Crypto winter – a time of opportunity for miners? Explaining how true this is

The protracted bearish trend in the crypto market and the fall in the price of bitcoin, on the one hand, reduced the income of miners, but on the other hand, they opened up some opportunities. It is enough to turn to the statistics. Risks and business Unlike many other enterprises, organizations that specialize in bitcoin mining are able to exist for a long time in “conditions of uncertainty”. The incomes of market participants are falling sharply, and sometimes even go into negative territory with the onset of protracted crypto winters – downtrends in the market. The situation is even worse for credited companies.. But, as statistics show, not everything is so simple. In practice, “digital cash production” is the acquisition, deployment and maintenance of computing power plus the search for a suitable source of electricity to ensure the functioning of the Bitcoin network through the transaction confirmation procedure.. It is mining that is the basis of decentralization of the system. Investing in Mining vs. Investing in Cryptocurrency Investing in bitcoin mining is different from buying an asset outright. On the one hand, when you invest in mining, you have a constant and predictable cash flow and physical assets (equipment) that can be sold (albeit at a partial loss) at the most stressful moments in the market. Such investments are more likely to attract relatively cautious people who are accustomed to investing in companies that can generate profits. On the other hand, direct investment in cryptocurrencies looks more risky.. When buying bitcoin or promising altcoins in the long term, you expect to earn money only in the future, which means you do not have a constant cash flow. In addition, by investing in bitcoins, you kind of “freeze money” in only one asset.. Whereas by purchasing mining equipment, you are not limited to mining only BTC. The right hardware can, for example, allow mining any other cryptocurrency based on a similar hashing algorithm (SHA-256 in the case of bitcoin). BTC is currently 65% cheaper than at its peak in November 2021. At such moments, some investors, having assessed all the risks, quit mining and switch to something else. But there are also those who wonder: “Isn’t now the right time to start?”. Bitcoin price and mining In general, miners' cash flows decrease as the BTC price falls.. At first glance, it seems counterintuitive that lower prices can give the mining company at least some advantages.. Nevertheless, since we are talking about the industry as a whole, we need to pay attention not to the market price, but, conditionally, to the cost of generating the final product, in our case, bitcoin. Among all the costs that are included in the cost of cryptocurrency, the biggest one is the price of electricity, without which the process of data processing in the blockchain is impossible.. Anyone who can find a cheaper source of electricity with equal performance will gain a competitive advantage. In some cases, he will be able to profit even in adverse market conditions. Since not all miners are able to achieve the same level of performance, in practice this means one thing: many will receive the final “cost of production”, at a cost close to the market price of the asset. As a result, many will have to sell equipment that does not pay off and leave the market. The secret lies in the nature of the crypto market, which is in many ways closer not to the stock market, but to the commodity market, and therefore is “countercyclical”. This means that the times of fall are the best time to expand your activities.. There is an interesting relationship between the price dynamics of mining equipment (for example, ASICs) and the price of BTC: the former, as a rule, undergoes a greater correction than the asset itself. Some statistics: in 2022, the price of BTC fell by 47% from April to August, at the same time, the cost of equipment decreased by 60% over the same period. A similar correlation was also recorded on the Hashrateindex portal: ASICs lose value faster than the price of the underlying asset falls. Source: citing Arthur Mining Bitcoin Mining Companies. The cable business has gone through three cycles of “expansion and consolidation.” The first cycle was associated with the arrival of technology enthusiasts and computer geeks, who started the business on the Internet, who organized the first network infrastructures.. It can be said that it was thanks to these pioneers, fanatics and enthusiasts that the network industry eventually gained mass distribution. Something similar happened to the first bitcoin miners back in 2009.. Then the first cypherpunks, crypto-anarchists and crypto-enthusiasts kept the network working, often without even counting on any reward. In the second cycle, players appeared who saw new opportunities for earnings and decided to quickly increase their capital. This is a wave of early investors and entrepreneurs who focused only on accelerating their expansion and short-term results. And finally, in the third cycle, we saw the consolidation of the entire industry. It was accompanied by the arrival of players who, on the one hand, paid attention to productivity and the long term, and on the other, were aimed at making money.. During the third wave, venture capital began to enter the market, and the industry became professional. Already in 2010, the 50 largest cable companies from the 1990s merged into four organizations. Most modern mining companies have already entered the second cycle, focusing mainly on short-term results and not paying due attention to performance.. This has affected smaller companies, which are very vulnerable to stressful situations. Bet on halving The positive investment expectations of many participants, of course, are associated with the deflationary model of the emission of the first cryptocurrency, which is a consequence of the systematic reduction of the block reward in the Bitcoin blockchain. We talked about whether it is realistic to expect BTC growth in the light of the next halving, and how the halving generally affected BTC pricing – we talked in a recent review. But it is interesting that many unprofitable players during the crypto winter still privately come to an agreement with creditors, bypassing bankruptcy.. For example, recent events with Greenidge Generation showed that investors are ready to consider debt restructuring, expecting that the business will still bring profit in the future.. And this is not the first time in history that a mining venture raises huge amounts of money for development. During the growth cycle of bitcoin between 2020 and 2021, miners' income grew proportionately. At the same time, many public companies kept their money in bitcoin to maximize profits.. Luxor Technologies estimates that public mining companies have borrowed between $3 billion and $4 billion to finance infrastructure expansion and equipment purchases. Produce when everything is up and sell when everything is down However, those same players made the following mistake: it usually makes sense for a manufacturer who is able to increase production to sell what you produce and reinvest the money received.. This is much more profitable than keeping what you produce on the balance sheet.. They did not take this into account and preferred to keep a significant part of their savings in the mined cryptocurrency during the period of growth in its value. But since the price of bitcoin (as history shows) cannot rise indefinitely upwards and is replaced by downtrends, miners had to reduce positions in order to pay off their debts and loans.. As a result, this led to increased pressure from the bears on the market in June-July, and ended with new price lows. In essence, the result of the money management strategy that these mining companies used is that they mined when it was expensive and sold when it became cheap.. As a result, this resulted in huge financial losses, in addition to operating losses caused by the decline in the price of bitcoin. So the least efficient players, firstly, cheaply got rid of cryptocurrencies from their balance sheets, and secondly, in the event of bankruptcy, they cheaply sold the computing power, which they once bought for huge money, according to the residual principle. We have already said that in exceptional cases, the price of specialized mining equipment can fall even more than the rate of the mined cryptocurrency during the crypto winter. On the other hand, more far-sighted and efficient participants just buy these assets cheaply in the considered period of time.. If they have enough reserves of money and investments to “wait out” the crypto winter until the next growth cycle, they will most likely be able to “recoup” the purchase of mining equipment from bankrupt participants. This is why we argue that for some, cryptowinter is a time of great opportunity. Best Time of Opportunity Why does this happen at all: some miners go bust, while others find themselves in a winning position? Bitcoin mining is a fickle business. As a result, the ideal time to enter is when prices are low.. At this time, the most short-sighted players face problems and leave the market. Of course, now the equipment is very cheap.. But for investment, it is not enough to buy a mining farm, you also need to calculate the profitability, payback, maintenance, repair, electricity and maintenance costs.. Among other things, it is necessary to study in advance all potentially profitable altcoins made on a similar hashing algorithm in order to reconfigure the equipment in time if some coin loses its value. In short, there are many factors to take into account.. This is when the miners will have the opportunity to survive the “crypto winter” cycle and increase their wealth with the onset of the “crypto spring”.