Miner profitability will push bitcoin to $50K this year: StanChart, and more

07/12/2023 0 Comments

1. Miner profitability will push bitcoin to $50K this year: StanChart

Standard Chartered expects the profitability of bitcoin miners will play a crucial role in driving the price of bitcoin (BTC) to $50,000 by the end of this year, and to $100,000 by the end of 2024.

In a Monday note, Geoffrey Kendrick, StanChart’s head of FX and digital assets research, highlighted the role played by miners in determining the overall supply of newly mined bitcoin.

This reduction in selling leads to a decrease in the overall supply of bitcoin, which ultimately drives up the price.

StanChart’s prediction aligns with an earlier forecast in April, when Kendrick said several factors would propel bitcoin toward $100,000 by the end of next year.

However, this time he emphasized the significance of miner profitability as the key contributing factor, considering it to be more impactful than earlier believed.

Q2 showed drop in miner sales, boosting prices

StanChart noted that during the first quarter of 2023, the 12 largest listed miners, representing 20% of global bitcoin mining, sold 106% of the bitcoin they mined.

This selling percentage appears to have slightly decreased to below 100% in the second quarter, reducing the supply and contributing to higher prices.

By adjusting their selling strategy, miners have the potential to benefit from the anticipated price increase in bitcoin.

StanChart expects bitcoin to rise to about $50,000 by the end of 2023 as the share of newly mined bitcoin sold is projected to decrease to around 20% to 30%.

This adjustment translates to miners reducing the number of bitcoin they sell per day from the current 900 to between 180 and 270.

Increased cash profits set to drive decreased selling

The bank highlighted that after speaking with bitcoin miners directly, it became evident that miners have three sources of cash: selling bitcoin, selling equity or borrowing.

Miners indicated that selling equity was unlikely due to low equity prices, and borrowing money was unfavorable due to high interest rates.

Consequently, selling bitcoin remains the most feasible option for miners to raise cash in the current cycle.

However, with higher bitcoin prices and increased cash profits, selling is expected to decrease significantly over time, supporting further price increases.

“We reiterate our end-2024 BTC price target of around USD 100,000, with potential upside from reduced miner selling,” Kendrick said.

Newcomers shine in cost efficiency

The bank evaluated miner profitability based on three factors: the direct cash cost of mining one Bitcoin (mostly electricity costs), the total cash costs per Bitcoin mined and whether mined bitcoins are sold or held.

They found that cash costs varied among companies, with Cipher Mining and TeraWulf as relative newcomers having the lowest costs.

On the measure of all-cash costs, Cipher Mining performed well, while larger-scale operations like Riot and Core Scientific also demonstrated favorable results.

Goldman Sachs earlier predicted a $100,000 target for bitcoin

Various analysts have weighed in on bitcoin’s potential trajectory. At the start of last year, Goldman Sachs said bitcoin could hit $100,000 in the next five years if investors treat it like gold.

More recently, Matrixport’s head of research predicted the cryptoasset would hit $125,000 by the end of next year.

2. Bitcoin’s surge: 300% increase to $120,000 in 2024 with declining miner sales, Standard Chartered predicts

According to Standard Chartered analyst Geoff Kendrick, Bitcoin could experience a surge of up to 300%, reaching a valuation of $120,000 by the end of 2024. Kendrick’s previous prediction in April was that Bitcoin would reach $100,000 by next year, but he now believes this estimate may be too conservative, taking into account the impact of miner profitability.

Kendrick attributes his more bullish stance to increased mining profitability. As miners find it more profitable to hold onto their Bitcoin rather than sell it immediately, the reduced supply of Bitcoin in the market can push prices higher. Kendrick estimates that in the second quarter, nearly 100% of all mined Bitcoin was sold, but he expects miners to gradually reduce their sales over time.

To illustrate this point, Kendrick explains that when Bitcoin’s price surpasses the average all-in cash cost of mining, miners tend to sell fewer tokens. If the average BTC price in the first quarter of 2024 reaches $50,000 as predicted, the calculation of “BTC minus all cash costs” would rise to $30,000. Consequently, selling only 27% of the Bitcoin mined in Q1-2024 would generate the same excess cash as selling 100% in Q2-2023.

