Stock Analysis & Ideas

Top Bitcoin Miners Bleeding Cash, but Analysts Remain Bullish

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The largest bitcoin miners haven’t been generating any profits lately, as the price of bitcoin has plummeted this year. Three of the top miners racked up losses totaling over $1 billion in Q2 alone. Nonetheless, analysts are still bullish on these stocks, with price targets implying high upside potential.

The three biggest bitcoin (BTC-USD) mining companies racked up over $1 billion in losses in Q2 amid this year’s “crypto winter.” Despite the heavy losses, analysts expect high upside potential from these companies. According to Bloomberg, in Q2, Core Scientific (CORZ) booked net losses of $862 million, Riot Blockchain (RIOT) lost $366 million, and Marathon Digital Holdings (MARA) lost another $192 million.

Crypto winter is a term that was first introduced during the previous bear market of 2018-2020. It refers to a state where the crypto market experiences big drops, sideways movements, and fear.

What is the Crypto Mining Industry? 

Bitcoin works in a system called “Proof of Work.” In short, this means that every time a transaction is being attempted on the blockchain, “miners” need to approve it by solving long strings of numbers. These strings are similar to mathematical equations or, simply put, a complex puzzle that needs to be solved in order to prove that the transaction is legitimate. This is done by using computer power to run through all of the possible combinations of the puzzle until the right one is found.

When the miner successfully solves the puzzle, they get rewarded in bitcoin, and the more computers working on the network, the more likely they are to succeed.

The current reward rate is at 6.25 bitcoins per block, and a new puzzle is being solved around every 10 minutes.

This has led to a big mining industry where companies build huge “mining farms” with the intention of mining and accumulating as much bitcoin as possible to later sell into the markets. This is done by building huge facilities filled with mining rigs that solve the puzzle time and time again. 

Core Scientific, for example, has 180,000 servers and is responsible for around 10% of the current computing power of the entire bitcoin blockchain network.

Riot Blockchain, one of the largest U.S.-based publicly-traded bitcoin miners in North America, had an amazing year in 2021, fuelled by the crypto market bull run. The company’s revenue increased to $213.2 million (1,665% year-over-year growth) in 2021, compared to $12.1 million in the prior-year period. The number of bitcoins held by the company increased 353% to 4,884 bitcoins as of December 31, 2021, compared to 1,078 bitcoins 12 months earlier.

Marathon Digital became the first North American bitcoin miner to hold over 10,000 BTC on its balance sheet. It has a total of 49,000 miners installed and maintains its goal of reaching almost 200,000 by 2023.

Why Were the Losses So Big?

The main reason for the losses experienced by bitcoin miners is the large drop in the price of bitcoin over the last quarter. This downturn in price forced miners to sell significant portions of their bitcoin holdings in order to cover operational costs and pay back debt.

From the report, it is evident that public miners are still selling their bitcoin holdings at a higher rate than their production rate. In June, miners sold 14,600 coins despite only producing 3,900, and in July, public miners sold 6,200 coins, making it the month with the second-highest bitcoin selling rate this year.

However, selling their bitcoin bags is still not enough of an income for some of these companies. Marathon took another $100 million loan in addition to selling off around $60 million in mining rigs, while Core Scientific entered a $100 million stock purchase with a VC firm.

How Bitcoin Miners Affect the Price of Bitcoin

These mining companies are always looking for the opportunity to sell their bitcoins at the highest possible price and take advantage of every move higher to sell more coins.

This added extra selling pressure to the price of bitcoin, which was already struggling due to the harsh market conditions of last year, pushing the price down further.

Which Bitcoin Mining Stock is the Best to Buy? 

According to analysts, the highest implied upside potential out of these three companies is awarded to CORZ stock. It sports five unanimous Buy ratings, and the average CORZ stock price prediction of $8.22 implies 232.1% upside potential.

Next, there is Riot Blockchain. It’s currently trading at around $7.25 after a ~67% year-to-date drop. However, it has a Strong Buy rating based on six unanimous Buy ratings from Wall Street analysts. The average Riot Blockchain price forecast is $14.83, implying 104.3% upside potential.

Lastly, there’s Marathon Digital Holdings, which has the least implied upside potential. Based on five Buys and two Holds from Wall Street analysts, it has a Moderate Buy consensus rating. The average MARA price target is $20.43, implying 61.9% upside potential.

Conclusion: Bitcoin Miners Need to Adapt

It is clear from the last quarterly report that simply mining and selling bitcoin may be profitable when the price is high, at $60,000, but not so much as it gets closer to the $20,000 level. With the constant rise in energy prices, and as the world moves away from polluting energy into a greener environment, the entire mining industry will need to adapt, or it will be left behind and will continue to lose money. This means that miners will have to find more income streams than simply mining and selling coins.

Riot Blockchain found a creative solution to the problem when it sold its extra electricity reserves to the state of Texas, making millions in the process. 

Unless the price of bitcoin goes back to approximately $40,000, it will be very challenging for these companies to create a profit for themselves and their investors.

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