What happened
After some recovery over the past few weeks, Bitcoin (BTC +1.06%) miners had a rough go of it this week. The value of Bitcoin is down 7.6% in the past week as of noon ET on Friday, and that leads to a lot of lost value for miners and related companies.
According to data provided by S&P Global Market Intelligence, shares of Canaan (CAN +3.52%) have fallen 15.7% since Friday's close, HIVE Blockchain (HIVE +2.90%) is down 17%, Riot Platforms (RIOT +1.26%) has dropped 17.6%, Hut 8 Mining (HUT +0.00%) is down 16.9%, and Cipher Mining (CIFR +4.16%) has fallen 22.7%. But will the drop continue?
So what
You can see in the chart below how these companies follow the price of Bitcoin, at least over the short term. And with good reason.
Whether you're mining Bitcoin or creating chips or other products for miners, the price of Bitcoin itself is very important. It's the equivalent to the price of a commodity for miners in the commodity industry. If the price falls, so does revenue.
To make matters even more complicated, miners often hold Bitcoin they mine on the balance sheet. This puts additional leverage on these companies, making the volatility worse both when Bitcoin goes up and when it goes down.
The reliance on high Bitcoin prices is evident when you start looking at net income for each of these companies.
CAN Net Income (TTM) data by YCharts.
They need Bitcoin to remain elevated to make money. If the bounce above $30,000 doesn't hold, they might continue losing money.
Now what
What's not clear at this point is whether the Bitcoin rally will continue. There's been renewed interest in blockchain assets after the U.S. began cracking down on some companies in the wake of SVB's failure, but both could actually lead to the U.S. crypto industry being even smaller.
Internationally, the news is better, with countries like the U.K. and Hong Kong creating rules that make crypto easier to own. It's possible that the U.S. will follow a similar path eventually, given Congressional pressure, but that has yet to happen.
One of the biggest challenges for these miners is that competition is much stronger than it has been in previous crypto cycles. Some other blockchains are faster, cheaper, and less energy intensive, reducing the market opportunity for Bitcoin.
Combine that with miners' reliance on the price of Bitcoin itself, and this is a tough business in which to generate long-term value. Most Bitcoin mining companies are just leveraged plays on Bitcoin, and investors who are looking for exposure to Bitcoin can just buy the cryptocurrency itself.
I have not been bullish on Bitcoin miners for a long time, and this week's move is a good example of why. They carry more risk than Bitcoin and often just exaggerate the cryptocurrency's moves.
