Bulking Up For Bitcoin’s Halving, Miners Sold $1.6 Billion In Stock In 2023

Overview

2023’s market boom was a boon for public bitcoin miners, many of which enjoyed triple-digit returns over the course of 2023. The best-performing stocks in 2023 were Marathon (591%), Bitfarms (582%), Bit Digital (553%), Cipher (546%), and Iris Energy (501%). Most importantly, these returns came after a bearish 2022 when bitcoin mining stocks fell by 78%, according to a crypto mining stock index.

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The public bitcoin mining sector used 2023’s lofty market to raise equity, firming up their balance sheets and eliminating debt. All told, the biggest publicly traded Bitcoin miners raised $1.63 billion in equity through the first 9 months of 2023 via public sales or private placements. These miners likely sold additional equity in Q4-2023, but we won’t know exactly how much until they report end-of-year financials later this month.

Some miners, like Marathon, used the fresh capital to pay down hefty debt loads incurred when they scaled up to ride the 2021 bill run, while others used the funds to finance infrastructure expansion and new ASIC miner orders.

Key Background

Bitcoin’s fourth block subsidy halving is scheduled to occur in mid-April. This quadrennial event will immediately cut mining revenue in half by reducing the number of bitcoin issued per block by 50%. If it were to happen today, for example, miners would earn roughly $140,000 per block instead of the ~$280,000 they earn today from the current block reward, which includes transaction fees and newly minted bitcoins. If the price of bitcoin doubles, their revenue would stay the same.

For many miners, last year was a preparation period to gear up for what will likely be the toughest year yet in bitcoin mining, and the equity sales attest to the shifting financial management strategies that public miners are executing to adapt to current market conditions ahead of the halving. The chart below illustrates the profit squeeze that the halving will force onto miners. Using a hypothetical scenario where a miner is running 10 Antminer S19 XPs at $0.06, we look at current operating profit and operating profit if the halving were to happen tomorrow by using hashprice, a revenue measure miners use that indicates how much money they can earn per day for their compute power.

As the chart indicates, if the halving were to happen tomorrow, this hypothetical miner’s margins would shrink from 60% to 19% – a significant reduction.

It’s worth noting that this hypothetical only looks at direct operating costs with regard to power and that public miners have overhead that includes selling, general, and administrative expenses (SG&A) and other costs such as servicing debt.

Core Scientific, which recently emerged from bankruptcy, is perhaps the poster child for how debt can burden a public Bitcoin miner. Even after shaving its debt significantly in Chapter 11 restructuring, Core Scientific reported $680 million in outstanding debt in Q3-2023, with a contractual interest expense of $60 million for the first nine months of 2023 on these loans.

With Debt Out of Reach, Equity Became the Only Practical Fundraising Vehicle for Miners in 2023

Public bitcoin miners, like other publicly traded companies, can tap into debt markets or their own equity to raise capital. Equity raises have typically been the go-to financing vehicle for these companies for two reasons.

First, many financiers have been leery of lending to a sector with such a volatile market. However, in 2020, 2021, and 2022, when interest rates were practically zero, raising debt was preferable because the debt was cheaper and this strategy was non-dilutive for their shareholders.

Some of the debt raised in years past came from credit facilities, like Marathon’s $200 million facility with Silvergate Bank, which it recently wound down. Others, like Core Scientific, took on debt via convertible notes (that can be turned into equity), covenants, and ASIC miner financing loans. The latter category was typically offered by crypto-native financial firms like NYDIG, Galaxy Digital, and Foundry (among others), and they usually carried high interest rates (10-15% or higher) and were collateralized by the very ASIC miners they financed. In fact, ASIC financing deals used to make up a substantial portion of the sector’s debt. ASIC financing accounted for $47.84 million in public miner debt in 2020, $662.25 million in 2021, and $641.80 million in 2022. As a point of reference to show the high cost of this debt for miners, the Bloomberg US Corporate High Yield Bond Index paid 6.926% yield to maturity from 2020-2023.

These ASIC financing loans ended in 2022 with a wave of defaults; the $277 million of confirmed defaults came from Iris Energy, Stronghold, and Greenidge.

The Federal Reserve’s rate hikes throughout 2023 moved the targeted federal funds rate from 525-550 bps, which made debt financing largely untenable, so equity sales took up virtually the entirety of the sector’s fundraising efforts.

Flush With Capital, Public Miners Are Sponging Away Debt, Expanding Operations

Miners first used these windfalls to shave away debt. From the end of 2022 to the end of Q3 2023, public Bitcoin miners reduced their burdens from $2.61 billion to $1.56 billion, a 40% decrease.

