Miners Choke on Higher Energy Costs
It represents strength that Bitcoin is holding the $38,000 level considering that energy costs have spiraled out of control.
I would consider this a relative victory for Bitcoin.
Like many other businesses, the cost of producing products is important and when the cost of oil is low, crypto miners laugh all the way to the bank.
That hasn’t been the case lately.
It was only just at the end of 2019 that the price of Brent crude was $20 and fast forward to 2022, the price touched $130 and has now settled around the $105 per barrel mark today.
It was no coincidence that Bitcoin’s most recent meteoric rise took place when the nominal cost of energy was half of what it is today.
The most glaring unintended consequence is the distressed nature of Bitcoin miners whom many have gone out of business because they simply aren’t profitable amid uncontrollable energy prices.
To dig deeper in the weeds, electricity comprises 90-95% of Bitcoin mining costs.
There was further news this week that a Russian Bitcoin miner had been included in the latest round of US sanctions. The Swiss-based Bitriver AG had moved its assets to Switzerland last year but found itself in the crosshairs, alongside 10 of its subsidiaries.
Bitriver claims to be the world's largest hosting provider for climate-friendly crypto mining (using renewable energy), and boasts a 100-megawatt data center in the Siberian city of Bratsk which it outsources to foreign miners from the United States and other Western nations.
HIVE (HIVE) is a Canadian miner which produced 278 BTC in March of 2022. The company also mines Ethereum with 2,549 produced, so that can diversify the company away from BTC. However, the company draws down on its ETH holdings to fund its strategic deal with Intel (INTC). The company sold 10,000 ETH to fund BTC rigs.
Ironically, the company has an ETH mining operation in Sweden which is the very nation leading the charge against Bitcoin operations in Europe.
Hive has access to 50MW of power and has an operating margin of 74% at present.
Marathon Digital (MARA) is focused on North American operations, which would shield it from European legislation. Marathon produced a Record 1,259 BTC in Q1 2022, up 556% Year-Over-Year and its total Bitcoin holdings increased to 9,374 BTC.
Like almost everything else that touches money in Europe, European regulation wants to tax and regulate galore which is what countries do when they are highly uncompetitive.
Europe has never produced an influential tech company from scratch and this is one of the biggest reasons why.
Sweden is in the process of regulating HIVEs ETH mining operations out of business in the name of climate change.
The obsession with climate change in Europe leading to the Stockholm syndrome attachment to green energy is just in its early innings.
It’s crystal clear to me that Europe will kick out all of its crypto miners and now there will be a sense of urgency since there is an energy crisis occurring within the European zone.
This all means that crypto miners will migrate to Russia and America with higher margins in Russia because the cost of energy is so low.
Although that is the long-term prognosis of the mining industry, in the short-term, cost challenges handcuff the best of them and the share prices of stocks like Marathon, Canaan (CAN), Riot, and Marathon are down in the dumps.
When the cost of oil retraces nearer to $70, I believe that will be the elixir for higher crypto mining share prices. Until then, rising interest rates and higher energy are something that miners must navigate or go bust.
