The Breakdown - Is Miner Selling Contributing to Bitcoin's Price Troubles?

Starting point is 00:00:04 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.com, near NFTX, and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, June 22nd, and today we are asking whether Bitcoin miners are contributing to the market's price troubles. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dig deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Also, a disclosure, as always, in addition to them being a sponsor of the show, I also work with

Starting point is 00:00:54 FTX. So, for the past couple of days, we have been discussing the state of the markets. The debate has sort of been whether we've reached a local bottom, something where we're likely to see a mean reversion or at least some sustained relief rally, or whether more broadly we're transitioning to a sort of protracted bottom phase. So far, we've discussed this largely in terms of three things. First, the larger macro landscape. How a secular shift in monetary policy is creating the context for basically all downturns across all asset classes. Second, we've been discussing crypto-specific failures and problems. So this is the Terralunas of the world, the Celsius story, the 3AC story. And in each case, there is a shared through line,

Starting point is 00:01:41 which is leverage unwinding and opaque institutions that have sometimes big tie-ups to one another that we didn't previously know about. Third, we've also been looking at data about how different market participants have been reacting, most notably a fairly significant capitulation in the period leading up to and around the crash that happened Friday into Saturday. Now, one of the factors in this question of whether we found a bottom or whether we're in for more pain has to do with the impact of changing prices and changing market conditions on Bitcoin miners. Are falling prices creating a situation in which miners are being forced to sell more of the Bitcoin they've mined or even their Bitcoin reserves? If that's the case, you would presume,

Starting point is 00:02:26 that this would put even more potential downward pressure on the price of Bitcoin. So let's dig into that today. On Sunday, GlassNode published a thread looking at some of the preceding carnage that we had just experienced. They looked at the $7.325 billion in Bitcoin losses, which was the most significant losses in a three-day period in Bitcoin's history, and also pointed to significant volume of Bitcoin moving between $18,000 and $23,000. Indeed, $555,000. changed hands in that price band. Going beyond that, however, they also pointed to a number of data points around miners. For a couple years now, miners have been in the mode of accumulating and

Starting point is 00:03:07 adding to their net supply of Bitcoin rather than having to sell it off to cover costs, and that pattern has recently shifted. In that thread, Glass Node wrote, Bitcoin miners are also under stress, with their balances stagnating from the 2019 to 2021 accumulation uptrend and reversing into decline. Miners have spent around 9,000 Bitcoin from their treasuries this week and still hold around 50,000 Bitcoin. Hash rate has also fallen 10% off all-time highs. Indeed, there was a lot of chatter about miners as Bitcoin fell off a cliff late last week. Investor Charles Edwards wrote Bitcoin is below electrical costs now. The average miner is facing serious stress. Will Clemente added Bitcoin's price sits at the lower bound of its production cost for the first time since the March

Starting point is 00:03:50 2020 liquidity crisis as well. The idea here is that Bitcoin should, at minimum, be worth the cost of energy to produce it. He went on lower Bitcoin price, higher hash and difficulty, and higher energy costs have put serious pressure on miners' margins. Hash price is now its lowest since October 2020. Julian and on-chain analysts wrote miners have begun their Bitcoin capitulation. We often see this activity at the beginning of a bull run or the beginning of an extended bear. Let's see if they continued to sell. So this was the chatter all around the weekend. But what about this week? Well, one specific data point comes from Toronto-based Bitcoin Minor BitFarms, which sold almost half of its holding in the past week for around $62 million with the goal of reducing their debt.

Starting point is 00:04:37 This is basically 3,000 Bitcoin that they liquidated, and it was in response seemingly to the crypto downturn beginning to squeeze minor profitability. According to a Tuesday press release, BitFarms is adjusting its hodeling strategy to, quote, improve liquidity and strengthen its balance sheet. On top of that, BitFarms also closed a $37 million equipment financing deal with Nidig bringing its liquidity to $100 million. Now, the interesting thing is where the money that they made from the Bitcoin sales went. It went to reduce a Bitcoin-backed credit facility that had been provided by Galaxy Digital.

Starting point is 00:05:10 That credit facility is now at $38 million outstanding. Importantly, this is the second tranche of their Bitcoin they've sold. They had already sold 1,500 BTC the previous week. That sale likewise went to reducing their debt exposure from $100 million to $66 million. Now, this is just one firm, but there is a lot here that's actually worth digging into. NXO lets you easily buy crypto with your bank card and earn industry-leading interest rates. Earn up to 16% on crypto and up to 12% on stable coins. Nexo makes passive income easy with interest.

