Bitcoin tumbled after a slate of ETFs launched. Here’s why that might dent some crypto miners’ profitability

Published Sun, Jan 14 20247:05 AM EST

Investors in bitcoin mining stocks are closely watching the price of the cryptocurrency after the Securities and Exchange Commission's move to allow spot bitcoin ETFs became a sell-the-news event. After the ETFs received regulatory approval last week, the flagship currency briefly touched $49,000. As the week went on, however, bitcoin wiped out its earlier gains and notched a modest weekly loss of 0.01%. Crypto mining companies are now feeling the squeeze in this latest bitcoin sell-off – and that's evident in the big week-to-date declines for Marathon Digital and Riot Platforms , both of which lost more than 20%. First, the hash rate – the amount of computing power the Bitcoin network uses to process transactions – has been hitting all-time highs almost every week and hurting miners' margins, according to Reginald Smith, analyst at JPMorgan. The network hash rate has increased more than 30% over the last four months, he said, rising alongside bitcoin's 157% ascent in 2023. Second, investors are watching bitcoin's price in the wake of the ETFs' debut because if the crypto doesn't rise to a range of $50,000 and $55,000 soon, smaller miners may not have sufficient capital to grow and may have difficulty maintaining their operations. "Miners who are at the lower end of the cost curve with limited amounts of debt and plenty of liquidity between bitcoin and cash on their balance sheets are going to be ones that fare the best in 2024," said Chase White, an analyst at Compass White. "But it could be a hard time in the middle of the year as miners play the prisoner's dilemma game of who needs to turn off their machines and who doesn't." "The older, less efficient miners are way less profitable, but they're still just profitable enough to stay online, hurting everybody's margin," he said. "If [the bitcoin price] gets to $45,000 or below only the newest, most efficient miners with the … lowest cost power are going to be able to stay online." A dynamic in focus This dynamic between the bitcoin price and the mining companies is coming into focus in anticipation of the Bitcoin halving, when the reward for mining the flagship crypto is cut in half, as designed in the Bitcoin code, to reduce its supply. Because of the supply cut, the halving historically sets the stage for big price rallies in the following six to nine months. However, the reduction in the reward also means miners' revenue takes a hit. Overall, analysts are fairly optimistic that bitcoin will rise as expected due to three key catalysts: the ETF, the halving and potential interest rate cuts. "The catalyst of the ETF and, a little bit later in the year, the potential for rate cuts, could lead bitcoin to run a lot faster than the global hash rate can run, which could alleviate a lot of this problem," White said. "But it needs to rise above $50,000 for that to be the case, and we think we can get there." Compass White's year-end price target right now for bitcoin is $75,000. White said private miners will likely struggle the most because it's harder for them to access capital than the publicly traded miners, which can sell stock in at-the-market programs. He named Riot Platforms, Iris Energy , Cipher Mining and Bitfarms as some of his picks. JPMorgan's top pick is Iris Energy. The firm is neutral on Cipher, CleanSpark and Riot, although Smith said he's incrementally constructive on Riot, which is more actively traded and he sees as a long-term winner. Last week, Iris Energy and Cipher dropped more than 16% each. In a note earlier in the week, Smith suggested there may be weakness after the ETF approval – likely driven by technical selling pressure, rather than fundamental miner economics, since institutional investors now have other ways to express a view on bitcoin with the introduction of ETFs. "We would view any sell-off [in mining stocks] as a buying opportunity, as the ETF does not directly impact mining economics or change competitive dynamics, and we remain bullish on bitcoin and bitcoin miners in 2024," he wrote.