Market downturn, cryptocurrency mining companies turn to equity financing
Since the fourth quarter of 2023, mining companies have increasingly financed their operations by issuing stocks.*Author: Igor K, *Cointelegraph**
Compiled by: Deep Tide TechFlow
Cryptocurrency miners are reducing their reliance on debt and turning to equity dilution to support their goals in AI and high-performance computing (HPC), but the returns of this strategy remain uncertain.
Changes in Debt-to-Equity for Bitcoin Mining Companies
The cryptocurrency winter of 2022 led major Bitcoin miners to file for bankruptcy due to excessive reliance on debt financing. Most publicly listed miners had a debt-to-equity ratio exceeding four, with over two generally considered unsustainable. Starting from the third quarter of 2022, the Bitcoin mining industry began to clean up its loans. The only exception was the second quarter of 2024, which was skewed by a $150 million investment in Hut 8.
In the crypto mining business, by reducing leverage, companies can decrease the debt service costs that have risen due to interest rate hikes and improve their credit standing. Additionally, lower debt levels allow miners to focus more on strategic development, such as expanding into high-performance computing (HPC) or developing financial management strategies.
Since the fourth quarter of 2023, mining companies have increasingly financed their operations through stock issuance. From the third quarter of 2023 to the second quarter of 2024, over $4.9 billion was raised, which is 300% more than in the previous three quarters. The largest increase occurred in the first quarter of 2024, raising nearly $2 billion.
Bitcoin miners are primarily raising funds for hardware upgrades to cope with the margin compression caused by the fourth halving. Companies need to upgrade their equipment to more efficient models to compensate for the reduced rewards.
Miners are diversifying their businesses into high-performance computing (HPC), including AI computing, making it easier for them to access equity funding. The average wait time to connect to the U.S. power grid is five years, but Bitcoin miners have already connected, giving them a competitive edge in the HPC space. While converting Bitcoin mining infrastructure into HPC data centers requires investment, customers are often willing to provide equity financing, thereby lowering capital costs.
Diversification: AI and HPC as New Revenue Sources
Several companies, including TeraWulf, Iris Energy, Hut 8, Core Scientific, and Hive, have begun to venture into the HPC and AI sectors. Currently, revenue from HPC and AI accounts for only 1.43% of their total revenue, but this percentage is expected to increase as demand for AI continues to grow.
Companies adopting HPC and AI strategies have seen their valuations grow more than those that have not. By the end of the second quarter, the stock value of miners involved in AI and HPC had increased by 25% since the beginning of the year, while traditional miners had decreased by 3%.
How much market share these mining companies can capture in the HPC and AI sectors remains unknown, but competition is quite fierce. Currently, the industry is dominated by three giants—Amazon Web Services, Microsoft Azure, and Google Cloud—which together control 63% of the market share. As Bitcoin mining companies enter this field, they will face significant challenges in an already competitive industry.
Marathon Digital's Bitcoin Holding Strategy
While most Bitcoin miners are securing funding through equipment upgrades or diversifying into HPC, Marathon Digital plans to use new capital to purchase more Bitcoin. In an announcement on July 25, Marathon stated it would buy $100 million worth of Bitcoin and shift to a fully held strategy, reflecting the company's confidence in Bitcoin's long-term value.
Investors expressed skepticism. On August 12, the company disclosed plans to issue $250 million in convertible bonds, but its stock price fell that day. Equity investors may be concerned about Marathon's increasing dependence on Bitcoin prices. Additionally, they worry that if the issued debt converts to equity, it could dilute their holdings.
Despite recent purchases, Marathon's Bitcoin holdings account for only about 30% of its market value. In contrast, for MicroStrategy, this ratio exceeds 50% and could potentially increase further, as the company recently submitted a $2 billion equity plan. Historically, MicroStrategy has accumulated Bitcoin through equity financing, and this strategy appears to be working. As of the end of the second quarter of 2024, the company held over 226,000 Bitcoins, with an average purchase price of $36,789.
