Bitcoin miners may be “dumping” coin rewards to cover previous losses
Analysts have been searching far and wide to find reasons for Bitcoin’s recent ranging behavior. The repeating pattern of racing ahead, then slowly pulling back to previous levels of support, and then repeating the entire scenario again and again just does not ring true to a subset of analysts on the technical side of the crypto community. There is a new “justification”, if you will, that is finding some traction among analysts at Fundstrat, a crypto sector strategy and research firm. Miners are very profitable these days, and the thinking is that they must be “dumping” there token rewards back into the market.
It is widely known that miners had an extremely tough time of it in 2018, when Crypto Winter blighted the industry, causing miners right and left to either exit the business, shut down their rigs temporarily, or stiff it out until the good times returned. It would be a very logical consequence to expect the “survivors” to need cash flow, not only to operate, but to cover prior losses and investments in capital equipment, so-called “CAPEX”.
The good news is that the meteoric rise in Bitcoin prices has once again made the mining profession attractive to many entrepreneurs, as well as the old established crew. As in the oil industry where drillers need $50 to $60 per barrel of oil to make money, Bitcoin miners face a similar financial imperative – BTC needs to sell for anywhere from $7,300 to $8,500 for miners, both old and new, to be profitable.
Fundstrat occasionally surveys a number of mining operations and operators to assess the current state of the industry. Alex Kern, an analyst at Fundstrat Global Advisors, recently tweeted the following information to the firm’s contacts, which was picked up and reported by NewsBTC: “From today’s @fundstrat Bitcoin mining update – @BITMAINtech Antminer S9’s cash and total cost of mining 1 $BTC = $7300 and $8500 (assuming $0.06 / kWh) – Older and newer generation mining rigs are profitable with BTC at current levels.”
Why the difference in old and new? Mining profits are highly dependent on the cost of computers, the cost of electricity to power them, and the efficiency at which computer power is both generated and applied. There is always an “arms race”, so to speak, to acquire the fastest and cheapest to run computing devices on the market. New versions hit the market every so often, which stirs up the competitive juices in the industry. The newer the machine, the more power and the lower the cost.
Utility costs are another story altogether. For the moment, we will ignore the criminal activities related to “crypto-jacking” or plugging into the grid at the behest of a university or some other enterprise. For legitimate firms, the need to find low cost sources of electricity is an ongoing exercise. The latest craze is to open shop in Siberia, where cheap hydroelectric power is abundant, as well as vacated industrial manufacturing sites, pre-wired and ready to go. In Kern’s example, $0.06 per kilowatt-hour is a given, but in Siberia, those costs, along with cool external temperatures, are a meager $0.04 per KWH. It is no wonder that towns on the tundra are being resurrected overnight.
Tom Lee, the co-founder of Fundstrat and Bitcoin advocate, also expanded upon his associate’s previous tweet: “Latest mining report from our quant team. Using S9 and $0.06/kWh, cash breakeven for $BTC mining is $7.3K vs price of ~$10k. Miners profitable and apparently some older rigs are also profitable. Their thesis remains if miners making $$$, they are BTC sellers to fund capex.”
Yes, new CAPEX will be a drain on profits, but we also suspect that a goodly sized debt load was accumulated during the lean times of Crypto Winter. Where will the cash come from to service these debts? The obvious answer is to sell current token rewards in the open market, never too much to drive the price down below a reasonable amount. As the price drops, a multitude of institutional investors are just waiting to pick up bargains, which they will buy, but again, not too much to drive the price up too severely.
How long might this “dog-chasing-its-tail” routine continue? The answer here is open for speculation. Hash rates are running at record levels, an indication that miners are cooking on all cylinders. At some point, if this logic is on the mark, miners will discontinue “dumping”, choosing rather to hoard until prices soar once more. Whatever transpires, it might behoove everyone to keep closer tabs on how miners are behaving.