As Bitcoin rises in value, crypto mining companies benefit from a virtuous cycle.
The miners have huge warehouses full of specialized equipment that keeps Bitcoin transactions running smoothly and they are rewarded with extra Bitcoin for their efforts. Firms may sell less cryptocurrency to remain afloat and spend more on mining equipment, making the Bitcoin network stronger overall as a result of rising cryptocurrency prices.
Things aren’t looking good right now.
As of the beginning of May, the value of one Bitcoin has dropped to roughly $20,600. Several miners’ stock prices have plummeted further. A 63% drop in Marathon Digital Holdings (ticker: MARA) since May 4th, a 58% drop in Riot Blockchain (ticker: RIOT), and a 70% drop in Core Scientific (ticker: CORZ) have all occurred since that day.
Miners can’t overcome their issues if the crypto markets remain in a state of stagnation.
When Bitcoin was trading at $60,000, the “break-even” Bitcoin price at which the corporations could still earn money by maintaining their server farms looked like a faraway concern. Just 27 percent lower than Bitcoin’s present valuation is the average cost of production for a miner based on JPMorgan’s estimate of $15,000 per coin. Smaller mining companies with greater operating expenses may already be cutting down.
A second issue is that several miners had major growth plans last year when things were booming. When Marathon Digital said in May that its cash on hand had decreased from $118.5 to $150 million after its first quarter, it was mainly because of expenditures in new mining operations.
This leads to the third problem, which has negative consequences for the crypto market as a whole: Bitcoin miners with access to the financial markets may have difficulty borrowing money or issuing shares to support their operations in the future. The financial markets may be closed to smaller, private Bitcoin miners. Selling Bitcoin, which some miners have steadfastly resisted doing, is the only viable option for obtaining cash at the moment, and this might lead to more pressure on the price of Bitcoin.
Researchers at Compass Point Research & Trading anticipate Marathon to start selling its Bitcoin production, and maybe even coins from its balance sheet, to finance expansion, they said on Tuesday. There have been no Bitcoin sales since October 2020, according to a Marathon spokesperson. Finally, “Bitcoin is an asset that we can use to our advantage should we want to do so,” stated a representative for the Bitcoin Foundation.
It has been selling coins since March, according to experts. Analysts noted several mining equities still had room for growth and assigned Buy recommendations to Marathon and Riot.
On Friday, JPMorgan analysts stated in a note that “this dumping of bitcoins has likely already impacted on prices in May and June,” and that “there is a danger that this pressure might persist.”
For the time being, the organizations that are vital to the continued operation of the Bitcoin blockchain may represent the greatest threat to the value of the currency.
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