Authors: flowie, ChainCatcher

Editors: Marco, ChainCatcher

Every Bitcoin halving is a stress test for mining companies.

Around April 2024, Bitcoin will experience its fourth halving. At that time, the block reward for Bitcoin will decrease from 6.25 to 3.125 bitcoins. The halving will not only increase mining difficulty, affecting mining companies' income, but also, with the expectation of a price increase accompanying the halving, make mining more profitable.

Major mining companies have been proactive in preparing for the upcoming Bitcoin halving by raising funds through equity financing, credit loans, and selling bitcoins, among other methods.

According to incomplete statistics from ChainCatcher, in the three months from the end of October 2023 to the end of January 2024, at least 11 Bitcoin mining companies announced financing, raising over $700 million. Additionally, some mining companies are actively seeking financing. On October 31, 2023, Marathon Digital, a Bitcoin mining company, submitted an S-3 form to the SEC, planning to raise up to $750 million through a mixed equity offering.

Mining Companies Actively Raise Funds Before the Halving, with Amounts Potentially Exceeding $1.5 Billion

The threat of Bitcoin halving to most mining companies is very apparent. In addition to the halving of income from mining block rewards, the production and operating costs of mining companies are increasing.

According to Grayscale's latest report, the 7-day average hash rate surged from 255 EH/s to 516 EH/s in 2023, a 102% increase, significantly exceeding the 41% growth rate in 2022. With the significant increase in computing power, Bitcoin mining difficulty and costs are also rising.

Many mining companies have recently spent a considerable amount to purchase new mining equipment. For example, Bitcoin mining company CleanSpark announced the acquisition of three Bitcoin mining facilities in Mississippi for $19.8 million. Cryptocurrency mining companies Phoenix Group and CleanSpark purchased Bitcoin mining machines worth $187 million and 160,000 Bitcoin mining machines, respectively, from Bitmain.

Faced with the dual challenge of reduced income and increased expenses, Bitcoin mining companies have been raising funds over the past four months to alleviate short-term financial pressure.

According to the crypto data platform RootData, in the three months from the end of October 2023 to the end of January 2024, there were almost 4 to 5 financing deals each month, with most financing amounts in the tens of millions of dollars.

The largest financing deal was the IPO completed by Bitcoin mining company Phoenix Group in December of last year. Phoenix Group completed a $371 million IPO on the Abu Dhabi Securities Exchange (ADX), attracting $12 billion in funds, oversubscribed 33 times.

In addition to Phoenix Group, Australian Bitcoin mining company Arkn Energy also completed a financing of over $100 million in the same month, led by Bluesky Capital Management, with participation from Kestrel 0x1, Nural Capital, and others. Earlier on October 24, 2023, Bitcoin mining company Crusoe Energy announced a $200 million financing commitment from investment company Upper90.

In addition, two mining companies have raised over $50 million. Canaan Inc. raised $75 million through two rounds of preferred stock issuance for research and development, expanding production capacity, and other general corporate purposes. Core Scientific, which completed bankruptcy reorganization, announced in December 2023 that its $55 million equity offering was oversubscribed.

Some Bitcoin mining companies are still in the process of raising funds. On October 27, 2023, the $6 billion Bitcoin mining company Marathon Digital submitted an S-3 form to the SEC, planning to raise up to $750 million through a mixed equity offering. According to the filing, Marathon Digital plans to use most of the funds raised to purchase more Bitcoin mining machines. Subsequently, another mining company, Bitfury, also plans to sell 10 million shares of Cipher Mining common stock to raise nearly $30 million in financing.

If the financing proceeds smoothly, it is expected that Bitcoin mining companies will accumulate over $1.5 billion in financing before and after the halving.

In addition to actively seeking financing, Bitcoin miners are also selling a large amount of Bitcoin to obtain liquidity. According to CryptoQuant data, from early January to early February 2024, the Bitcoin reserve (unsold Bitcoin held in company-related digital wallets) decreased by 84,000 coins to 1.8 million coins. The last time this level was reached was in June 2021.

Halving Meets BitcoinFi: Are Mining Companies Facing Opportunities or Reshuffling?