Reduced miner selling not only affects prices but also impacts the inflation rate of Bitcoin. By reducing the net supply of Bitcoin by approximately 250,000, the inflation rate could decrease from 1.7% to 0.4% year-over-year.

The recent increase in Bitcoin’s price, with it surpassing $30,000, has been attributed to interest from Wall Street giants in creating Bitcoin exchange-traded funds (ETFs). This has led to other bullish predictions for the cryptocurrency, such as Fundstrat’s Tom Lee forecasting a valuation of $200,000 in the coming years.

The profitability of mining has been rising as the cost to produce new Bitcoin decreases. Large-scale miners, including Riot and Core Scientific, have been cutting corporate costs, while energy prices have also declined. Additionally, halving events, which occur when the amount of Bitcoin produced by mining is halved, tend to lead to industry consolidation and further reduction in mining expenditures. The next halving event is expected to take place in April or May of 2024.

Why is it relevant for investment funds in Latin America?

If Bitcoin reaches the predicted levels, it is likely to attract the attention of investors and adopters in Latin America. This could increase interest in Bitcoin mining and cryptocurrency trading in the region.

Latin America is a region with a growing adoption of technology. This provides a vast market for venture-backed startups, either locally or as an entry point to other markets in Latin America.

The region has shown a growing interest in cryptocurrencies, particularly due to factors such as the volatility of local currencies, limited access to traditional financial services, and the opportunity for more efficient and cost-effective international transactions.

3. Bitcoin miners are not looking forward to Bitcoin halving

As the intricate dance of technology and economics unfolds in the realm of cryptocurrencies, Bitcoin miners are nervously anticipating an event which, while maintaining the currency’s value, puts them in a precarious position.

This is the quadrennial phenomenon of Bitcoin halving, a coded aspect of the cryptocurrency world that is now casting shadows of uncertainty over the industry’s future.

Balancing act: Bitcoin miners vs. market stability

The principle of Bitcoin halving is simple yet consequential. Every four years, the reward Bitcoin miners receive for validating transactions is halved. This mechanism was designed to regulate the supply of Bitcoin and protect its value over time.

In of April 2024, the halving will reduce miners’ earnings from 6.25 Bitcoin to 3.125 per block. Despite these cuts, historical trends have shown significant price rallies in Bitcoin’s value post-halving.

These market surges and technological advancements in mining efficiency have previously helped miners weather the storm. However, the forthcoming halving event carries a much heavier air of uncertainty.

Miners with high operational costs or outdated infrastructure may find their operations unviable. About 40% of miners are still grappling with operational costs that exceed the break-even electricity price projected post-halving, pointing to turbulent times ahead.

Additionally, the challenges are intensified for smaller miners who outsource their operations, as their profit margins risk turning negative.

Mounting costs and competitive pressure

Another significant factor plaguing Bitcoin miners is the market’s own success. While Bitcoin value has seen an 80% surge this year, reaching around $30,000, its peak of almost $69,000 in late 2021 is a distant memory.

This value growth hasn’t outpaced the parallel increase in production costs, which have risen alongside electricity prices. This financial tension is further tightened by a substantial debt burden that many miners now carry, totalling between $4.5 and $6 billion across the global mining industry.

Factors like the mining ban in China have led to a surge of miners relocating to North America, causing increased competition. Concurrently, the computing power required to mine Bitcoin has hit a record high, compressing profit margins even further.

To maintain their current profits post-halving, Bitcoin’s value would need to surge to between $50,000 and $60,000, a stark contrast to the current market scenario.

Preemptive strategies: Miners in survival mode

In the face of these challenges, Bitcoin miners are taking proactive steps to cushion the halving’s impact. Tactics include locking in power prices and building up financial reserves.

Some, like Hut 8 Mining Corp., have secured credit facilities to preserve their Bitcoin treasury, while others, like Texas-based miner Lotta Yotta, are limiting investments and preserving cash flow.

The halving event is projected to double Bitcoin’s production cost, adding another layer of strain on the miners.

Without taking into account other significant expenses like management compensation or debt interest payments, the cost of producing a single Bitcoin already ranges between $7,200 and $18,900.

This daunting reality underscores the high-risk nature of Bitcoin mining, particularly during a halving year.

The halving event, integral to the sustainable growth of Bitcoin, casts a dark cloud over the miner community. While some innovative solutions like waste-to-energy projects are being explored, the future is uncertain for many miners.