Summary
Bitcoin mining is a tough business even in Bitcoin bull markets.
Regardless of fundamentals, sentiment usually pushes Bitcoin miners higher when Bitcoin is in a bull cycle.
Bitcoin miner investors do well to not hold Bitcoin miners long term.
Bitcoin mining involves deploying computers to solve complex cryptographic problems so that Bitcoin transactions can be approved and added permanently to the blockchain. The blockchain is the ledger of all Bitcoin transactions since its genesis and is maintained by all nodes on the network.
Miners receive rewards for their work, in the form of Bitcoin. Competition is built into the system. As more miners come online they race to solve the same problems. The first to solve the problem gets the reward. This competition is called 'difficulty'.
Naturally, as Bitcoin prices go up, more parties become interested in mining. The degree of difficulty also goes up, and along with it the costs of mining, in energy, and in computer wear and tear. Difficulty and the depreciation of equipment reduce the ability of Bitcoin miners to leverage Bitcoin's bullish cycles.
It gets worse. While difficulty climbs higher in bull markets, it has not dropped much when Bitcoin prices have fallen. This means it is hard for any Bitcoin miner to survive bear markets, and we saw many go bankrupt near the end of the 2018 bear market.
Muddling Through a Bull Market
Two of the most widely followed Bitcoin miners are Riot Blockchain (RIOT) and Marathon Digital (MARA). Both companies survived the 2018 bear market, and have been great long trades of late. Since their lows in March 2020, Riot is up over 9300% and MARA is up 10,300%.
You might think that with runs like those in their stock prices, these companies have capitalized immensely on Bitcoin's bull run. Not at all. It's best to say that they have kept their doors open.
Riot's first three earnings releases for 2020 reported an operating loss of nearly $18.5M. To bolster the company during the loss, they sold over $49M in common shares. I anxiously await the close of their 2020 books.
Marathon lost $9.8M in 2020. In order to shore up their leaky ship, they sold $229M worth of shares in January 2021. On the bright side, MARA took $81M of that money and put it into new mining servers to improve its profitability.
Consider how both companies are diluting shareholders' holdings during a massive bull market in Bitcoin.
Marathon also used $4.3M to buy digital currencies in 2020, likely Bitcoin, and presumably with cash from the shares sale. They also bought another $150M worth after the close of the year. That has paid off so far. Those investments and the new servers will have us watching Marathon closely, especially as we see a large correction in Bitcoin around the corner.
Sentiment is Hot
If you think I'm now going to tell you to short the shares of these companies, you are wrong. I am long Riot. I may take a position in Marathon. While it is true that one day the financials of these companies will haunt shareholders, prices are currently in a strong uptrend. We can thank sentiment for disconnecting share value from economic value.
In this situation, we can assume that so long as Bitcoin is in a strong bullish cycle, so will Bitcoin mining shares. And our view is that Bitcoin is on its way to $150K in this cycle.
Currently, we have lofty targets for RIOT. We are looking for $195 to complete a third wave, so long as it holds over $14. Eventually, we may see RIOT over $300 as Bitcoin achieves our target at $150K. Just note that we expect a drop in Bitcoin to $40-$50K and possibly below $20K as soon as the current third wave we're watching is complete. That correction should be the longest in duration since the May 2019 to March 2020 correction.
We arrived at these targets via Elliott Wave theory and Fibonacci Pinball, links to which we include in this article.
MARA's chart is much harder to read, since it has a three-wave corrective structure (A-B-C vs. 1-2-3-4-5). Right now the C wave is expected to top under $114, if it has not topped already. If we make the assumption that MARA will remain bullish throughout Bitcoin's bullish cycle, we may see a larger C wave. However, the corrective structure suggests that ultimately MARA will break down to new all-time lows, most likely after $150K Bitcoin.
In both stocks, Bitcoin mining investors will want to know when Bitcoin has topped so they can liquidate their shares. The next Bitcoin bear market will not be kind to these companies, with their poor financial shape.
Don't be fooled by Bitcoin miners. Due to the financial dynamics of mining Bitcoin, these companies do not offer amazing leverage on the Bitcoin price, as you see in metal mining companies. Even with Marathon's purchase of increased mining power in January, it remains to be seen whether it can heal financially. Any models of what those servers will produce are subject to Bitcoin's wild swings, and the machinations of 'difficulty'. And they are running out of time, as Bitcoin is close to finishing the third wave in this cycle.
The bottom line is that a trade in these shares is a play on sentiment, not on solid value.
But this doesn't mean you should ignore these companies. With Elliott Wave analysis, trading sentiment is our bread and butter. Just know what you are buying, and decide whether you are willing to trade a financially fragile company that rallies solely based on the sentiment of crypto traders.