Compilation|GaryMa Wu said blockchain
Wu said the blockchain was reprinted and compiled with the permission of Arcane Research
Original link:
https://arcane.no/research/survival-of-the-fittest-which-public-bitcoin-miners-are-the-best-prepared-to
Chaos in the cryptocurrency industry is unfolding as Bitcoin's price drop has caused a contagion effect, causing the downfall of several overleveraged market players such as Celsius and 3AC. Many speculate that the weakest publicly traded bitcoin mining companies will be affected next.
Most bitcoin mining stocks have plunged more than 50% this year, with some companies, such as Stronghold and Terawulf, losing almost 90% of their value. Still, things could get worse as bitcoin mining companies continue to feel pressure from four fronts.
1. Decrease in Bitcoin price = "The value of the block reward decreases.
2. Increased mining difficulty = "requires more computing power to mine.
3. Rising energy prices => Bitcoin production costs increase.
4. Rise in interest rate, decrease in investor interest => increase in cost of capital.
These four forces are compressing profit margins, lowering cash flow, and making it harder for miners to raise capital. The current cash flow of Bitcoin mining has plummeted by more than 80% from its peak in November 2021. At the time, Bitcoin mining was a super-profitable business, which led to massive expansion plans by listed miners, requiring billions of dollars in investment.
Plunging operating cash flow and sluggish capital markets will make it difficult for these companies to cobble together the cash they will soon need to invest in new mining machines or repay loans. Some miners may go out of business, or have some of their assets bought cheaply by more powerful miners.
In this article, I analyze the cash flows and balance sheets of eight publicly traded mining companies to determine who is best positioned to use this bear market to sow the seeds needed to be the winners of the next bull market. I measure their strength based on direct bitcoin production costs, operating cash flow, and balance sheet.
Who has the lowest direct production cost of Bitcoin?
The direct cost of producing Bitcoin is critical because it affects a miner's operating cash flow and determines when miners are forced to shut down their mining machines. It is determined by the price of electricity and the energy efficiency of the mining machine. Other variable costs also exist, but electricity typically accounts for more than 80%. Therefore, I only use electricity costs and ignore other variable costs.
The chart above shows the direct production costs of Bitcoin for eight listed mining companies. We see that Stronghold's Bitcoin direct production cost is only $3,600, which means that even at the current depressed Bitcoin price, they have a high cash flow profit. Stronghold is vertically integrated, with two power plants behind which are bitcoin mining operations. The company uses coal waste accumulated from decades of coal mining in Pennsylvania to fuel its power plants. Their fuel is essentially free, and they also receive government subsidies when they clean up their waste coal, making their bitcoin production costs some of the lowest in the industry.
Argo's Bitcoin production cost is the second lowest at $3,900. According to their latest investor presentation, the company can get $20/MWh of electricity for their new facility in West Texas. Additionally, Argo's mining rigs are very energy efficient. Its new facility is immersion cooling, which can further improve the efficiency of the miner, but I have not yet factored these potential efficiency gains into the calculations.
Of our eight mining companies, Bitfarms has the highest direct bitcoin production cost at $8,500. The Canadian company doesn’t have access to cheap electricity like most other listed miners, and the rigs aren’t as efficient as the average.
Bitcoin Production Cost Winners: Stronghold and Argo
Losers in Bitcoin Production Cost: Bitfarms and Hut8
Who has the strongest cash flow?
In a bear market, cash is king. Miners with the most substantial operating cash flow are the best able to cover upcoming expenses such as rig deliveries or debt payments.
The chart below shows current monthly revenue, cost of revenue, and resulting operating cash flow. These figures are estimates based on bitcoin production capacity at current bitcoin prices and do not take into account future increases in hashrate. For two reasons, I did not consider future increases in computing power. First, most of these miners have historically overestimated their ability to add hashrate, and their current liquidity situation has also caused some miners to cancel or delay expansion plans. Second, at present, non-accretive cash flow presents a worst-case scenario, which is the focus of this analysis.
