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Actions of public miners against Bitcoin
For most risk assets, including bitcoin and public bitcoin mining stocks, declines from all-time highs have been substantial. While bitcoin fell 41.20% from its all-time high in November, the entire bitcoin mining industry performed much worse, facing an average decline of 64.10%. Public shares of bitcoin miners have acted as additional investment vehicles for indirect exposure to bitcoin with the potential to outperform bitcoin over the past few years – at least until the market changes in November 2021.
Apart from miners pricing in USD, how are they performing in bitcoin? Those who use bitcoin as a unit of account will naturally look for opportunities that will overtake bitcoin in an effort to increase their overall bitcoin position and share of a limited supply. With the latest drawdowns, bitcoin miners are starting to look relatively cheap when valued in terms of BTC, as many of these stocks are approaching or hitting new 12-month lows.
While our base case scenario is that the broader equity market (and likely bitcoin) has more downside ahead this year, individual mining stocks could be closer to a bottom than the rest of the market, most having already fallen from 60% to 70%. Below are some of the top public miners valued in BTC over the past year, well below their yearly averages.
The drop in performance against bitcoin is more recent over the last six months. Some miners have seen strong outperformance against bitcoin since 2020, with the hash price of bitcoin dropping from $0.07 to $0.42 at its recent high. As the price exploded and the hash rate lagged, miners had a golden period generating more revenue per hash, which led to a period of higher profits, higher revenue and valuations higher stock markets.
As of 2020, here are some of the miners’ stock returns when valued in bitcoin across the major market cap miners. This hash price boom, combined with growing investor demand and speculation, led to Marathon and Riot stocks outperforming bitcoin by 202% and 70% respectively. Choosing and timing the right miner stock (or basket of miner stocks) to outperform is also crucial, making bitcoin self-custody the best approach for most.
Since 2021, these returns and outperformances have been more subdued (even negative), showing how difficult it has been for miners to outperform bitcoin with a hash price spike during a broader macro pivot to a risky market regime.
Hash price (miner’s income per terahash) now sits at around $0.182 and continues to fall from its short-term uptrend as price stagnates and hash rate growth diverges, lower up 14.46% and up 22.23% since the start of the year respectively. At a roughly annualized growth rate of 66.69% almost through April, this would put the total hash rate at nearly 289 PE/s by the end of the year.
While it’s a daunting task to bring so many hash rates and power online this year amid ASIC supply chain delays, power capacity issues and rising hardware costs. energy, some large public miners are still planning to increase their hash rate by 154% until 2022 – from 37.1 PE/s to 94.1 PE/s. This growth (table below) includes all announced plans for 2022 on self-operated and hosted hash rate.
Without a near-term bullish price catalyst, expect the network hash rate expansion to continue; higher difficulty adjustments will continue to lower the price of the hash. The hash price naturally tends towards zero over the lifetime of bitcoin, as the marginal cost of producing a bitcoin becomes more competitive over time, but there will be lucrative periods where price appreciation exceeds the ability of the hash rate to grow in the short term.
Despite the recent decline in valuations, we have seen little change from public miners to curb their hash rate expansion plans for 2022 and 2023 or reduce their BTC holdings. Reported bitcoin holdings rose 7.3% month-over-month in March, showing signs that bitcoin miners are not yet facing a major sell-off or selling pressure to reverse. this new industry trend of increasing bitcoin accumulation.
The downward trend in the price of hash will force weaker miners to unplug the machines, find more efficient power sources, and/or sell those machines or their bitcoin holdings in the worst case. Some of these market dynamics can be tracked via a USD mining rig price index with data from Luxor and their Hashrate index.
Overall, USD prices for ASICs across all efficiency levels have fallen significantly after a local peak in November 2021. This could make ASICs more attractive at lower prices for buyers, but will also lower the asset value for large fleet owners. Like the price of hash, Hashrate Index expects prices to continue trending lower after the China ban.