Bitcoin miners see revenue drop 80% from peak. Can they all survive?

Hello, welcome to Distributed Ledger, our weekly crypto newsletter that hits your inbox every Thursday. I’m Frances Yue, crypto reporter at MarketWatch. I’m going to introduce you to the newest and greatest in the world of digital assets this week.

Find me on Twitter at @FrancesYue_ to send feedback, or tell us what you think we should cover. You can also reach me via email to share your personal stories with crypto.

Crypto at a Glance

BitcoinBTCUSD,
-0.17%
gained around 5.3% in the past seven days and was trading at around $20,131 on Thursday, according to data from CoinDesk. Ether ETHUSD,
-0.38%
added 3.6% over the seven-day period to reach around $1,365. Dogecoin DOGEUSD Meme Token,
-0.90%
rose 9% while another dog-themed token, Shiba Inu SHIBUSD,
-0.53,
was trading up 3.1% from seven days ago.

Cryptographic metrics
The biggest winners Price %return in 7 days

Tokenize Xchange

$10.89

40.5%

Maker

$848.63

16%

Elrond

$54.74

16%

Polygon

$0.84

12.8%

Stellar

$0.12

10.8%

Source: CoinGecko as of October 6
The biggest declines Price %return in 7 days

Celsius Network

$1.15

-21.8%

Chiliz

$0.22

-ten%

IOTA

$0.27

-8.9%

Synthetix Network

$2.28

-6.9%

Lido CAD

$1.52

-6.2%

Source: CoinGecko as of October 6
Miners under pressure

It’s been a tough year for bitcoin miners. And there is no sign of a reversal.

Energy prices have soared this year, driving up costs for miners. U.S. electricity prices in August jumped the most since 1981, rising 15.8% year-over-year, according to the U.S. Bureau of Labor Statistics.

Meanwhile, bitcoin prices are down nearly 60% since the start of the year, leading to disappointing earnings for miners.

Worse still, bitcoin’s hashrate, or the total computing power securing the network, has reached an all-time high. This means that the bitcoin mining difficulty, which is automatically adjusted approximately every two weeks based on the hashrate, will increase. According an estimation from Bitcoin mining company Braiins on October 10, miners will prepare for the biggest increase in difficulty since May 2021.

In the face of these challenges, miners on average have seen their revenue drop by 81% from the October 2021 peak, analysts at Arcane Research wrote in a recent note. According to Arcane analysts, most public miners have seen their gross margins fall to a range of 30% to 40% from 80% to 90%.

In September, Compute North, one of the largest data center operators for crypto miners, filed for bankruptcy in September. The company has made the decision “to stabilize its business and implement a comprehensive restructuring process,” a Compute North representative wrote to MarketWatch via email.

Marathon Digital MARA, a Nasdaq-listed crypto-miner,
+2.02%
said Thursday it has more than $80 million of exposure in Compute North, including $10 million in convertible preferred shares of the bankrupt entity’s parent company, Compute North Holdings Inc. and $21.3 million tied to a senior unsecured promissory note with the company.

Marathon also paid approximately $50 million in operating deposits to Compute North entities.

“We haven’t seen any operational changes,” Fred Thiel, president and CEO of Marathon, said in an interview. “Most of it is mining-related deposits and we don’t consider those to be necessarily at risk,” Thiel said.

“There is a loan to the parent company of $21 million, which makes us one of the largest unsecured creditors. And we’ll see where it shakes out in that process,” Thiel said.

Why did the hashrate keep rising in a bear market?

There is “a long lead time” for buying mining machines, according to Sam Doctor, Chief Strategy Officer at BitOoda.

That’s why in 2021, as bitcoin prices continued to climb and the Federal Reserve maintained its accommodative monetary policy, “a lot of miners leveraged,” said Messari analyst Sami Kassab. “The public miners wanted to compete with others and started raising capital and equity,” Kassab noted.

In an effort to expand their operations, bitcoin miners have ordered machines worth billions of dollars in 2021,” Kassab noted.

