When Bitcoin falls, miners take it hard.
The halving didn’t have quite the impact many investors hoped this week as the price of Bitcoin (CRYPTO: BTC) fell 3.4% over the last seven days as of 2:30 p.m. ET. A recovery of 4.7% in the last 24 hours has saved this from being an even worse collapse for the industry.
According to data provided by S&P Global Market Intelligence, Riot Platforms (RIOT 1.17%) fell as much as 13.8% during the week, Marathon Digital (MARA 2.64%) was down 11.8%, and Cleanspark (CLSK 1.32%) was off 16.2%. As I’m writing, the stocks are down 12.5%, 10.1%, and 15.2%.
Bitcoin’s drivers aren’t what you think
As much as the crypto industry is talked about as an alternative to traditional finance, the same drivers of growth stocks will move Bitcoin. The biggest news items this week were a hotter-than-expected inflation report early in the week and the Federal Reserve deciding to hold rates steady on Thursday.
The Fed is worried about inflation heating up again. And with rates remaining high, that may cool the economy and leave fewer funds for people to buy discretionary or speculative assets like Bitcoin.
There’s also less bullishness on the impact of exchange-traded funds (ETFs) on the Bitcoin market because launches in Hong Kong weren’t met with much demand, and U.S. fund flows have slowed to a crawl.
The outsized impact Bitcoin has on mining operations
Miners are taking the brunt of this week’s move for a few reasons. First, companies generate revenue from Bitcoin, so when the price rises, it’s good for business, and when it falls, revenue and margins drop.
The second big impact is that many of these companies hold Bitcoin on their balance sheet, which leverages the impact. That can be great when Bitcoin is rising, but it makes a massive impact when it drops.
After the halving, the reward for mining Bitcoin has also gone down, and many investors thought that would lead to a spike in the price. But that hasn’t happened yet, and if it doesn’t, we will see margin pressure for the Bitcoin miners.
Where do miners go from here?
Miners haven’t been particularly profitable, especially when Bitcoin dropped in 2022 and early 2023. That’s reversing, as you can see below, but that’s partly because of the impact of mark-to-market accounting for the Bitcoin already on their balance sheets.
RIOT Net Income (TTM) data by YCharts. TTM = trailing 12 months.
What we will have to watch in the future is whether these companies can make money with half of the Bitcoin reward. Costs will go up, and margins will likely go down. But one of the bull cases has been that the survivors will have more market share and benefit from higher Bitcoin prices.
If Bitcoin doesn’t move higher soon, I’m afraid the financial picture for miners will get harder. They’re already facing higher electricity costs and now will feel a pinch from Bitcoin’s price and the halving. That’s why I’m staying out of these stocks today.
Travis Hoium has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.