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Crypto mining companies have seen their shares rise over the past month. Pictured here is Fred Thiel, Marathon Digital’s CEO.
Jordan Vonderhaar/Bloomberg
The crypto crisis may have passed, but
Bitcoin
mining investors would do well to remember the lessons. The big? When Bitcoin prices crash, costs are king.
Crypto mining companies have seen their shares rise over the past month. Even after the decline on Wednesday, shares of
Riot Blockchain
(ticker: RIOT) is up 34% since July 18.
Marathon
Digital Holdings (MARA) is up 58%, while
Nuclear science
(CORZ) is up 71%. This compares with an increase of 11.6%
S&P 500
.
The stock’s performance comes just months after the industry appeared to be facing a crisis. The failure of a major stablecoin and the collapse of several cryptolenders caused Bitcoin’s price to crash and the profitability of miners to similarly crater. Capital markets largely shut down for miners, at least temporarily, and some of the companies — which tend to try to keep the Bitcoin they produce — ended up selling digital assets or equipment to shore up their balance sheets.
Crypto miners run huge warehouses of computers and compete against other miners to answer the energy-intensive math problems that power the Bitcoin network. The faster they perform their work, relative to their competitors, the more Bitcoin they win.
This means that miners’ long-term value depends mainly on three factors: their processing power, their energy costs, and the price of Bitcoin.
A couple of months ago, all of these factors seemed to be working against miners. Some companies, such as Marathon Digital, mined fewer Bitcoins than expected due to storms, maintenance issues and delays in bringing new facilities online.
Meanwhile, rising energy costs and falling Bitcoin prices conspired to squeeze miners’ margins, bringing overall profitability this summer to its lowest point since the Covid-induced panic of early 2020, according to
JP Morgan
.
But investors have more to cheer about lately. Since dipping below $20,000 in June, Bitcoin prices have risen to around $24,000. Analysts are almost universally positive about the sector. Every analyst tracked by FactSet has Buy ratings on Core Scientific and Riot, while Marathon has six Buy ratings and two Holds.
But with the market working in their favor, at least for now, investors would do well to step back and assess which companies will have the most breathing room should Bitcoin take another step down.
To that end, DA Davidson analyst Chris Brendler says Riot in particular will be well-positioned to avoid any kind of renewed crypto decline.
The company reported a surprise second-quarter loss of 50 cents per share after the close on Monday, compared with the 6-cent-per-share profit that analysts expected, according to FactSet. The loss was driven by a decline in the value of recent acquisitions the company had made as well as falling Bitcoin prices, and the company’s shares fell 6% on Tuesday.
But the short-term pressure hides Riot’s biggest strength should the so-called crypto winter extend: its low mining costs.
Brendler says mining could remain profitable even if Bitcoin prices were to drop by about half from here, and the company has no long-term debt. Of course, such a fall would be painful, but Riot would have an opportunity to gain market share as other miners, whose costs to mine Bitcoin are higher, potentially shut down their machines.
Each of the nine analysts tracked by FactSet rates Riot a Buy with a price target of $18.11, roughly double where the stock is trading now.
“If you go to $10,000 Bitcoin, the question is who’s going to be able to ride it out?” says Brendler. “If you can, you’re in good shape to print money. If you can’t, you don’t mine. It’s that simple.”
Write to Joe Light at [email protected]