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Starting point is 00:07:16 BitFarms was founded in 2017 and had maintained this hoddle strategy for its entire operation, never having to sell Bitcoin until now. They operate on 100% renewable energy and have been publicly traded in Israel since 2018. That means they made it through ups and downs for years without having to sell. However, during this past cycle, they, like so many companies, chose debt as a mechanism to grow. This makes sense, right? Not only were interest rates near zero, but companies were flush with cash and very willing to lend. For a company like Bitfarmes that had such long-term conviction around Bitcoin, it just made a ton of sense. Instead of having to sell your Bitcoin to grow, just use a Bitcoin collateralized loan. Now, in the beginning of this correction a couple of months ago, the company

Starting point is 00:08:01 was still clearly focused on their core strategy. In April, Chief Mining Officer Ben Gagnon commented on their financial strategy saying, quote, we think that Bitcoin is currently undervalued, and the long-term and medium-term potential of Bitcoin is significantly greater than the cost of capital to borrow against the cryptocurrency. However, since then, the price price of Bitcoin has been cut in half. So what's the updated statement? Alongside Tuesday's press relief chief financial officer Jeff Lucas said, quote, while we remain bullish on long-term Bitcoin price appreciation, this strategic change enables us to focus on our top priorities of maintaining our world-class mining operations and continuing to grow our business in anticipation

Starting point is 00:08:41 of improved mining economics. So we clearly have a couple different interesting dimensions to this story. One is the macro debt setup, tons of companies leverages, up in this same period. And now it seems they're just trying to put themselves on a shoreer footing, unless there is something more going on. Selling half of your store of Bitcoin quickly to reduce your exposure to a specific lender sounds a little bit like it might be a margin call situation, so is there any evidence of that? Indeed. On June 17th, the Blocks Wolfie Zau writes, BitFarm's liquidating parts of the collateral to reduce the margin call risk of its remaining Bitcoin pledged as collateral sounds more like what's happening.

Starting point is 00:09:20 had a $100 million-dollar Bitcoin-backed loan as of May 31st. Margin call at 133%. A few days later, on June 21st, Wolfie wrote, BitFarms just got liquidated another 1,500 Bitcoin to reduce down the outstanding loan by $28 million when Bitcoin plunged below 19K over the weekend. On the same day, David Gerard talked about the ghosts of BitFarm's past strategies, saying BitFarms had a pitch deck in July 2021,

Starting point is 00:09:45 talking about their strategy of borrowing dollars using the mine coins as collateral. I guess the money ran out. So now the story has taken on a different dimension, and it's starting to look much more like the larger trend in crypto right now, which is that a secular shift in the macro environment, which is causing downward pressure on the price of crypto and all other risk assets, is coming directly into contact with the leverage that was taken on during the bull market, causing an unwind of that leverage, which of course creates its own feedback loops and further negative price pressure.

Starting point is 00:10:15 Now, as an aside here, I want to be clear that I am not comparing BitFarms, who actually actually had the collateral to do what they needed to do, to the crazy unwinds we've been seeing in crypto over the past few weeks. It's just to point out that there is a very clear and common thread across all of these shifts. If I'm BitFarms then, I'm on the one hand, of course, frustrated that I become a forseller, but at least glad I'm in a position to cover it and I haven't screwed the pooch. But for the rest of us, we're probably a bit more interested in the larger implications with the mining industry. Is this just a Bitfarm's thing, or is it something more broad. Earlier this week, Arcane Research released a report titled

Starting point is 00:10:49 Miners have started to dump their Bitcoin holdings. The big headline graphic is one showing the amount of Bitcoin sold by public miners in each month of 2022. These numbers are just guesstimates because I'm reading a chart without super precise numbers, but in January, it looks like miners sold around 1600 BTC. In February, that number was around 700 to 800. Miner sold 1,100-ish Bitcoin in March, and then around 1,000 in April. Then in May, the number surged up above 4,000. Now, the percentage of the production that this selling represented tells an even more stark story. In January, miners sold a little under 40% of their production. In February, it was under 20%. It was close to 30% in March and then just over 20% in April,

Starting point is 00:11:32 but by May, it was more than 100%. In the first four months of 2022, on average, public mining companies sold 30% of their production. By May, that was up above 100%, and Arcane argues that given that conditions worsened in June, it's likely that they're selling even more. Now, the caveats to these numbers are that public miners, who Arcane is drawing from, comprise only about 20% of Bitcoin hash rate. Arcane says, quote, public miners likely sell a larger portion of their mined Bitcoin now, since they could keep a larger share of their production during the bull market by tapping into financial markets, which was more difficult for private miners.

