry revenues reaching all-time highs, Deutsche Bank said in a research note.

On Monday, daily mining revenue hit a new peak of $78 million a day, climbing in unison with the ongoing bitcoin rally. That same day, the token surged past a $72,000 record threshold, though analysts expect even higher price levels this year.

Driving the rebound is Wall Street’s emerging embrace of the asset, with 11 spot bitcoin ETFs launched in mid-January. The success of these funds is spurring even more institutions to jump into the race, including Wells Fargo and Merrill.

Other tailwinds are yet to come, and include regulatory changes, loosening monetary policy, and the highly anticipated halving, Deutsche said.

The latter, a four-year event that reduces the amount of bitcoin awarded to successful miners, is pushing firms to acquire new capital. Since February 2023, 13 firms have invested $1 billion in specialized computers and equipment, meant to boost operations.

It’s crucial that miners invest in such upgrades, as halving cycles often cut into profit-taking, leading to firm fallout and consolidation.

“The last halving took place in May 2020, reducing the miner reward from 12.5 to 6.25 bitcoins per block. Miners saw their profits significantly reduced overnight. Many were forced to shut down outdated rigs that became unprofitable to operate,” Deutsche wrote.

The next halving is scheduled for April of this year, and will reduce awarded bitcoins to just 3.125. Fierce competition is already evident in rising bitcoin energy consumption, which rose to its highest since September 2022 in annualized terms, the bank said.

But for bitcoin investors, the halving cycle should enflame the price rally.  “In the 30 days prior to the November 2012 halving, prices rose by 5%. A more substantial 13% gain was seen ahead of the July 2016 event. Most recently, there was a sizable 27% price increase in the month before the May 2020 halving,” it wrote.

The token’s higher prices could actually mean that miners have to sell less of acquired bitcoin to achieve the same profitability, Standard Chartered analyst Geoff Kendrick pointed out last year. This means that firms could sell even less of the asset, diminishing supply and causing bitcoin to surge even higher.

In his latest forecast, he expects bitcoin to rise to $100,000 before 2024’s end, boosted by inflows to the ETFs.

Why This Bitcoin Mining Cycle is Different: Coinbase Analysts Weigh In

2. What Would Impact the Current Bitcoin Halving Cycle?

Historically, halvings have reduced Bitcoin miners’ rewards. The 2024 halving will slash issuance from 6.25 BTC per block to 3.125 BTC. Though historical data offers some guidance, the limited number of past events restricts the ability to predict future price movements accurately.

The halving mechanism is designed to mitigate inflation and influence the market price of Bitcoin. However, to truly grasp Bitcoin’s potential post-halving, investors must examine the detailed dynamics of supply versus demand.

Remarkably, since early Q4 2023, there has been a significant increase in the active BTC supply, with a 1.3 million rise outpacing the cumulative ETF inflows. This shift suggests a deeper change in market behavior, especially with the presence of institutional investors through ETFs, adding a layer of complexity.

The reduction in Bitcoin supply traditionally leads to speculations of a price increase. Yet, this cycle demands a reevaluation of such assumptions. The analysis must consider the nuances of miner selling activities, long-term holder actions, and liquidity from Bitcoin collateral usage.

Nevertheless, the introduction of spot Bitcoin ETFs has drastically shifted the scenario. These financial products have seen massive inflows, fundamentally altering how investors approach this halving.

Hence, this cycle distinguishes itself with the steady influx of ETF investments contrasted against an expanding active Bitcoin supply. This scenario challenges the simple scarcity narrative, advocating a nuanced understanding of supply and demand.

Although this cycle may not necessarily trigger a supply crunch, it highlights Bitcoin’s evolution into a recognized digital asset class within mainstream finance. According to NiceHash, the Bitcoin halving is approximately 34 days away.

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Harvey CHEN