It has been a welcome respite in the markets lately after a torrid first half. However, the rebound in one sector was particularly strong.
Over the past two weeks, bitcoin mining stocks have risen. The chart below from analyst report Mike Colonnes quantifies this move: Average bitcoin mining stocks jumped 36% in the first two weeks of August, as opposed to a 4.5% rise in BTC and a 3.6% rise in the S&P 500.
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The broader market positive was well covered. The CPI data fell to 8.5% this month, below expectations of 8.7%, and with the current environment overly focused on inflation numbers and related Fed responses, that in itself is good news. Also, in the world of cryptocurrencies, the news of Coinbase’s partnership with institutional investment authority Blackrock sent Bitcoin soaring higher and flirting with the $25,000 mark (although some analysts’ predictions were much higher than that, as I wrote here last week).
Rising costs and falling revenues
Again, if we take a step back, does it make sense that mining stocks have skyrocketed to this extent? A week ago, I published an article about rising electricity prices that are putting pressure on miners.
While the geopolitical climate is making headlines due to soaring gas prices, electricity is also on the rise. Focusing only on Europe, the European electricity benchmark averaged €201/MWh in the first quarter of 2022, up 281% from the same quarter in 2021.
In some countries it was even worse. Spain and Portugal recorded a jump of 411%, while prices in France rose by 336% and prices in Italy were the highest in the EU at 249 euros per MWh, up 318% from the previous year.
And yet, do we see these stocks swinging so excessively right now? And bitcoin, which is obviously the income of miners, is still down almost 50% compared to last year?
Well, the answer lies in the complexity of the mining network. With the aforementioned operating costs on the rise and miner revenues on the decline, small miners have really felt the pressure. With many shops closed, mining difficulty has dropped to its lowest level in five months, which paints a rosier picture for those who remain – as I outline below.
However, despite the long-awaited delay, the record of the mining pools’ bitcoin holdings betrays the struggle they’ve been up to this year so far. I have been drawing these balance sheets for the last 6 months and it is very clear that there was a sharp reversal on May 9th. What happened on May 9th? Well, a coin called UST set off a death spiral of epic proportions, triggering an epidemic crisis that spread throughout the industry – there was no way out, and certainly not for minors.
Interestingly, even though the market has gone green in recent weeks, these sales have not increased. While the data only recovered in July, the markets started their recovery last month. Indeed, this point is also reflected in the Colonnese report as it presents the chart below showing that Bitcoin sales by miners remained high in July. August business filing data, if the market stays green, it will be interesting to gauge if the tone changes here.
We estimate that the 11 miners in our data set sold 6,019 BTC in July, or 167% of their total mining for the month.
Mike Colonnes, HWC Research
High Beta Stocks
With the growth of green markets and bitcoin, mining stocks are rising at a more explosive pace, and this is exactly what we have seen in the market before – bitcoin mining stocks have proven to be highly correlated with the price of bitcoin.
Indeed, the Colonnes report also shows this. While Bitcoin is still having a bad year overall, dropping 47% despite a recent pullback, mining stocks are the worst off, trading 59% on average below the prices they opened the year at. Again, these are high beta stocks correlated with Bitcoin, so it makes sense in this context.
So, as the cryptocurrency as a whole is still having a headache following the Terra contagion crisis and the Fed’s crackdown on overall market liquidity, it’s important to remember how high the beta of many of these mining stocks is.
Of course, the situation since the beginning of the year was terrible, and this was reflected in prices. But the last few weeks show that once this bottom is reached, the rebound on offer here will be huge. The real question, which I covered this morning in my first article of the week, is knowing exactly when this will happen.
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