Core Scientific has the highest cash flow from operations each month. Their monthly revenue of $33 million generates $16.6 million in cash flow after deducting direct costs. Core Scientific is a large company with their own computing power of 9.2 EH/s, which makes their cash flow very high.
Argo has the lowest monthly operating cash flow of $4 million. Still, due to their meager bitcoin production costs, their immediate profit margins are a whopping 77%, which is pretty good.
Absolute operating cash flow gives a company substance and the ability to pursue exceptional opportunities. Still, a giant like Core Scientific has a bigger cash outflow to pay for investments than a smaller player like Argo. Therefore, we should consider the upcoming rig and debt payments for these miners.
Some miners have huge orders for mining machines that are scheduled to be delivered in the next few months and require payment. Additionally, some have been financing their new mining rigs with miners’ rigs or loans backed by Bitcoin. As the price of Bitcoin and the price of mining machines fall, miners must deposit more collateral. For example, Bitfarms had a sizeable Bitcoin collateralized loan, forcing them to recently liquidate a large chunk of their Bitcoin holdings.
The chart below shows listed miners’ remaining rig payments in 2022, including payments related to upcoming rig orders and upcoming payments related to their rig financing deals.
We see that some of these companies have hundreds of millions of surplus miner payments in 2022. Marathon has the most, with $260 million, because they plan to increase their computing power from the current 3.9 EH/s to 23.3 EH/s in early 2023. Marathon has been notoriously slow at getting their miners online, I don't expect them to be as fast as they are now. A large proportion of these mining machines scheduled to be delivered in 2022 may also accumulate dust in the storage room like Marathon's mining machines.
If Marathon doesn't go live as soon as the miners are delivered, the imminent flood of miner payments will drain their liquidity. Still, the company has plenty of cash on hand, so they might be able to get away with that challenge.
Riot is also expanding non-stop, with remaining miner payments of about $190 million in 2022, as the company plans to increase its hash rate from 4.6 EH/s to 12.6 EH/s by January 2023. Unlike Marathon, Riot has followed their hashrate scaling schedule for most of their history. The company also has a huge 700 MW newly built data center to provide space for the upcoming delivery of mining rigs. Therefore, I believe Riot can come online and generate cash flow.
Naturally, larger companies will have larger payments for upcoming miners than smaller companies. To analyze the relative liquidity situation regardless of company size, I divided the remaining miner payments in 2022 by the total operating cash flow for the year in the chart below.
Not only does Marathon have the absolute highest payout for remaining miners in 2022, but it is also the highest relative to their current operating cash flow. Marathon's $260 million remaining miner payment in 2022 is 6.2 times more than their total operating cash flow for the year, calculated at $7.1 million per month in operating cash flow.
As mentioned earlier, if Marathon doesn't come online in time for these miners to arrive, they will suffer a lot of liquidity drain because they have to pay for the miners that arrive without the corresponding cash flow. If they get into this situation (and I believe they will) their liquidity will be drained by miner payments and they will likely need to sell most of their bitcoin or dump their miners on the market.
Due to Core's huge cash flow, the company only pays miners 1.5x in 2022 relative to their operating cash flow. This figure is based on current operating cash flow and does not take into account future cash flow increases. Additionally, Core has historically been able to launch their mining rigs as soon as they arrive.
Argo is the only Bitcoin miner that should be able to pay for the delivery of the remaining miners in 2022 with its current operating cash flow. The company has been relatively conservative in its expansion plans, allowing it to take advantage of exceptional opportunities that may arise when bear markets drain liquidity from other miners. Having said that, Argo's upcoming miner fees for 2022 are only estimates based on their miner deposits, as I could not find this information in their investor relations resources.
Marathon and Riot will not be able to pay for their upcoming delivery of mining rigs from their cash flow alone and will have to raise more capital or use the liquidity on their balance sheets.
Cash Flow Winners: Argo and Core Scientific
Cash Flow Losers: Marathon and Riot
Who has the strongest balance sheet?
In the previous section, we examined the liquidity position of publicly traded mining companies based on incoming operating cash flows relative to upcoming cash outflows. Here, we'll analyze miners' balance sheets to determine their current liquidity position.