Starting point is 00:12:08 Basically, what they're saying is that in a bull market, if you had access to debt capital at favorable rates, you are more likely to take on that debt rather than sell your Bitcoin at these top prices. The flip side is that now you have more debt on your books, which might make you more likely to be a forced seller. This would certainly track with what we're seeing with BitFarms, right? Now, there are lurking implications, of course. The Arcane report concludes, quote, the miners are some of the biggest whales holding around 800,000 Bitcoin according to coin metrics, of which public miners own 46,000. If they are forced to liquidate a considerable share of those holdings, it can contribute to pushing the Bitcoin price down further. Still, not every story this week is about BitFarm

Starting point is 00:12:48 style selling. Coin Telegraph published a piece called Marathon Powers On. The lead whose Marathon Digital Holding says it will continue to accumulate Bitcoin despite the slump in the profitability of its mining operations. Their VP of corporate communications, Charlie Schumacher, told Coin Telegraph, quote, the company isn't immune to the macro environment, but it is, quote, fairly well insulated and well positioned. Going on, Schumacher said, for reference, in Q1, 2022, our cost to produce Bitcoin was approximately $6,200. We also have fixed pricing for power, so we are not subject to changes in the energy markets. Indeed, a June 9th statement for Marathon said that it had been accumulating Bitcoin and had not sold any since October of 2020. As of June 1st of this year,

Starting point is 00:13:31 Marathon held approximately 9,9441 Bitcoin worth around $200 million at current prices. So clearly, one of the fascinating things here is we're seeing how even within the category of mining, there can be such different dynamics company to company based on things like their debt exposure, the cost of the electricity they use, etc, etc. Now, while Marathon claims $6,200 as its price for Bitcoin, other reports, specifically one I saw on Seeking Alpha, have a very different number. That report puts Marathon's cost per Bitcoin at $31,700, which is obviously a lot more. I don't exactly know what to make of this, and I think that the reminder here is just huge grains of salt for everything right now. Please, please remember that. Still, if we're trying to get an aggregate sense of the mining

Starting point is 00:14:16 industry, look at GlassNodes report from June 20th called Falling Domino's capitulations across the board. They point to something they call the Pua Multiple, which is a measure that tracks minor income in USD and looks at it compared to yearly average. Pua Multiple currently says that aggregate revenues are 61% lower than their yearly average. Based on that, the quote, ongoing minor income contraction is worse than the Great Migration in May to July 2021. That said, there were worse days in 2018-2019 and 2014-2015, where the multiple reached a 69% revenue decline versus yearly average. Glassnote goes on. With this extensive financial pressure on miners, outflow volumes from their treasuries reached rates of between 5K to 8K per month.

Starting point is 00:15:01 This is now comparable with the 2018-2019 bare market capitulation event. Remarkably, after Bitcoin failed to hold its ongoing consolidation's low band of 28K, miners stopped selling and actually saw balances increase at a rate of 2.2 Bitcoin per month. This shift in reaccumulation, especially as translated by media, has introduced something of a competing narrative. Yahoo Finance published a story on the 21st that said Bitcoin rallies above 21K as miners accumulate. That piece references, again, a glass node chart on Bitcoin minor net position change that shows that while the end of the end of the end of of April, May, and the first part of June were heavy sell periods. In the last few days,

Starting point is 00:15:40 miners have actually flipped back to accumulation. If you go look at Twitter, by the way, it's the same sort of whipsaw, where on June 18th in the midst of the crash, you saw accounts tweeting about how Bitcoin miners were capitulating and selling all their coins. While then, after the weekend drop and during the relief rally, you have miners stopping selling as one of the factors that's contributing to Bitcoin pumping. Taking a step back, NetNet, there are a lot of folks who are really just coming to understand the mining business now. Nick Carter tweeted, miners are pro-cyclical, which set off quite a discussion, but I think the main point is that the incentives are such that miners have an imperative to

Starting point is 00:16:17 capitalize as much of their mine Bitcoin as possible during the bull market to expand operations, which leads inherently to having to take more risk to expand and remain competitive. The flip side of that is that when things go badly, they end up becoming forced sellers. That pro-cyclicality means that miners end up being volatility, drivers at the extremes. Now, of course, on top of all of this, there is a whole different dimension which we haven't gotten into. Minor profitability is going to be based on two things, the market value of the thing they're mining, but also the cost it takes to do so. Within costs, we've talked a lot on this show about the cost of capital and debt servicing, but the other obvious cost is

Starting point is 00:16:54 electricity cost. One of the things that will be fascinating to watch as prices of traditional sources of energy skyrocket is if those miners that are set up with waste energy like flaring or renewables like New England-US hydropower, and up outperforming relative to miners who are running on regular power plant grids. So ultimately, as we wrap up, I think it's fair to say that based simply on the minor selling we've seen over the past few months, yes, pressure on miners has been contributing downward pressure on the price of Bitcoin. The question is whether this accumulation phase actually continues, whether we've really bottomed and rebounded. And for that, unfortunately, we just need more time. For now, I want to say thanks again to my sponsors, nexo.io.

Starting point is 00:17:34 and FTX, and thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Is Miner Selling Contributing to Bitcoin's Price Troubles?

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