China’s broad Bitcoin mining expulsion this year, coupled with its most-serious crypto ban to date, is a clear inflection point in the nascent-yet-growing Bitcoin space. Almost overnight, the criticism that “China controls Bitcoin” became moot, as the historical epicenter of Bitcoin mining went dark and its professionals packed up their machines to move elsewhere.
In the subsequent fallout, North America—particularly, the United States—emerged as the dominant mining hub around the world. Furthermore, mining machine preorders and hashrate projects for 2022 indicate that this won’t change anytime soon.
Some models show that the United States alone has already captured 35% of the network’s hashrate. Though this data from Cambridge’s Bitcoin Electricity Consumption Index is imperfect; it leans on IP address data, which can be unreliable due to VPNs and other IP-scrambling technologies, and it is incomplete as it only draws from four Bitcoin mining pools, it’s likely not far off the mark. At Luxor Technologies, we estimate that the United States currently runs 40% of the network hashrate.
The ban kickstarted the largest restructuring of “hashrate” since Bitcoin’s inception (hashrate is the industry term for how much computing power is employed at a given time to secure the Bitcoin network). With more than half of Bitcoin’s hashrate displaced from China, the second half of 2021 has been a lucrative time for plugged-in miners.
None more so than North America’s top, publicly traded Bitcoin mining companies. The top six by market capitalization, for example, mined 79% more bitcoin in Q3 than they did in Q2 and 155% more than they mined in Q1. With competition clipped by China’s mining ban, they are producing more blocks than they otherwise would have if Chinese miners, which used to represent anywhere from 50-60% of the network, remained online. These miners also turned on new machines over Q3, expanding their hashrate.
And there’s more coming. Thanks to a plethora of financing options made more readily available with Bitcoin’s growing popularity, these public companies are raising more money than ever before to expand their operations. They’ll be using this money to purchase news machines and build out infrastructure which will cement North America as the dominant hashrate hub in the years to come.
Broader Context: How China Used to Dominate Bitcoin Mining
China historically held an unshakeable foothold as the top mining destination in the world. Not only did the leading mining rig manufacturers rise to dominance in the country thanks to their proximity to manufacturers of the silicon chips that the specialized machines need to function, but China’s hydro-rich Szechuan region and copious coal deposits in Xinjiang and Inner Mongolia supplied miners with dirt cheap energy, making mining in the country incredibly lucrative.
Juggernaut as it was, the CCP’s mandates completely dismantled the once booming bitcoin mining industry in China. When the crackdown began fracturing operations, Bitcoin’s hashrate crumbled, falling by over 50% from its peak of roughly 190 exahashes a second (EH/s) in May to a low of 69 EH/s in late June. (“Exa” is a numeric that denominates 1 quintillion, and hashrate is a measure of how many “hashes” (i.e. guesses to find the next block in the chain); so 190 exahashes per second means miners collectively are making 190,000,000,000,000,000,000 guesses a second to mine the next block).
With so much hashrate turned off, Bitcoin’s difficulty lowered to make it easier to mine. Difficulty is an internal score that is algorithmically adjusted roughly every two weeks to make sure Bitcoin’s blocks are mined in target with a 10 minute average; if hashrate increases during a difficulty period, the difficulty raises, and if hashrate decreases, then difficulty decreases.
Of course, hashrate bounced back as fast-moving Chinese miners turned on rigs elsewhere and mega-farms in North America and elsewhere turned on new machines of their own. In fact, bitcoin’s difficulty has increased 8 times in a row, the longest succession of upwards adjustments since the first half of 2018.
NOTE: Some sources have reported that Bitcoin’s hashrate has already reclaimed the highs it set earlier this year, but this is not accurate. The only way to measure real-time hashrate is to calculate it by factoring both the number of blocks produced during a given time frame and the current mining difficulty (a metric that dictates how difficult it is for miners to mine blocks). The sources claiming that hashrate has rebounded to pre-China ban highs relied on 1-day estimates, which can be skewed if blocks come out faster or slower than usual; a more accurate measurement looks at the moving average across one or two weeks.
More Bitcoin = More Money For Miners
But if we look at miner profitability in BTC terms (what we call hashprice), we can see that Q3 was a particularly lucrative time for miners compared to Q2. As you can see in the first chart there is a clear inverted correlation between mining difficulty and hashprice. Looking further down at the Coinmetrics chart, daily mining revenue in USD has been moving up in sync with the hashprice thanks to Bitcoin’s rally from $30,000 to its new all-time high of $66,500.
Daily miner revenue in USD YTD (Source: CoinMetrics)
All of this also lead to impressive gains for the stocks of these publicly-traded mining companies, which have provided a 217% return on average. In comparison, bitcoin has only appreciated 97% this year. For further comparison, the Viridi Cleaner Energy Crypto and Mining Semiconductor ETF (RIGZ) is up 76% since it launched in late July.
Outlook and Implications: North American Miners Press Their Advantage
North American miners have been rapidly expanding operations this year, and they have no intention of letting off the gas pedal anytime soon.
Looking at publicly-available data from SEC filings and investor presentations, many of the top publicly traded bitcoin mining companies in North America expect to dramatically increase their hashrate under management in 2022.
The above companies are forecasted to increase their collective hashrate by 277% from 17.83 EH/s to 67.34 EH/s. This growth will come from new generation equipment that the miners have pre-ordered and which are scheduled for delivery between now and the latter end of 2022.
Decision Points: Where Bitcoin Mining Stocks Fit In a Crypto Portfolio
As Bitcoin and bitcoin mining are becoming more institutionalized and they are also becoming accepted in mainstream financial circles, as evidenced by the fact that Blackrock, Vanguard, Goldman Sachs, Susquehanna, and many other Wall Street heavyweights hold shares of top mining companies (though often as a result of maintaining mutual funds tracking the price of indices such as the Russell 2000 that include such stocks).
I expect these companies to continue trading as a Bitcoin proxy for investors who want exposure without owning the asset outright. The mining companies, especially those with large bitcoin treasuries, have played a de-facto role as a bitcoin fund of sorts; Hut 8, for example, holds 4,724 BTC on its balance sheet, and even though its total hashrate is on par with Bitfarms (which holds 2,300 BTC at a ~$900 million marketcap), Hut 8’s ~$2.1 billion marketcap is closure to Riot (which holds 3,534 BTC at $2.8 billion marketcap but which has almost twice as much hashrate as Hut 8).
Additionally, these stocks are unlikely to be impacted much by the new Bitcoin futures ETFs that were just launched. The restrictive nature of these products, overhead that comes with rolling over monthly contracts, and expense ratios make them an imperfect competitor to Bitcoin or its associated mining stocks. In fact, you can see in the chart below that they have largely outperformed the first two ETFs (ProShares Bitcoin Strategy ETF (BITO) and the Valkyrie Bitcoin Strategy ETF (BTF), which have trailed Bitcoin since inception.
Even when spot market ETFs for Bitcoin get approved, investors will no doubt continue to look at these stocks as roundabout investment vehicles for Bitcoin itself, and much in the same way gold miners trend up and down with gold, they will track Bitcoin’s price. Additionally, as these miners continue to mature by expanding operations and increasing revenue streams, taking advantage of this brief opportunity to gobble up market share, they will benefit from the fact that their valuations in the future will be tied more to their actual performance than we’ve seen in the past.
That said, those miners with more Bitcoin on their balance sheets will likely experience larger drawdowns in a bear market because they are more exposed to bitcoin and, as a result, trade like something of a stand-in for it.