CoinShares’ analysis indicates that Bitcoin mining companies Riot, TeraWulf, and CleanSpark are best positioned to navigate the anticipated significant cost increases following the upcoming Bitcoin halving in April.
As a result of halving, CoinShares projects a rise in production costs and cash costs for Bitcoin from around $16,800 and $25,000 per Bitcoin in Q3 2023 to $27,900 and $37,800, respectively. The average production cost for crypto miners post-halving is estimated to be $37,856.
The halving reduces the block reward for miners by half, slowing down the creation of new Bitcoins in adherence to the network supply control deflationary policy. The upcoming halving in April 2024 will reduce the Bitcoin block reward to 3.125 BTC, potentially leading to increased mining costs as miners expand operations to maintain profitability.
CoinShares highlights Riot, TeraWulf, and CleanSpark as particularly well-positioned for the halving, citing their ability to handle large selling, general, and administrative expenses (SG&A) — a significant challenge for many miners.
“[…] we think Riot, TeraWulf and Cleanspark are best positioned going into the halving. One of the main problems miners have is large SG&A [selling, general, and administrative expenses] costs. For miners to break even, the halving will likely force them to cut SG&A costs, otherwise they could continue to run at an operating loss and having to resort to liquidating their HODL balances and other current assets.”
CoinShares’ analysis assumes a post-halving Bitcoin price of $40,000. Below this point, mining firms may need to use financial reserves or operational buffers to stay afloat. Among the three recommended companies, Riot is seen as the best positioned due to its cost structure and extended operational runway. However, all miners, including Riot, face challenges if Bitcoin prices drop below $40,000.
“Overall, unless the price of Bitcoin remains above $40,000, we believe that only Bitfarms, Iris, CleanSpark, TeraWulf and Cormint will continue to operate profitably.”
Despite improvements in fleet efficiency, miners’ direct cost structures aren’t improving significantly, as they may need to increase power draw and energy consumption to mine the same amount of Bitcoin.
According to CoinShares, electricity costs constitute about 68% and 71% of miners’ total cost structure pre- and post-halving, respectively. The analysis also highlights the challenge of scaling data centres based on the number of rigs, requiring substantial capital expenditure funded by cash, equity, or debt. Using Core Scientific as an example, CoinShares points out that debt financing can increase miners’ all-in cost of production due to higher interest expenses, making them vulnerable during Bitcoin downturns.
In an attempt to regain solvency, Core Scientific recently concluded a $55-million equity financing round on January 8 and plans to relist on Nasdaq after completing bankruptcy proceedings.