The cash that the public Bitcoin miners raised in 2023 also went toward ASIC miner orders to pad their hashrates before the halving. From Q4-2023 through the first half of 2025, public Bitcoin miners have had more than 67 EH/s worth of Bitcoin mining ASICs on order (for reference, the entire Bitcoin network currently sports 540 EH/s). Many of these orders for 2024 and 2025 are for the latest next-generation models that are forthcoming in the new year, namely the Antminer S21 and T21 models and the Whatsminer M60 series.

Some orders will replace existing models in active facilities, but others will outfit new and under-construction facilities. Riot, for instance, ordered massive quantities of M56 and M66 rigs for its all-immersion Corsicana facility in West Texas, which it plans to begin energizing at the end of Q1 2024, and Cipher plans to fill its Black Pearl facility – a Texas Bitcoin mining farm which it recently acquired – with Antminer T21s when it is fully energized in 2025.

Leading public miners have 1.2 gigawatt of expansion currently under development (this figure includes active construction of new sites, expansion via power purchasing agreements with utilities, and pending acquisitions). This figure illustrates that collectively, these miners are building out facilities that are capable of drawing up 1.2 GW of power; for comparison, New York City requires 5.5 GW of power. Estimates for the entire Bitcoin network’s power draw, for reference, is roughly 17 GW, according to estimates from Hashrate Index;18.5 GW, according to estimates from Cambridge; or 18 GW, according to Coin Metrics.

As industry consultant Amanda Fabiano put it, “if you’re not growing, you’re dying,” so these expansion plans will be essential for public miners to remain in good shape after April’s halving event.

Bitcoin Miners HODL Less Now Than in 2021 Bull No More

Additionally, before 2022, many hoarded the coins they mined instead of selling them to fund their operations, opting to lean on debt and equity for a financial runway.

Now, public miners are opting for a more conservative approach. Since 2022, they have increasingly relied on their monthly mining supply and bitcoin treasuries for cash. The chart below shows a collective Liquidation/Production Ratio for public miners. A ratio above 100% means that, in total, public Bitcoin miners sold more bitcoin than they mined in a month, meaning that they dipped into their reserves.

As a result of their new financial strategies – and the fact that their valuations appreciated significantly over 2023 – public miners are in a much healthier place currently than they were at the beginning of 2023. We can see this improvement in the fact that nearly all of them reduced their debt-to-equity ratios over the course of 2023 (in most industries, a debt-to-equity ratio below 1.0 is considered healthy).

Outlook and Implications

To survive the Bitcoin halving, miners need more than a strong balance sheet. They also need healthy operations, and some are better poised than others. Taking a look at the most recent power price data for these miners and their recent ASIC orders, we can map out their operation’s power efficiency versus their cost of power. For ASIC fleet efficiency, the lower the number, the better. In the chart below, we map out current efficiency while also presenting projected efficiency with the translucent points on the chart.

Most miners have a goal to drop their average fleet efficiency below 26 watts per terahash. Hypothetically, if the Bitcoin halving were to happen tomorrow given current Bitcoin mining economics and these miners achieved this fleet efficiency, their break-even power prices at 26 watts per terahash would roughly be $65/MW.

Given this analysis, we can see that Riot is the best positioned currently from an operational standpoint, as they can secure extremely low power given their curtailment options with the Electric Reliability Council of Texas (ERCOT) and they are upgrading their fleet to next-generation, highly efficient miners. Similarly, Terawulf has low-cost power and a highly efficient fleet that will only become more efficient with its recent orders; Cipher and Hive also have low cost power, but they have a longer way to go to improve their fleets.

Marathon is an extreme outlier. The company’s “asset light” strategy – where it historically has relied on hosting its fleet at other facilities instead of owning its own infrastructure – lends itself to high power costs, although it also has the most efficient fleet currently. Marathon is altering this approach by acquiring two Bitcoin mining sites from Generate Capital (one in Kearney, Nebraska and the other in Granbury, Texas), which Generate clawed back from Compute North in its 2022 bankruptcy.

This will help lower some of Marathon’s all-in power costs, but it’s unclear whether it will be enough to bump them down to a range that will give them more breathing room once the halving arrives. Of course, Marathon is one of the largest and oldest public miners out there and it still retains a massive war chest of 15,174 BTC and $394 million in cash, so they may be able to temporarily weather post-halving margins that put them underwater operationally.

Decision Points

Still, reserves will only get miners so far after the halving if Bitcoin’s price doesn’t go on another big bull run. So when investors are evaluating stocks this year, it’s probably best to focus on those miners with lower power costs, sound operational efficiency, and clear plans for expansion, as competitive costs and growth will be key for weathering April’s 50% reduction of bitcoin mining revenue.

For instance, as we mentioned above, Riot has one of the most efficient fleets and extremely low power costs. The company also has some impressive BTC and cash reserves with $442 million in working capital as of Q3-2023 and a 6,952 BTC treasury, and Riot holds virtually no debt.