In April, the block rewards generated by Bitcoin miners will be slashed by 50% as part of the cryptocurrency’s 4-year halving cycle. In the short term at least, that means revenues for companies like Marathon Digital and RIOT Platforms will drop off a cliff.
During the previous 2 halving events in 2020 and 2016, the consolidation of hash power among larger, more efficient setups essentially wiped out small miners, leaving only industrial operations able to compete. Now, as the next reduction in BTC rewards approaches, even the biggest players may not be able to survive.
The primary concern for firms like Marathon and RIOT is that even before the halving, Bitcoin mining is generally only profitable when the market is up.
To survive, miners need cheap electricity, and the industry is concentrated in places where it has the support of local governments and energy providers.
In the US, for example, firms have flocked to Texas to take advantage of the state grid’s dynamic pricing and supply model, which increasingly relies on facilities like RIOT’s Rockdale mine to soak up excess electricity during periods of low demand.
Yet even with these incentives, 24 years after the company was founded, RIOT is only now on the cusp of breaking even. Meanwhile, Mararthon’s path to profitability has been shorter, but volatile market conditions in the runup to April could still derail its progress.
Among publicly listed mining companies, many investors have reasoned that there are better-priced opportunities to be found among smaller firms with a value-to-sales ratio.
In a recent analysis, Seeking Alpha observed that “Bitcoin mining companies might not survive a 50% cut in Bitcoin mining revenue.” Given the expected hit to their income from April onward, the report concluded that many miners are currently overvalued.
Specifically, it pointed to RIOT’s current market capitalization of $2.12 billion, which has already fallen by around $900 million since peaking last year. In the coming months, the report predicted RIOT’s stock market valuation falling even further, highlighting the $1 billion mark as a recommended entry point for investors.
Seeking Altha drew a comparison between RIOT and Core Scientific, which was once one one the biggest publicly traded mining companies, but went bust last year after a dramatic reversal of its fortunes during 2022’s crypto winter.
Core Scientific’s decline serves as an important lesson for miners today. No company is too big to fail in a highly competitive industry, where razor-thin margins can easily be erased by market downturns .
Even Marathon, which by most measures is the world’s largest Bitcoin miner, could still struggle if the price of Bitcoin falls too low to support its operational costs.
In the run-up to the halving, Marathon has been doubling down on efficiency, scaling its operations and cutting costs. Nonetheless, market analyst Pollock Mondol recently observed that the company’s cost structure remains higher than many of its peers. Should Bitcoin prices dip below $30,000 post-halving, he concluded that Marathon’s profit margins would be wiped out, putting its entire business model in jeopardy.