Do bitcoin miners sell the bottom? -Bitcoin Magazine

Buying low then selling high is one of the most fundamental elements of investment advice in the history of financial markets. Bitcoin is now 10 months into its current bear market cycle, and many investors and companies that didn’t “sell high” probably regret it.

Miners differ from all other market participants, however, in that they actually always buy (pay electricity to earn more bitcoins) and, depending on their business strategy, always also sell (sell bitcoins for pay capital and operating costs). ).

So how are miners faring in the current bear market? This article examines the financial decisions of some miners over the past two years – during the past bulls and bears for bitcoin – and assesses where some improvements could be made to how the average mining company decides whether to hold, sell or sell. buy bitcoins.

Cliff’s Notes on Mining the Bear Market

Here’s a quick look at the current state of the mining economy – things aren’t looking great.

The price of hash is down 69% so far in 2022, and with it the profitability of the machine. Legacy hardware like the Antminer S9s, for example, are so unprofitable now that the total hash rate of the network they contribute to has fallen from 30% to less than 5% this year, according to Coin Metrics. The difficulty continues to hit new all-time highs as more miners add more hash rates, and the latest downward adjustment was the first drop in months.

Some miners are also sitting in unusually large debts, data shows compiled by Jaran Mellerud, mining analyst at Arcane Research. Some miners even sell the contracts to purchase undelivered hardware while other miners, like CleanSpark, buy them at a discount. And the past two months have seen two companies file for bankruptcy: Celsius Mining and Compute North.

Managing Bitcoin Mining Cash

One of the most important considerations every miner faces is whether to hold or sell their bitcoin. Other operational matters of course proceed before the miner starts earning coins for their work. But what about block rewards is the focal point of any mining strategy.

Some miners hoard as much as they can while waiting for the price to rise. These miners usually take out loans to finance their operating expenses. Or they become lenders themselves and earn a return on the coins they mine. Other miners sell every coin they earn and just want to operate profitably without any exposure to bitcoin’s ups or downs. Most miners fall somewhere between these two extremes: holding what they can afford and selling what they need.

All of these decisions are made based on a miner’s cash management strategy, and each team has a different approach. Fortunately for readers, public mining companies broadcast these decisions to investors and the general public.

In the bull market, miners weren’t just building new facilities, accumulating bitcoin, and announcing record hardware purchases. Some of them even went out and bought bitcoins at market prices to add to their treasuries. Marathon bought 4,812 BTC in January 2021. Argo Blockchain also bought 172.5 BTC in the same month. To say the miners were optimistic would be an understatement. However, bitcoin is now trading around 30% below its January 2021 low. These miners didn’t quite “buy the top”, but it was relatively close.

In the bear market, miners sell much of their bitcoin – in some cases even more than they mine, signaling their acute reaction to bearish conditions by even liquidating their reserves. It is important to note that the total amount of bitcoin these companies sell is in the thousands, but it is a very small amount compared to the daily trading volume in most liquid bitcoin markets. From Riot to Cathedra, big and small bitcoin mining companies were selling large amounts of their bitcoin holdings.

Bulls of last resort

Instead of selling bitcoin at $20,000, wouldn’t a miner prefer to sell it at $69,000, the all-time high? In theory, this makes perfect sense. But in practice, executing this preference is more difficult. On the one hand, miners are not the most sophisticated players in the market. On the other hand, cash management strategies are still very simple (hold, sell or lend) and often incomplete. For example, many miners have ways to hedge against the price of bitcoin, but almost none of them can hedge against the hash price of bitcoin, which would be a much more valuable financial product.

It is also important to note that miners are meant to be very optimistic even when others are not. Miners are in many ways Bitcoin’s bulls of last resort. Minors at home demonstrate this particularly by continue to mine despite horrible market conditions. Even though miners would have a stronger track record selling more bitcoins at a higher price than months ago, for better or for worse, their role is to somehow push the price up wherever it is. go.

What does the next mining cycle hold?

In the coming years, bitcoin mining companies will surely be better at cash management. Many companies will learn from the past couple of years and focus on better profit maximizing strategies. This could include hoarding fewer coins. After all, gold miners aren’t known for hoarding large amounts of the precious metal on their balance sheets.

It is hard to imagine bitcoin mining companies acting differently in the future. But bitcoin miners have an almost mythical status in the industry. Bullish miners hoarding their coins is a psychologically reassuring thing for many market participants. Even small rumors that “miners are bearish” or “miners are selling” send waves of fear through social media. Even if miners sell coins at a higher price, however, everyone would rather have well-capitalized miners at the bottom of the bear market than underwater, overleveraged companies struggling to stay alive.

This is a guest post by Zack Voell. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.