"Self-rescue of miners under the 'sell-off wave', when will the price impact end?"

Author: Tuo Luo Finance

Prices continue to fall, and the industry is worried, but there is one group that may be even more anxious.

As Bitcoin briefly dropped to $54,000 (now recovered to $57,000), miners, already suffering from a sharp decline in profits after the halving, find their survival increasingly difficult. According to research institutions, if Bitcoin reaches $54,000, only ASIC miners with efficiency over 23W/T can be profitable, with only five models of miners barely able to sustain themselves.

However, part of the culprit behind this decline is undoubtedly the miners themselves. To cope with cash flow issues after the halving, mining companies continue to sell off their holdings. In just June, 30,000 Bitcoins from miners entered the market.

As BTC approaches the shutdown price, miner capitulation is also nearing its end, but the impacts of halving and price changes on them are more profound than expected.

For Bitcoin, which has a fixed supply of 21 million coins, the importance of miners as direct producers is self-evident. Before institutions flooded into BTC, mining companies were the biggest power holders in the Bitcoin industry. The business model of mining companies is quite simple: apart from self-mining and selling mining machines, they also provide hosting services for others, with corresponding costs being electricity prices, labor, and storage maintenance costs. Since these costs are relatively controllable, they can be used to derive the basic price needed to keep mining machines running, known as the shutdown price. Of course, regardless of the model, the higher the BTC premium, the higher the profits. Since 2011, mining has made many people wealthy, and the history of crypto has left behind the bitter and sweet notes of mining companies.

In addition to the rising energy costs, mining rewards are the most concerning indicator for miners. To limit the speed of Bitcoin mining and inflation, the rewards miners receive for mining are halved at fixed block heights, specifically every time the Bitcoin blockchain produces 210,000 blocks. This process occurs approximately every four years, and in April of this year, Bitcoin completed its fourth halving, reducing the mining reward from 6.25 BTC to 3.125 BTC.

Every few years, miner profits are halved, leading to a rapid decline in the input-output ratio. This mechanism forces the mining industry to become more refined, industrialized, and scaled. After all, increasing computing power increases the probability of obtaining certain profits, making mining a typical capital-intensive industry. Due to declining profits, after the halving, shutdown prices rise, and miner capitulation will occur. Simply put, miner capitulation refers to some miners reducing operations or selling the BTC they mined to sustain their livelihoods or hedge risks, which usually triggers further declines in Bitcoin prices.

This situation undoubtedly occurred after this year's halving. According to MacroMicro data, the average cost of mining a single BTC soared to $83,668 at the beginning of June, slightly decreasing to about $72,000 by July 2. While costs soared, total miner revenue plummeted from an average of $107 million per day before the halving to $30 million, reflecting the increasing operational difficulties of mining companies.

Data from CoinShares' head of digital research, James Butterfill, shows that during the April halving event, Bitcoin prices hovered around the average production cost for miners. Among the 14 confirmed mining companies, half of the well-known companies, including Bit Digital and Riot Platforms, had overall production costs above the average level.

Bitcoin pool operator F2Pool also confirmed this conclusion. Based on an estimated energy cost of $0.07 per kilowatt-hour, when the BTC price is $54,000, only ASIC miners with a power efficiency of 26 W/T or lower can achieve profitability. Specifically, six Bitcoin mining machines, including Antminer S21 Hydro, Antminer S21, and Avalon A1466I, achieve Bitcoin breakeven at prices of $39,581, $43,292, and $48,240, respectively. Other models like Antminer S19 XP Hydro, Antminer S19 XP, and Whatsminer M56S++ can achieve profitability when Bitcoin prices exceed $51,456, $53,187, and $54,424, respectively.

Different models of mining machines' breakeven points at different energy prices, source: F2Pool

In this context, with the retreat of inscriptions, mining companies naturally chose to sell off to survive, whether for cash flow reserves or industry migration and exit. Since June of this year, crypto mining companies have sold off over $2 billion worth of Bitcoin, totaling about 30,000 coins, and the amount of Bitcoin held by miners has dropped to its lowest level in 14 years.

Fortunately, regardless of the good asset-liability ratio granted to mining companies by the previous bear market's stress test, from the market perspective, as Bitcoin prices decline, small and medium-sized mining operations have begun to gradually shut down, and Bitcoin mining difficulty is rapidly decreasing, signaling the imminent end of miner capitulation. On July 9, BTC.com data showed that Bitcoin mining difficulty was reduced by 5% to 79.5T, with the average hash rate across the network over the past week at 586.72 EH/s. Correspondingly, since May, the amount of Bitcoin miners sent to exchanges for sale has significantly decreased, and over-the-counter trading volumes have notably declined. Compared to the previous accumulation of selling pressure, the total trading volume at mining companies' over-the-counter trading desks was exhausted by June 29.

In addition to post-halving capitulation, consolidation and mergers have also become a major trend in this round of mining company cycles. Upgrading equipment to enhance capacity, developing low-cost energy regions, and merging mining pools all require substantial cash reserves. Therefore, for small mining companies with less optimistic balance sheets, the best way is to seek financing or, more directly, to be acquired.

From a certain perspective, mining company acquisitions also represent the aggregation of mining pools, providing more practicality. Even before the halving, ten leading mining companies raised a total of $2 billion through equity financing activities. Marathon Digital, CleanSpark, and Riot Platforms were the top three companies raising funds in Q4 2023, accounting for 73% of the total funds raised. In April of this year, Bradford predicted that the mining industry would ultimately consolidate into four core companies: CleanSpark, Marathon, Riot Platforms, and Cipher Mining. Notably, these mining companies are also the main forces behind the BTC sell-off after the halving; for example, Marathon sold more than 1,790 BTC in May and June.

