Bitcoin (BTC) mining stocks usually follow BTC’s price because it directly influences company earnings. These stocks were beaten down heavily in the last quarter of 2022, especially in December. The downturn after FTX’s collapse worsened with the bankruptcy filing of the largest U.S.-based Bitcoin mining company, Core Scientific.
During this time, other mining stocks, like Marathon Digital Holdings (MARA) in the chart below, exhibited a weak correlation with Bitcoin’s price, suggesting that December’s downturn was probably overblown.
The negative trend reversed at the start of 2023 as most mining stocks posted impressive gains. The Hashrate Index mining stock index, which tracks the average price of publicly listed mining and hardware manufacturing companies, increased by 62.5% year-to-date. The positive price spike also restored the strong correlation between BTC price and mining stocks.
However, the mining industry remains under stress, with low profit levels expected for prolonged periods. Since Q2 2022, mining companies have funded operations by selling BTC from reserves, selling newly mined BTC, raising debt and issuing new shares. Unless Bitcoin’s price consolidates above $25,000, the industry will likely witness a few takeover attempts or further treasury sales to pay off debt.
Some mining companies are operating at a loss
Currently, the top mining companies’ price-to-earnings (PE) ratio is negative, suggesting that they’re operating at a net loss, making their stock prices vulnerable to steep downturns.
Riot Blockchain, Bitfarms Ltd, Hive Blockchain Technologies, Cleanspark Inc, Marathon Digital Holdings and Hut 8 Mining are the largest publicly traded Bitcoin mining companies with over 1% of the global hash rate share. The top 15 public mining companies have a combined share of around 19%.
Notably, the PE ratio of most companies in the industry is between 0 and 2, except for Marathon, Hive and Hut 8. This raises alarms that these companies could be overvalued at their current valuations.
A net loss position is no reason to reject a stock because markets are usually forward-looking. If one is long-term bullish on Bitcoin, the mining stocks are obvious choices. However, these companies must survive through…
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