main conclusions
Core Scientific was worth over $4 billion last summer but is down 985 points from all-time highs Rising electricity costs are driving up costs as falling Bitcoin prices hurt revenue With the rate of hash close to all-time highs, the entire mining industry is suffering Cryptocurrency winter continues to claim victims. The latest to succumb to Chapter 11 bankruptcy is Bitcoin miner Core Scientific. The Bitcoin price drop has significantly reduced revenues, and while cash flow is still positive, revenue is not enough to cover operating costs. The goal is for the company to restructure under the Chapter 11 process rather than liquidating it entirely. Core Scientific has been taking a hit all year, as have miners across the industry, as they are squeezed on both ends – falling revenue in the form of Bitcoin prices and rising costs as a result of rising electricity costs in Worldwide. The stock was trading at a market cap of over $4 billion last summer, but is now down 98% from all-time highs, its current market cap of $70 million. The share price tripled last week when financial services firm B. Riley offered to provide the company with $72 million in non-cash financing. The stock has since given up some of those gains.
Struggling mining industry
Across the industry, miners are struggling. Electricity costs and Bitcoin price are the two most vital inputs to a bitcoin miner’s bottom line, and both have moved significantly against them this year. So did the hash rate, with it approaching all-time highs for much of the year. A higher hash rate means more computing power is required to verify transactions on the Bitcoin blockchain. While a higher hash rate is seen as a positive because it increases network security – it would cost more energy and time to take over the network – it also weighs on miners’ profit margins. When the hash rate hit another all-time high of 250 TH/s in early October, analytics firm Glassnode warned that “miners are on the cusp of acute income stress.” This latest feature on Core Scientific proves it. Looking at miners’ reserves, the number of bitcoins held by large mining pools has also steadily declined this year.
Mining stocks are a leveraged bet on Bitcoin
It’s a poignant reminder that with these mining companies’ revenue denominated in Bitcoin, they are obviously extremely volatile stocks. Unfortunately, this year brought the perfect storm, not only causing Bitcoin prices to crash, but also rising costs in the form of electricity, meaning miners were hit twice as hard. Looking at stock prices, many companies have dropped more than the price of Bitcoin, which as I write this is trading at $16,800, down 64% on the year. Many mining companies are seeing losses that surpass this in 2022. They expect 2023 to bring better fortunes. But for Core Scientific, the path is darker. Now embroiled in the Chapter 11 process, it hopes to restructure and ride out the storm, but there’s no getting around the fact that the mining market is likely to remain torrid in the short to medium term, at least.