Although debt and equity financing can temporarily alleviate financial pressure, in the long run, they also pose greater financial risks for mining companies after the halving.

Since the main impact of Bitcoin halving is on block reward income, mining companies such as Bitmain, which primarily sell mining machines, are relatively less affected. However, mining companies such as Marathon Digital, Hut 8, and Riot, which rely mainly on mining and hoarding coins for revenue, have a higher debt ratio and leverage. Their revenue is strongly correlated with Bitcoin prices, and these companies may face a situation of insolvency in a bear market, as they can only rely on increasing Bitcoin mining efficiency and profiting from Bitcoin appreciation.

Looking back at the last halving cycle in May 2020, although Bitcoin prices rose by 72% in the six months after the halving, most mining companies with mining and hoarding coins as their main revenue source experienced greater net losses after the halving.

For example, taking Marathon Digital as an example, in 2021, the cryptocurrency market entered a bull market after the halving, with Bitcoin prices reaching nearly $70,000, and Marathon's total revenue for the year reached $159 million, a 35-fold increase from the $4.37 million in revenue in 2020. However, the total operating costs in 2021 also increased 26 times compared to 2020, resulting in a net loss of over $37 million in 2021, compared to just over $10 million in 2020. As the cryptocurrency market entered a bear market in 2022, Marathon's net loss expanded to $686 million.

Similar to Marathon, Riot's net loss in 2022 was as high as $510 million; Core Scientific applied for bankruptcy protection at the end of 2022 due to excessive losses; and Argo and other mining companies sold assets due to debt.

In the new halving cycle in 2024, mining companies still face similar financial challenges. According to the 2023 mining report released by CoinShares, it is predicted that after the fourth halving in 2024, the average production cost of each Bitcoin will be $37,900. Most miners will face the challenge of sales and administrative expenses and will need to reduce costs to remain profitable. Unless the price of Bitcoin remains above $40,000, only Bitfarms, Iris, CleanSpark, TeraWulf, and Cormint will be able to continue to be profitable. Hashrate Index predicts that there will be more mining company mergers, acquisitions, and asset sales in 2024 and 2025.

Although the 2024 halving brings challenges to mining companies, compared to the previous three halvings, the 2024 halving also presents some new variables and opportunities worth paying attention to.

Looking back at 2023, with the explosion of the Bitcoin ecosystem, the mining industry and mining companies experienced a certain degree of recovery. The total annual revenue of the Bitcoin mining industry (transaction fees and mining rewards) was close to $10 billion, with total revenue climbing slowly each quarter. According to Hashrate Index statistics, almost every listed mining company achieved significant increases in stock prices, market capitalization, and company valuation in 2023. The financial condition of listed Bitcoin mining companies was healthier compared to 2022.

Several mining companies saw a significant narrowing of net losses in 2023. For example, Marathon's net loss decreased from $686 million in 2022 to $268 million, while Riot's net loss narrowed from $510 million in 2022 to $288 million.

In addition to block rewards, the income source for Bitcoin mining also includes transaction fees. With the halving of block rewards, the importance of transaction fees will continue to increase. The surge in transaction fees due to the explosion of Ordinals and BitcoinFi in 2023 brought new opportunities for mining companies.

According to data from Hashrate Index, the proportion of transaction fees to block rewards in 2023 was 7.6%, compared to only 1.5% in 2022. On November 20, 2023, the transaction fees on the Bitcoin network exceeded those on the Ethereum network for the first time, setting a new record.

As Bitcoin continues to rise this year, if the trading volume of BitcoinFi continues to increase and there is a concentrated explosion of Bitcoin Layer 2, it may attract more developers and users to drive innovation and activity on the Bitcoin network, making transaction fees one of the most important sources of income for miners.

Furthermore, after the approval of the U.S. Bitcoin spot ETF at the beginning of the year, it may offset some of the continuous selling pressure from mining issuance, thereby having a more positive impact on the price of Bitcoin and alleviating the asset-liability ratio of Bitcoin mining companies.

Overall, although the expansion of various dimensions of Bitcoin has brought some opportunities for mining companies, the revenue challenges brought by the halving are still daunting. Mining companies need to control costs and seek more revenue models.

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