We start by looking at the debt-to-equity ratio (D/E). CleanSpark has almost no debt, as its debt-to-equity ratio is only 0.1. Riot is a close second with a D/E ratio of 0.2. Since debt is the riskiest form of financing, these companies have low risk on their balance sheets and low risk of having to declare bankruptcy.
And Stronghold has a D/E ratio of 4.7, which is very high for a Bitcoin miner. Bitcoin mining is risky and should therefore be primarily financed with equity. Stronghold has such a high D/E not only because of its debt, but also because its stock is down 95% from its all-time high, leaving the equity worth only $38 million.
Core Scientific also has a strong D/E ratio of 2.1. The remaining mining machine payment graph shows that Core's mining machine mortgage debt is high, which is an unstable debt. Mining machine prices have halved in 2022, and I expect them to continue to fall. As their collateral continues to depreciate, Core companies must continually provide more collateral on these loans.
To determine the strength of a company's balance sheet, we must also look at the liquidity of the company's assets relative to its short-term liabilities. The quick ratio shows the value of a company's most liquid assets divided by its current liabilities. A Bitcoin miner's most liquid assets are its cash and cash equivalents and Bitcoin holdings.
The Marathon has an unusually high quick ratio of 17.4. The company has large Bitcoin holdings, large amounts of cash, and low current liabilities. As explained, its operating cash flow is terrible relative to future miner payments. Still, they still have around $260 million in cash and cash equivalents or Bitcoin sitting on their balance sheet that can be used to cover upcoming miner payments. From a purely operational standpoint, Marathon may be one of the weakest bitcoin mining companies, but its balance sheet is solid.
Balance Sheet Strength Winners: Marathon and Riot Blockchain
Balance sheet strength losers: Stronghold and Core Scientific
Summarize
Most listed bitcoin mining companies are having a hard time. Their current operating cash flow is barely enough to pay for the mining machines they are about to deliver, and the current state of the capital market makes it difficult for them to raise equity or debt. Several companies will experience a liquidity squeeze that will force them to liquidate some of their assets. In every crisis lies great opportunity, as the best-capitalized miners will be able to buy the assets of struggling miners cheaply.
Argo is, in my opinion, the best financially sound Bitcoin miner out there right now. Argo has a strong balance sheet with little debt and strong operating cash flow relative to upcoming miner payments. Argo also has the second lowest direct Bitcoin production costs in the industry.
According to this analysis, the weakest miner is Marathon. It has a strong balance sheet and a lot of cash, but their upcoming massive miner payments will quickly drain their balance sheet. Therefore, I believe the company will be forced to liquidate most of the bitcoins on its balance sheet, or sell its mining machine orders to other miners.
Bear Market Winner: Argo
Bear Market Loser: Marathon
Spoiler: The sale of coins by various mining companies
From January to April this year, listed mining companies only sold 20% to 40% of their Bitcoin production, and most of them are trying to hold the mined Bitcoin as part of their "strive to hold regardless of cost" strategy.
This strategy worked well until Bitcoin’s price plummeted from $40,000 to $30,000 in May. The fall in bitcoin's price has spurred financial hardship, forcing miners to begin liquidating their precious bitcoin holdings, with May being the first month they sold more than 100% of their production.
Many people were shocked by the large number of bitcoins sold by listed miners in May, but in June, they sold about 14,600 bitcoins, almost four times the amount in May. Listed miners produced only 3,900 BTC in June, which means they sold almost 400% of their production, eventually losing nearly 25% of their holdings.
Core Scientific and Bitfarms sell the most
Some miners sold most of their Bitcoin holdings in May and June, while others managed to hold on. As the chart below shows, Core Scientific was by far the largest bitcoin seller, dumping nearly 10,000 bitcoins in May and June. Core Scientific began selling in May, but intensified their selling in June, selling more than 7,000 bitcoins.
