The miners have to give up their “HODL strategy”

 

The miners are suffering the most from the fall in bitcoin prices. This is now expressed in a kind of mini-surrender: After other sources of funding dry up, they have to sell the accumulated bitcoins.

Mining is a kind of procedural conversion of fiat money like dollars into bitcoin: the miners use dollars to buy hardware (an Asic miner), and they use dollars, euros and so on to pay for the electricity needed to run the hardware . They receive bitcoins according to their hash performance.

Now, when the bitcoin price falls, profit margins get tighter and many mining rigs are no longer profitable. With electricity costs of 7.5 dollar cents and a pool fee of 3 percent, this applies to the Antminer T17 - built in 2019. "The output is always below the electricity costs. Therefore, we advise miners to switch off the devices to avoid losses,” writes cloud miner Bitdeer.

Collin Wu adds in his weekly mining newsletter that according to statistics from F2Pool, the latest generation of Antminers, the S19, become unprofitable at a price point of around $10,000. Since Bitmain’s miners are among the most efficient, this threshold should apply to all devices on the market. It would be interesting to see what happens on a fall below $10,000.

The big question is how long miners will be able to keep operating at a loss and when will they start mining farms on a large scale. So far there has been a kink in the development of the hash rate since the all-time high on May 21st. But a real capitulation is in no way visible in the long term.

However, a change in strategy is visible in order to finance the operation.

The HOLD Strategy

During the past few years, most miners have followed a “HODL strategy”: they have avoided selling the mined bitcoins at all costs.

This is reasonably consistent: because a miner would not be a miner if he did not bet on rising prices. Mining means gradually converting the invested capital into Bitcoin at a discount over the course of several years. Unlike an investor, who can sell at any time, a miner invests in the long term depending on the success of Bitcoin.

In the course of this "HODL strategy", the miners tapped into two main sources to pay for electricity and rent without selling bitcoins:

Many miners have issued shares, most notably North American miners such as Core Scientific (CORZ ), Marathon Digital (MARA) , Riot Blockchain (RIOT) , Bitfarms , Hut 8, Hive and Argo Blockchain . The shares bring two main value propositions to the stock exchange: the operation of the farms and the accumulated Bitcoin stocks. This has worked brilliantly for the past year, when all mining stocks have hit highs.

Some of the miners also took out loans in dollars and other fiat money, which were backed by those bitcoins as collateral.

In this way, the miners managed to accumulate large amounts of bitcoins and use them to finance operations without discarding them. Arcane Research determined in mid-May which bitcoin treasures some of the listed miners were sitting on:

The strategy fails in the bear market

But in May and June, miners had to learn the hard way,  writes Compass Mining , "that this strategy only works until it stops."

Miner share prices have been under pressure all year and profitability has been sewn up. After prices collapsed in May and June, they collapsed completely. Most stocks are down 80 percent, some more than 90 percent.

The loans backed by Bitcoin are also partially due because the value of the coins deposited as collateral has melted. Some platforms that lend dollars against bitcoin collateral, such as Celsius or Babel Finance , are insolvent, while others are becoming increasingly conservative.

There is a kind of liquidity bottleneck. The “HODL strategy” fails, and miners are forced to fund their operations from other sources: by selling bitcoins.

You can see this as a kind of small capitulation: In May alone, Core Scientific sold 2,598 Bitcoins, Riot Blockchain 250, and Argo Blockchain 427 BTC. Collin Wu adds that the publicly listed miners sold 4,411 Bitcoins in May, which is equivalent to almost 90 million euros today.

This is about four times as much as in the first few months of 2022, in which they sold an average of 1,115 bitcoins each. Nonetheless, these miners continued to hold 46,594 bitcoins at the end of May; Marathon owns a good 9,000 of them, which have so far managed not to sell any coins.

While the full numbers for June are not yet available, there is little hope that the trend has changed. Miner Bitfarms recently wrote that it has “adjusted its HODL strategy” to “improve liquidity and strengthen its balance sheet.” The company has sold 3,000 bitcoins for about $62 million, and used part of it to repay loans , which were backed by bitcoins. Bitfarm still owns 3,349 bitcoins; unlike before, the miner will throw part of the mined coins onto the market to cover the costs.

Bitfarms is certainly not the only miner who feels this way, although not everyone is making big noises about it. We will probably not have reasonably complete information about the listed miners until July.

The dark figures

How many Bitcoins are still with the miners is a very difficult question. This will be announced for the publicly traded large miners. But what about the smaller ones? With the private ones? With those that are not listed?

According to CompassMining, the three largest publicly listed miners – Marathon, Core Scientific and Riot – provide a good 45 exahash, which accounts for almost a quarter of the current hashrate of just over 200 exahash. So there should be a not inconsiderable proportion of miners who are not listed on the exchanges.

Onchain analyzes give some indications of them. However, as the analyst Coinmetrics explained on June 22, these are not necessarily easy to interpret. If a pool finds a block, it distributes the mined bitcoins to the miners involved. Coinmetrics calls these the “1-jump miners”. For example, on June 1, 2022, the ViaBTC pool paid out a total of 223 Bitcoin to 60 unique addresses.

There are a total of 2.9 million bitcoin addresses that jumped from the pools and were therefore probably involved in mining. These addresses hold a total of 2.6 million bitcoins. That is 13.6 percent of all Bitcoins. So many coins have been mined and never moved since there have been mining pools (so since 2010 or 2011).

Narrowing the data down to 2022 leaves 34,000 such addresses holding 125,000 bitcoins. With a few more heuristics, Coinmetrics can narrow the number down to 28,000 addresses that together hold 55,000 bitcoins.

This number has dropped significantly over the past few weeks, from around 75,000 to 55,000. So the miners are dumping their coins on the market, and on a much larger scale than the information about the listed miners shows. On the other hand, miners have been accumulating bitcoins all year, and their holdings only dropped to April levels in June.

The chart remains very fuzzy, partly because it doesn't include data on how many miners are still holding (or expelling) coins they mined in 2021. Despite this somewhat nebulous length of data, two rough conclusions cannot be doubted:

First, the miners’ “HODL strategy” is no longer working, which is why they have been dumping a lot more coins since May than in previous months and years. In part, they are forced to do so as Bitcoin-backed loans mature. Because the miners have accumulated large amounts of coins, excessively large sums sometimes end up on the exchanges. This liquidation may partly explain why prices fell so sharply in June.

Second, miners continue to hold significant amounts of bitcoin. They keep hoping for rising prices and try to make it through the valley without selling more bitcoins than necessary. Holding Bitcoins is still an important basis of the business for them. However, if the doldrums continue, they may need to sell more bitcoins. However, they will be happy to reactivate the "HODL strategy" at any time.

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