As miners sought to keep operating, but also service their debts, they plugged into the new machines, helping to increase hashing power.

What future for minors?

If bitcoin prices fall below $17,600, the yearly low hit in June, miners will come under additional pressure, Kassab warned.

“You will bankrupt some of the weaker miners, and they may have to sell their machines to some of the stronger miners,” Kassab said. Even more powerful miners will come under pressure, “and most likely just have to keep selling bitcoin held on their balance sheet in order to fund their operations,” Kassab said.

BitOoda’s doctor believes bitcoin prices are already at a level where bitcoin miners will be forced into consolidation. Some existing miners could merge, or distressed investors would come in to acquire several companies or privatize some public companies. “There are obviously different ways this can happen,” the doctor said.

In September, Bitdeer, the bitcoin mining company of crypto billionaire Jihan Wu, installation a $250 million fund to buy distressed assets from fellow miners, Bloomberg reported. Bitdeer did not immediately respond to a request for comment.

Kim Kardashian’s SEC Fine

On Monday, Kim Kardashian agreed to pay $1.26 million to settle charges brought by the Securities and Exchange Commission for illegally promoting a cryptocurrency called EthereumMax on Instagram.

The SEC claimed the influencer did not disclose that she was paid $250,000 by the token’s issuers to promote it, despite the post having the hashtag “#ad” at the bottom, reported Chris Matthews of MarketWatch.

“In securities laws, you have to disclose not only that you’re paid, but also the amount and nature” of the payment, Gensler told CNBC on Monday.

This isn’t the first time the SEC has targeted celebrities promoting cryptocurrencies. Boxer Floyd Mayweather, musician DJ Khaled and actor Steven Seagal were all fined after the SEC said they illegally touted crypto stocks, Gensler noted.

Crypto companies, funds

Shares of Coinbase Global Inc.. PIECE OF MONEY,
+1.29%
gained 1.2% to $73.82 on Thursday and is up 19.1% over the past five trading sessions. by Michael Saylor MicroStrategy Inc.
MSTR,
-0.21%
the shares fell 0.4% on Thursday to $241.30, after rising 13.9% in the past five days.

mining company Blockchain Riot Inc. RIOT,
-1.24%
shares were down 0.8% at $7.19 on Thursday, and they are up 1.6% over the past five days. Shares of Marathon Digital Holdings Inc.
MARA,
+2.02%
advanced 1.9% to $13.08, up 21.5% in the past five days. Another miner Ebang International Holdings Inc.. EBON,
-2.58%
saw the shares fall 4.6% to $0.40 on Thursday, as they are down 1.7% over the past five days.

Overstock.com Inc.
OSTK,
+0.76%it is
shares rose 0.7% to $26.35. Shares traded up 7.4% in the five-session period.

Shares of Block Inc.
SQ,
-0.35%,
formerly known as Square, slid 0.4% to $61.92 and was up 10.7% for the week. Tesla Inc.. TSLA,
-1.11%
shares fell 0.5% to $239.78, down 10.6% in the past five days.

PayPal Holdings Inc.
PYPL,
+0.63%
edged up 0.6% to $94.38, with a 6.4% gain over the five-session period. Nvidia Corp.
NVDA,
-0.60%
shares fell 0.2% to $131.83, an 8% gain last week.

Advanced Micro Devices Inc.
AMD,
-0.13%
shares rose 0.4% to $68.27 on Thursday, up 6.4% from five trading days ago.

Among crypto funds, ProShares Bitcoin Strategy ETF
BITO,
-0.48%
fell 0.2% to $12.39 on Thursday, while its Bitcoin Short Strategy ETF
COCK,
+0.57%
rose 0.4% to $37.02. Valkyrie Bitcoin Strategy ETF
BTF,
-0.77%
slipped 0.5% to $7.73, while VanEck Bitcoin Strategy ETF
XBTF,
-0.40%
cut 0.5% to $19.59.

Grayscale Bitcoin Trust
GBTC,
-0.33%
fell 0.6% to $11.90.

Required readings

Carol N. Valencia