Monthly BTC production of the top ten listed mining companies, source: Farside Investors

On the other hand, these four companies have not disappointed. In June, CleanSpark acquired the micro-miner GRIID Infrastructure for $155 million, expected to increase its power capacity by 400 megawatts. CleanSpark also acquired a total of 60 megawatts (MW) of Bitcoin mining facilities in rural Georgia for $25.8 million.

Back in May, a more controversial acquisition occurred. Riot Platforms acquired a 9.25% stake in Bitfarms on May 28, becoming the largest shareholder of the company. Riot then purchased 1.5 million shares on June 5, raising its stake to about 12%. Due to high shareholder stakes and concerns over corporate governance, it requested to increase the number of independent directors on Bitfarms' board. This was opposed by Bitfarms, which even announced on June 10 that it had approved a shareholder rights plan "poison pill" to prevent acquisitions by peers and competitors.

Cipher Mining had already purchased 16,700 mining machines as early as January of this year, installing the latest generation of Avalon A1466 mining machines at its Bear and Chief Mountain facilities in Texas in the second quarter.

Other mining companies are also striving to adopt various measures to improve mining machine efficiency and enhance their survival probability during adverse cycles. Over the past six months, Iris Energy has reduced its average energy consumption by 15% to 25 J/TH, while TeraWulf's efficiency has increased by 11% to 24.6 J/TH. Core Scientific has also emerged from bankruptcy marketing, currently leading with an efficiency of 24.23 J/TH.

However, overall, the trend towards the concentration of mining is inevitable. Small and medium-sized mining companies, apart from seeking geographical differences or improving efficiency to achieve lower costs, will face weak competitiveness in the long term. The gradual increase in shutdown prices has also triggered a wave of exits, which is normal.

The industry is highly cyclical, and profit uncertainty is increasing. Against this backdrop, even leading mining companies are diversifying their strategies to weather the storm, and some companies are inevitably planning to start anew. The booming new star, AI, has become a landing spot for mining companies eager to transform.

Unlike previous cycles, this year, among the four major mining companies globally, stock prices have not outperformed Bitcoin's price increase, but the gains of medium-sized mining companies have been quite noticeable. The core reason is the integration of the AI wave. In recent months, several Bitcoin mining companies have begun to replace some of their mining equipment with devices used for running and training artificial intelligence systems.

It is well known that AI, especially the training of large models, is a high-computing and high-energy-consuming scenario. However, before the advent of GPT, data center operators and mining companies were not friendly to this business, believing that the commercial efficiency was not high enough. But everything changed quietly after GPT appeared; a striking statistic is that the energy consumed by ChatGPT queries is ten times that of Google searches.

With this premise, AI companies began to seek warehouses with cheap energy and the capacity to support a large number of computing devices. However, data center approvals are strictly regulated in various countries. In North America, for example, the time from initial approval to construction completion can take several years, and sites with over 100 megawatts of power and high-voltage transformer substations are extremely rare. A few years ago, 80% of data center loads were focused on just six or seven markets. However, Bitcoin mining companies that combine cheap electricity, suitable physical space, and computing infrastructure naturally meet this demand.

Some mining companies have begun to enter this field by renting space and equipment and self-operating computing power. Core Scientific, which had previously announced its entry into bankruptcy proceedings, signed a contract in June with AI startup CoreWeave to provide over 200 megawatts of GPUs for a period of 12 years. CEO Adam Sullivan stated in an interview, "There are many invitations from AI; AI companies are actively bidding and starting to purchase mining facilities at prices higher than those in the crypto sector. After announcing AI infrastructure deals, financing and cooperation intentions from top private equity firms have also increased."

A typical case of self-operation is Hut 8, which received a $150 million investment from Coatue this year, with the financing aimed at building AI infrastructure. It had previously purchased its first batch of 1,000 NVIDIA GPUs and expanded its GPU-as-a-service model. Bit Digital is also not to be outdone, claiming to have reached an agreement with a client to provide 2,048 NVIDIA GPUs over three years.

Of course, even transitioning to AI is not as easy as imagined. Not all mining sites can be converted into compliant data centers, and more importantly, the costs of building or repurposing data clusters to accommodate AI computing are not low. The capital expenditure required for AI operations is about 20 times that of Bitcoin mining, so mining as a business will only continue if it is profitable; small and medium-sized mining companies will still persist.

However, the effects of the transformation are significant. Taking the aforementioned companies as examples, Core Scientific expects to increase its projected cumulative revenue by $1.225 billion within the two-year contract timeline, while 6% of Hut 8's sales now come from AI, and Bit Digital's AI revenue has reached 27%. Stock prices also reflect positive expectations, with Core Scientific's stock rising 25.33% in the past month, Bit Digital up 31.25%, and Hut 8 soaring 67.41% within the month.

In summary, whether actively seeking change or being forced to transform, the defensive battle of mining companies has just begun, and the wave of acquisitions is still in its very early stages. In the long term, given the cyclical nature of mining, diversifying and transforming to broaden revenue sources has become an inevitable path for mining companies. Additionally, regarding the price impacts brought by the halving, various signals indicate that capitulation is nearing its end. The strong support from shutdown prices, along with ETF absorption, suggests that short-term adjustments are not to be feared; clearly, the reasons for the significant decline lie more in the limitations of market liquidity.

From an industrial perspective, the mining industry, once at the top, is gradually moving away from the center of crypto power. The wealthiest group is also experiencing a shift in survival. Where the layers of historical strokes will ultimately land remains to be seen, and the threads of crypto will continue.