What happened
Bitcoin miners took a nosedive on Monday morning following a bad weekend and rough Monday morning for Bitcoin (BTC +0.56%) and other cryptocurrencies. The downturn in the market has been taking place for a while, but accelerated late last week.
Hut 8 Mining (HUT +0.00%) fell as much as 15.8% early and is down 6.5% at 1:30 p.m. ET. Hive Blockchain Technologies (HIVE +9.23%) dropped 17.6% and is currently down 8.2%, while Marathon Digital Holdings (MARA +2.79%) fell 11.9% and is now off only 1.2%, and Bit Digital (BTBT +6.55%) plunged 17.9% and is currently down 9.8%.
Image source: Getty Images.
So what
There are two downsides of falling Bitcoin prices for miners. First, the Bitcoin they are mining is less valuable, meaning their operating revenue and margins will likely drop if the decline in prices is extended.
Second, most mining companies have decided to keep Bitcoin on their balance sheet, further increasing their exposure to the price of Bitcoin. It's this balance sheet exposure that can push valuations lower rather quickly.
No matter how you look at it, miners are tied to the success and failure of Bitcoin and with prices plummeting from Friday afternoon through early this morning it's hard to see how they wouldn't be impacted. The question now is how long the drop in prices will last and if a recovery in prices and trading activity will come at all in 2022.
Now what
The chart below shows the general challenge for Bitcoin miners today. They had been given high market valuations on the idea that profitability and cash flow would improve as Bitcoin rises and mining needs increase. But you can see below that they were yet to demonstrate much in the way of cash from operation in 2021.
HUT Cash from Operations (Quarterly) data by YCharts
Now, we are seeing Bitcoin drop and that means balance sheets are getting worse, cash flow is getting worse, and this is at a time when many of these companies are also expanding their mining operations.
I think at the end of the day Bitcoin mining is going to be a commodity industry and we're seeing some of the dynamics that regularly happen in commodities. When the money is good, investments flow in and capacity will go up. When the bottom falls out of the market there's a lot of weakening financials. We are seeing the latter today and it could make for a rough first quarter for miners.
Stocks are bouncing back, but this is a reminder that if you want exposure to Bitcoin you can always just buy Bitcoin. Miners are a leveraged bet on the industry and they can turn south much faster than the underlying cryptocurrency.
