BTC block reward miners drowning in red ink as chasing the green gets harder

BTC block reward miners must be rethinking their business models because their current model no longer makes economic sense.

The Core Scientific mining operation’s Q2 figures showed a net loss of $805 million in the three months ending June 30. While most of that red ink was a non-cash adjustment related to its recovery from its bankruptcy restructuring, operating income fell by nearly one-third and the cost of producing a single BTC token more than doubled year-over-year.

This dramatic cost increase reflected both the rise in the global hash rate, as well as the impact of this spring’s scheduled ‘halving’ event, which reduced the block reward subsidy to 3.125 BTC. Small wonder that the company is placing a side bet on serving as a data center for artificial intelligence (AI) companies or that it’s looking to raise over $400 million via a new debt offering to repay its existing debt (news of which caused its share price to drop nearly 11% on Tuesday).

Rival miner Hut 8 (NASDAQ: HUT) reported a Q2 net loss of nearly $72 million compared to a $1.7 million loss in Q2 2023. While much of that $72 million loss was due to Hut 8 adopting new accounting rules that allow it to report the ‘fair value’ of the digital assets on its balance sheet, the number of BTC mined in this most recent quarter was 279, down from 740 a year ago, while the cost to produce a single BTC rose 132% year-on-year.

Environmentally-conscious miner—if such a term truly applies to any operation mining the utility-devoid BTC—CleanSpark reported a net loss of $236.2 million in its latest quarter, citing the same ‘fair value’ issues. CleanSpark’s cost of mining a single BTC was up like everyone else’s, but throw in depreciation of the mining gear and the real cost to produce one BTC in the most recent quarter was 112.7% of average mining revenue.

The most recent update from Australia’s Iris Energy showed the company generated revenue of $61,306 for each BTC mined in July, while electricity costs came to $61,677, for a net loss of $371 per BTC (and that’s before factoring in all the other costs). Small wonder then, that the company say it’s “reassessing its future energy pricing structures.”

MARA (NASDAQ: MARA) (formerly Marathon Digital) produced 30% less BTC tokens in Q2 2024 than the year before, despite the company’s hash rate increasing 78% over the same span. MARA noted “unexpected equipment failures” during Q2 but acknowledged the new post-halving reality and the increasingly cutthroat competition to secure a block reward.

Other publicly traded miners reported similarly dire straits, with Bitfarms (NASDAQ: BITF) booking a net loss of $27 million. Bitdeer lost $17.7 million, despite mining 45.5% more BTC than in Q2 2023. Cipher Mining, which Bloomberg recently reported was looking for someone to buy them out, posted a net loss of $15.3 million in Q2 after posting a net profit of nearly $40 million in Q1.

It will get worse before it … actually, no it just gets worse

Things haven’t really improved since the third quarter began, with daily mining revenue hitting new year-to-date lows. These are lows that haven’t been seen since the depths of ‘crypto winter’ in early 2023, while mining difficulty is hitting all-time highs.

Ionic Digital, the entity that assumed the mining operations of bankrupt digital asset lender Celsius Network, recently shelved its plans to go public. Ionic blamed the change on (a) the resignation of its CEO Matt Prusak and (b) the loss of its auditor and the resulting inability to file timely paperwork with the Securities and Exchange Commission. But the souring mining outlook probably didn’t help.

Satoshi Nakamoto designed the Bitcoin block reward subsidy to decrease over time, with the idea that that revenue stream would be first augmented and eventually supplanted by transaction fees. But, the artificial constraints put on Bitcoin in 2017 meant the resulting BTC network will never be able to handle a sufficient volume of transactions to fulfill Satoshi’s vision.

In the long run, this ensures BTC’s already concentrated hash rate will eventually be the sole province of one or (at best) two mining groups. In the shorter term, all miners will be forced to look for alternative means of keeping their operations running. Some of these struggling miners are shifting their focus from blockchain to AI, while others are attempting more desperate measures.

MARA image

In late-July, MARA announced “a full HODL approach to retain all BTC going forward, reflecting our confidence in the long-term value of BTC.” This was accompanied by news that MARA had bought an additional $100 million worth of BTC, boosting the total amount of BTC on its balance sheet to over 20,000 tokens.

It’s worth noting that BTC’s fiat value topped $67,000 on the day MARA made that ‘HODL’ announcement but was worth less than $50,000 just 10 days later. While it has since regained some of that lost ground, BTC is still down more than 10% since MARA released its big news. Astute.

It’s worth recalling that, on Marathon’s Q3 2023 analyst call last November, management was asked: “Why did Marathon choose to buy back the convertible debt instead of buying [BTC]?” CFO Salman Khan replied that “hope is never a good strategy … certainly we hope that the prices behave like they did in the previous halvings, but certainly we want to be prepared for any bear market.”

On the same call, CEO Fred Thiel said Marathon buying BTC “would just be emulating MicroStrategy’s (NASDAQ: MSTR) strategy where they lever up their balance sheet to buy [BTC] and that really is the primary driver of the value of that company. We believe as a [BTC] miner we generate much more value by using capital to drive growth.”

But that was then, and this is now (or never). On August 12, MARA announced plans to issue $250 million worth of new debt “to acquire additional [BTC] and for general corporate purposes.” MARA boosted this potential raise to $300 million later the same day.

Thiel hyped the share dilution strategy via his personal X/Twitter account, even tagging Michael Saylor in the tweet, just as Thiel did when announcing MARA’s HODL strategy). Basically, in nine months, Thiel has flipped from critic to fanboy, eager to mimic Saylor’s plan of turning his company into a pseudo-BTC exchange traded fund (ETF).

Thiel ignored X/Twitter queries as to why he’d reversed his previous slagging of Saylor’s strategy, nor did he offer any explanation as to why he apparently no longer believes MARA’s mining operations are capable of delivering value for shareholders (other than, you know, math).

USA! USA!

At the recent BTC conference in Nashville, Thiel appeared on a panel and declared that “under a Trump administration, you’re going to see [BTC] mining flourish.” CFO Khan previously met Trump at the latter’s Mar-a-Lago resort in June as part of a miner outreach to the former president as he was making his much-publicized transition from Bitcoin hater to donation-hoovering champion.

Trump has displayed his ignorance of the digital asset sector by insisting that all future BTC blocks be mined in America. Trump appears to believe that blockchain blocks are physical items that can be constrained by physical borders and that the BTC rewards issued to U.S. miners stay on U.S. soil forever.

Trump’s chances of retaking the White House look a lot less certain than they did just one month ago, but miners aren’t backing off their support. Unlike the ‘crypto’ wild card that VP Kamala Harris currently represents, Trump represents the possibility of tax breaks, fewer regulations and increased access to scarce electrical grid capacity.

To cement Trump’s support, miners like MARA are playing on his simplistic sloganeering by hyping Russia’s recent decision to legalize mining by domestic companies (despite Putin’s concerns about their energy consumption). Ginning up this supposed superpower showdown, Thiel tweeted that it “looks like Russia wants to own as much #blockspace as possible.”

A few days later, Thiel tweeted that “every block mined by MARA Pool in USA is proudly stamped ‘Made in USA.’” MARA’s official account tweeted that “MARA is Team USA, proudly declared in each American-made [BTC] block we mine.” As some jokers were quick to note, will blocks mined by MARA’s new operations in Kenya be stamped ‘Made in Africa’?

But why stop there? Why not stamp every block with something even more fawning, like ‘Trump’s hands are NOT comically small,’ or a Romanized Mandarin riff on ‘Suck it, Chyna!’ Or would that be ridiculous?

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