Bitcoin Mining Stocks Plunge as Network Hashrate Surges, Squeezing Profit Margins: JPMorgan Report

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As a seasoned crypto investor with a decade of experience under my belt, I find myself both intrigued and cautious about the recent developments in the Bitcoin mining sector. The surge in hash rate, while a testament to the network’s strength and security, has undeniably put a squeeze on profitability for miners. This is particularly true for U.S.-listed companies, as evidenced by their 18% drop since the end of July.

Bitcoin mining company stocks have allegedly encountered notable obstacles during the first fortnight of August, undoing gains linked to artificial intelligence (AI) excitement as the network’s hash rate escalated sharply. As reported by Will Canny for CoinDesk, citing a research report issued by JPMorgan last Friday, the soaring hash rate has driven mining profitability to record lows, causing a substantial drop in the market capitalization of Bitcoin mining businesses.

In simpler terms, Bitcoin’s hash rate refers to the collective processing power employed by miners within the Bitcoin network to solve challenging mathematical problems that verify and safeguard transactions. This power is measured in hashes per second (H/s). A higher hash rate implies more miners are actively participating, making the network resistant to threats like double-spending. It also indicates the mining difficulty; as more miners join, the difficulty increases to keep a consistent block production rate. The hash rate serves as an important gauge of the network’s stability, security, and the competitive environment among Bitcoin miners.

During the initial part of August, the hashrate rose approximately 5 exabytes per second (EB/s) on average, reaching around 621 EB/s. This 1% boost in hashrate presents a substantial hurdle for miners, especially since it’s still 30 EB/s shy of the levels witnessed before the Bitcoin halving event.

Analysts Reginald Smith and Charles Pearce from JPMorgan have pointed out that the combined stock market value of 14 U.S.-based Bitcoin mining companies they follow has decreased by about 18% since late July. Currently, these shares are being traded at double their relative portion of the four-year block reward payout, suggesting a notable overpricing in the market.

In spite of facing strong resistance, U.S.-based mining companies have successfully increased their portion of the worldwide Bitcoin mining network’s computing power for a fourth straight month, reaching an unprecedented 26%. However, this progress is outweighed by the ongoing fall in mining profitability. The hashprice, a crucial indicator used to evaluate mining profitability, remains 30% lower than it was in December 2022 and 40% below its pre-halving levels. This prolonged strain on profitability may slow down the expansion of the network’s computing power in the coming period.

As a crypto investor, I’ve noticed that the price of Bitcoin has seen a dip by approximately 8.3% since the last halving on April 19th. However, despite this recent drop, it’s important to remember that it’s still showing a strong performance with a 39.4% increase so far this year. In fact, when compared to the same period last year, Bitcoin has surged by an impressive 124.5%. This just goes to show that even in times of short-term volatility, the long-term potential of Bitcoin remains robust.

In the face of widespread difficulties within the industry, Marathon Digital Holdings, Inc., a major player in the Bitcoin mining sector globally (traded as MARA on NASDAQ), made a substantial move on August 14th. The company successfully raised $300 million through an oversubscribed sale of convertible senior notes. This capital influx enabled Marathon to acquire 4,144 Bitcoins, valued around $249 million at the time, significantly expanding its strategic Bitcoin reserve which now surpasses 25,000 BTC.

As an analyst, I’m sharing that Marathon Digital Holdings has announced the issuance of unsecured senior notes with an annual interest rate of 2.125%. These notes will be due on September 1, 2031, but can be repurchased, redeemed, or converted earlier if needed. Starting March 1, 2025, the interest will be paid semi-annually on March 1 and September 1. Interestingly, from September 6, 2028, Marathon Digital Holdings has an option to redeem all or part of these notes at 100% of their principal amount plus accrued interest, only if the common stock price exceeds 130% of the conversion price for a specific period prior to the redemption notice. However, if less than all notes are redeemed, at least $75 million in aggregate principal must remain outstanding.

Holders of these notes have the right to request MARA for repurchase of their notes on March 1, 2029, or under certain significant changes within the company. Additionally, this obligation may extend to an increase in the conversion rate if the notes are converted during specific corporate events or upon receipt of a redemption notice, as well.

These notes can be exchanged for cash, shares of MARA’s common stock, or a mix of both, depending on MARA’s decision. This conversion is only allowed during certain events and periods prior to March 1, 2031. After that date, the conversion becomes unrestricted until two days before they mature.

At first, for every $1,000 invested as the principal amount, there are about 52.945 shares issued, which is roughly equivalent to each share costing around $18.89. However, this initial conversion price may change depending on specific events that occur.

Read the full press release:

— MARA (@MarathonDH) August 14, 2024

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2024-08-19 10:04