Companies mining cryptocurrencies have a number of headwinds to battle right now. Fool.com contributor Chris MacDonald and The Motley Fool's Eric Bleeker discuss two of the major catalysts sinking crypto miners on the Dec. 15 edition of "The Crypto Show" on Backstage Pass.
Eric Bleeker: Let's move on to the crypto miner correction. Whoever made this slide should be ashamed of themselves, how tiny these names are. That was me.
We have Argo AI, or Argo Blockchain (ARBK 1.00%), excuse me. Argo AI is a self-driving car company. Down 37 percent. Cipher Mining (CIFR +1.07%) down 63 percent, Marathon Digital Holdings (MARA 0.23%). Actually, flat. Riot Blockchain (RIOT +1.02%) down 18 percent, and this is since the beginning of September.
You noticed those gains have been particularly accentuated. If you look on your screen, right around the beginning of November, around this time that we have been seeing a general risk-off across the markets.
It's worth noting, some of the gains, especially in something like a Cipher Mining, extend far beyond the drops in Bitcoin (BTC 0.31%) itself. I was looking online, and there is an expert who seems to have this story well covered. He has "A crypto crash on steroids." "Crypto currency miners sink more than 9%, U.S. and China finally agree on something, and it's not good for crypto miners."
Well, luckily, we have this expert on the show today. Chris, you've been writing a lot about this story. What's going on in crypto mining?
I should just note, too, quickly before I throw it over to you that crypto mining, it's a space that has attracted significant attention. These miners have been mining bitcoins and generally, a lot of the time, keeping them on their balance sheet. It's been a way for a lot of people to play Bitcoin through the public market. I know that we haven't covered miners as much on the show.
Chris, what's going on the space? Why the sudden collapse?
Chris MacDonald: I think with the theme of de-risking in the markets, the crypto mining sector is an interesting one to look at.
These two articles talk about two different things. The first is more about how crypto miners react to price volatility with, let's say, Bitcoin. Then the second one is more about the environmental concerns around the crypto sector. Those are the two main drivers that I'm looking at right now as some of the biggest reasons for why the crypto mining sector is down.
And I'll try not to go into too much of a tangent on this.
Eric Bleeker: Please do.
Chris MacDonald: [laughs] I find the crypto mining sector one to be very interesting. When I think of crypto miners, really, it's a misnomer. Crypto miners are more validators on a blockchain. They help validate and secure transactions and add new blocks to a given chain. But they're called miners because they receive rewards for doing that.
In a way, it's interesting to think about a crypto miner like you would a gold miner. Bitcoin is often referred to as digital gold. They have high up-front fixed costs -- so the actual mining machines, the cooling systems, the real estate, the infrastructure to do it, similar to a miner who needs to invest in his trucks and his drills and what have you.
Then their profitability ultimately relies on the price of Bitcoin, or for gold miners, just the price of gold. These companies are very sensitive to price movements. What that means is if the price of gold or the price of Bitcoin goes up, that pretty much directly hits these companies' bottom lines because such a big portion of their costs are fixed. That means that essentially, when the price of Bitcoin is fluctuating and there's some volatility there, these miners can see higher volatility than the underlying assets.
If you're in a de-risking environment where you're saying, "Well, I don't like how volatile the price of Bitcoin is," if Bitcoin sells off X%, 5%, a Bitcoin miner might sell off 10%. But in a bull market, it's the other way around. That's more what I meant by leverage when you're thinking about crypto miners versus the actual underlying cryptocurrencies. These are a little bit technically more volatile and more higher-risk, but higher upside options for investors to consider. Right now, in this present market, they're getting hit hard on that front.
Then from an environmental standpoint, most investors may or may not have read about the bans from China on crypto mining. That pushed a lot of activity to countries like Kazakhstan or Canada or the U.S. Recently, there was a new story this past week that Kazakhstan has become less friendly to crypto miners. What's happening is, if you're a crypto miner and you're setting up an operation in a given country and you're forced to move out of that country for whatever reason, obviously, that's going to place a big hit on the sector.
There's some complicated dynamics there with the terahash rate, and U.S.-based crypto miners have benefited. Companies like Marathon that you noted didn't decline as much. They're benefiting from that environment because less computing power means that they can earn more rewards. It's a rather complex situation.
But now, the U.S., I understand, makes up 35 percent of the global Bitcoin production, and that trend is likely to increase. What we've seen here, there's another piece I wrote about U.S. regulators potentially cracking down. [Sen.] Elizabeth Warren has requested some information from crypto miners on how much power consumption is being used, potential for disruption to power grids, and then also the environmental impact.
For countries that are trying to meet green targets, crypto miners, they suck a lot of power out of the system. It's difficult to maybe hit those targets when those electricity resources are being used in that way, and a lot of electricity still is not green yet. There's a real concern there among environmental-conscious investors, and there's a concern among those who are worried with volatility in this segment.
There's those two big aspects that I'm watching right now, but this is one sector that seems to be really under pressure right now, so I will be following it closely.