Bitfarms is the second largest seller of bitcoin in this bear market, selling 3,353 bitcoins in June. German company Northern Data was the third largest seller, dumping all of its bitcoin and ether in May and June. Below, we dig into what forced these companies to sell.
Marathon and Hut 8 Not Selling in May and June, Currently Holding the Most Bitcoin
While some listed miners have been dumping most of their holdings, others have yet to sell any. Marathon, which has so far avoided selling bitcoin, is now the company with the most bitcoin on its balance sheet with 10,055 bitcoins, followed by Hut 8 with 7,405 bitcoins. Riot sold 6,654 BTC, a little more than usual, ranking third with 6,654 BTC in reserve, but a far cry from Core Scientific and Bitfarms’ shipments
During the gold mining period in 2021 and early 2022, Core Scientific can pay the fee by tapping the capital market without relying on selling coins. This allows them to have a reserve of over 10,000 bitcoins, the largest of any listed miner.
Core Scientific currently holds only 1,959 bitcoins after a massive sell-off in May and June, which means their bitcoin reserves have slipped all the way down to No. 6. Core Scientific remains by far the largest company in computing power, regularly producing around 1,000 bitcoins per month. They’re churning out bitcoins, which means they’re likely to climb the ranks in the coming months, unless they decide to change their reserve strategy after being hurt by a “hold hard at all costs” strategy.
Why Are Miners Selling Their Bitcoin Reserves?
Most miners have recently increased their bitcoin sell-offs to free up liquidity on their balance sheets as they need dollars to pay for upcoming infrastructure upgrades and miner deliveries. In 2021, they were able to raise equity or debt to cover these expenses, but recently, their ability to obtain outside capital has diminished dramatically due to a fatal combination of rising interest rates and diminished investor interest in Bitcoin. Dry capital markets mean these companies increasingly need to fund their operations with their own liquid capital, which consists mostly of bitcoin in reserve.
Weakness in capital markets affects all listed miners and does not explain why specific miners like Core Scientific and Bitfarms are selling so much compared to others. To find out why, we have to look at the structure of their balance sheets. Core Scientific and Bitfarms have the largest Bitcoin and mining machine collateralized debt positions, and plummeting Bitcoin and mining machine prices have forced the companies to sell Bitcoin to repay these loans.
The graph above shows the Bitcoin and mining machine collateralized debt status of listed mining companies on March 31, 2022. We see that Core Scientific and Bitfarms are by far the companies with the most debt, and coincidentally they are also the largest sellers of Bitcoin in this bear market. We also saw that Marathon, CleanSpark, and Riot, didn't sell that much bitcoin, and they didn't have any bitcoin or miner-backed debt before this bear market started.
Bitfarms issued a press release in June explaining why they sold 3,000 BTC. The company used the proceeds to pay down debt secured by bitcoin and mining machines. In particular, their bitcoin-collateralized credit financing with Galaxy Digital had problems, as the fall in the price of bitcoin forced them to sell bitcoin to pay off the loan.
Will mining companies continue to sell off?
The figure below shows the Bitcoin reserves of listed mining companies in the first few months of 2022. They sold a large part of them in June and sold a lot of Bitcoins in July. Now their total Bitcoin holdings It has returned to the level at the beginning of this year.
I think we've now experienced the worst Bitcoin sell-off of listed miners. They will continue to sell a larger share of their output than in the first months of 2022 due to reduced access to outside capital, but the extreme Bitcoin sell-off we saw in June will not last.
I believe miners will not keep dumping their bitcoins for two reasons. First, miners have less bitcoin to sell now than they did in early June. Their bitcoin holdings shrunk by nearly 11,000 in June. The 23% decrease was largely due to Core Scientific and Bitfarms selling off their holdings. Some miners, such as Marathon and Hut 8, still have a lot of bitcoin on their balance sheets, which they can sell, but if they haven't dumped their holdings, they may not need to, unless the bitcoin price goes further fall.
The second reason I believe we've had the worst miner sell-off is that "Bitcoin and collateralized debt" that caused the worst miner sell-off is now substantially reduced and the worst of the systemic risk has passed.
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