Miners spend an average of $15,000 to produce each coin, JPMorgan estimates.
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The plummeting price of Bitcoin could force crypto miners to sell the tokens to fund operations, further pressuring the digital currency.
In good times, crypto mining firms and Bitcoin’s price are locked in a virtuous cycle.
The miners own giant warehouses filled with specialized equipment that keep Bitcoin transactions humming and are rewarded more Bitcoin for the work. Rising crypto prices mean the firms can sell fewer of those coins to stay afloat and invest more in the mining equipment, making the Bitcoin network overall more powerful.
These aren’t good times.
Since the beginning of May, Bitcoin’s price has been cut nearly in half to about $20,600. Shares of some miners have fared even worse. Marathon Digital Holdings (ticker: MARA) is down 63% since May 4, while Riot Blockchain (RIOT) has fallen 58% and Core Scientific (CORZ) has fallen about 70%.
The miners are facing a trifecta of problems that can’t be solved while the crypto markets stay in the doldrums.
For one, the “break-even” Bitcoin price at which the companies still make money by running their server farms—which seemed a distant worry when Bitcoin traded at $60,000 in November—now looms large. Though some miners have lower costs, JPMorgan estimates that the average cost of production for a miner is about $15,000 per coin, just 27% below Bitcoin’s current level. Some smaller miners, with higher costs, have likely already scaled back operations.
Secondly, in the heady times of last year, some miners made significant expansion plans. Marathon Digital, for example, in May disclosed that its cash on hand had declined by $150 million to $118.5 million at the end of the first quarter, primarily because of investments in new mining activities.
Which leads to the third issue—one that has bad implications for the entire crypto market. The biggest Bitcoin miners, which have access to the capital markets, might find it hard to borrow money at reasonable rates or issue stock to keep funding operations. Smaller, private Bitcoin miners might not have access to the capital markets at all. That leaves selling Bitcoin, something that some miners have scrupulously avoided, as the best way of raising funds right now, and that could end up continuing to pressure Bitcoin’s price.
Analysts for Compass Point Research & Trading in a note on Tuesday said they expect Marathon to start selling its Bitcoin output, and maybe even coins from its balance sheet, to fund growth. Marathon didn’t immediately respond to a request for comment, but the company on June 9 said it hadn’t sold any Bitcoin since October 2020.
Riot, the analysts noted, has already been selling coins since March. On the plus side, the analysts said they still see upside to many miners’ stocks and have Buy ratings on Marathon and Riot.
“This offloading of bitcoins has likely already weighed on prices in May and June,” wrote JPMorgan analysts in a note on Friday, adding that “there is a risk that this pressure could continue.”
For now, at least, the companies critical to keeping Bitcoin’s blockchain functioning might be the worst enemy of the token’s price.
Write to Joe Light at [email protected]
