Are Crypto Mining Companies Rising From the Ashes?

To gain insight into the prospects of crypto miners in the future, it may be necessary to provide an explanation of their function. In the world of cryptocurrency, decentralized networks use various consensus mechanisms to agree on transactions and data. The two primary mechanisms are Proof of Work and Proof of Stake. Proof of Work cryptocurrencies rely on miners to ensure the security and integrity of the network. These miners use specialized computer hardware to solve intricate mathematical problems that are integral to the process of verifying transactions and appending them to the blockchain.

Once a miner successfully solves a mathematical problem, they receive a reward consisting of a specific amount of newly created cryptocurrency along with the transaction fees generated during that block. Some of the more popular Proof of Work Cryptocurrencies are Bitcoin, Zcash, Dogecoin, Bitcoin Cash, Litecoin, and Dash.

Although mining was once conducted on the personal computers of tech enthusiasts, the substantial rewards have given rise to large-scale crypto mining companies that occupy warehouses the size of Costco, filled with specialized mining computers known as ASIC (Application Specific Integrated Circuit) miners.

In the US, there are several large, publicly traded mining companies including: Riot Blockchain (RIOT), Marathon Digital (MARA), Cipher Mining (CIFR), Hut 8 Mining (HUT), BIT Mining Limited (BTCM), and Greenridge Generational Holdings (GREE). There are also a few Chinese and Canadian mining companies which are listed on US exchanges. As you can see by this 3-year chart of Riot Blockchain, there has been severe pain over the past 2 years! From its peak of $79.50 in February of 2021, price has fallen 84%! 
The chart for nearly all the competitors in the mining space looks eerily similar. 

However, speculators have surged back into mining stocks over the past 4 months, with Riot experiencing a 286% rally from the December ’22 lows of $3.25.

So, is this the great phoenix rising from the ashes? Or just a dead cat bounce on the road to bankruptcy?

Right now, there are 4 key issues plaguing the industry.

1. Energy consumption: Cryptocurrency mining requires a lot of energy, which can be a significant expense for mining companies. The White House released a report in 2022 which estimated that Cryptocurrencies use between 120-240 kilowatt-hours per year. That’s more energy than is used in Australia or Argentina over the course of a year! For this reason, Proof of Work cryptocurrencies may face significant pressure from regulators for environmental waste.
2. Equipment costs: Cryptocurrency mining requires specialized equipment, such as ASICs and GPUs (graphics processing units), which can be expensive to buy and maintain. As the competition for mining rewards increases, mining companies may need to upgrade their equipment regularly to remain competitive. These costs have risen sharply due to supply chain disruptions and the chip shortage.
3. Regulatory uncertainty: The regulatory landscape around cryptocurrency mining is still evolving, and mining companies may face uncertainty around issues such as taxation, licensing, and legal compliance. Some governments have also imposed restrictions or outright bans on cryptocurrency mining, which can create challenges for mining companies operating in those regions.
4. Market volatility: Cryptocurrencies are known for their price volatility, which can have a significant impact on mining profitability. If the price of a cryptocurrency falls, mining rewards may not be enough to cover the cost of equipment and energy consumption.

2022 was a brutal year for miners. On September 15th , the second largest cryptocurrency, Ethereum transitioned from Proof of Work, to Proof of Stake. This means that the miners were no longer needed on the Ethereum network. This left miners around the world without work, and millions of dollars’ worth of equipment which is no longer needed. For many, this was their main source of income and pushed them to cease operations. We also saw several miners such as Compute North and Core Scientific (CORZQ) file for bankruptcy or sell off their assets to rival companies.

The natural course of business when you have a “Hot New Thing”, is an initial surge in competition, followed by market saturation. This leads to consolidation, where we see the leading companies take over. This may be that moment. As smaller miners were pushed out, it potentially opened the door back up to the other miners to start earning again. 

If you are trading or investing in any of the aforementioned securities, it is advisable to monitor any government or agency reports that may signal a crackdown on mining. For instance, in 2022, New York imposed a two-year moratorium on crypto mining firms, halting the issuance of new miner permits. Currently, Texas, which is the base of Riot Blockchain, has proposed Senate Bill 1751 to the Senate chamber, aiming to limit benefits and tax incentives for bitcoin miners, and also requiring mining operations to cease during power emergencies. It is probable that such regulatory obstacles will become more frequent in the coming years, further straining an already pressured industry.

At the end of the day, the most significant catalyst for a crypto mining recovery is the price of bitcoin. The 5-month rally has breathed new life into the miners, and speculators have taken notice. If the uptrend in cryptocurrency continues, you can anticipate that miners will trend along with them. The higher prices go, the greater the profits for miners.