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Survival Guide for Cryptocurrency Mining Companies in 2023.

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For Bitcoin mining companies, 2022 is undoubtedly a storm. What lessons should mining companies learn and how to survive the long bear market?

Original Title: "2023 Survival Guide for Cryptocurrency Mining Companies"

Source: Coindesk, George Kaloudis

Translated by: PANews

For Bitcoin mining companies, 2022 is undoubtedly a storm.

The Fed's interest rate hike has increased the cost of funds, and the stubborn increase in Bitcoin network computing power and price plummet have caused corporate management strategies to fail, ultimately leading to lower profits from Bitcoin mining. The data doesn't lie, as the stock prices of the five largest crypto mining companies listed on the US stock market have all suffered setbacks. The trading prices of Core Scientific (CORZ), Riot Blockchain (RIOT), Bitfarms (BITF), Iris Energy (IREN), and CleanSpark (CLSK) have fallen by 99%, 85%, 91%, 92%, and 79%, respectively.

However, don't worry about "Bitcoin death". Although Bitcoin mining companies do need to take some measures (such as restructuring or implementing more reasonable corporate strategies), it does not mean that these listed companies will go bankrupt due to market storms.

What mistakes did Bitcoin mining companies make before?

In the past few years, some Bitcoin mining companies have chosen to sell the BTC they have mined instead of using debt and other capital as operational funds. In fact, this model only works when the following two conditions are met:

1. The continuous rise in Bitcoin prices has led to an increasing number of people hoping to participate in the cryptocurrency market.

2. The cost of Bitcoin mining funds is very low, which has led to an increasing number of people who want to participate in mining in pursuit of profits.

Although both of the above scenarios have occurred in the past few years, a very strange situation has occurred in the Bitcoin mining market, namely: Bitcoin mining companies are not making money by selling BTC, but by using some "financial means".

In theory, the operating model of a Bitcoin mining enterprise should be: the enterprise purchases BTC mining machines to mine BTC, sells a portion of the mined BTC, and uses the proceeds to pay for the expenses required to maintain the operation of the enterprise.

In reality, the operating model of a Bitcoin mining enterprise is as follows: the enterprise purchases BTC mining machines to mine BTC, while borrowing funds from the debt or securities market to pay for the expenses required to maintain the operation of the enterprise.

Of course, not all Bitcoin mining companies do this, but companies like MarathonDigital have stuffed all the BTC mined in the past 26 months into their balance sheets without selling any BTC to pay for their operating expenses. This practice is obviously problematic because companies should operate sustainably and steadily without relying on the capital market, and then make money through the correct profit model, otherwise problems will arise.

Now, the tide has receded - the price of Bitcoin continues to decline, the cost of funds continues to increase, and the competition for Bitcoin mining is becoming increasingly fierce. Every mining company is trapped in a wounded world. CoreScientific has announced bankruptcy, Bitfarm's CEO has resigned, and Argo has been forced to restructure. Fortunately, all of this happened in 2022.

2023 Cryptocurrency Mining Enterprise Survival Guide

When the time comes to 2023, I believe every struggling Bitcoin mining enterprise is asking one question: What should we do? To be frank, although the cryptocurrency market has not yet recovered from its pessimistic sentiment, there are still reasons to remain optimistic.

First of all, Bitcoin mining companies should mine BTC when it is profitable and shut down when it is not. Simply put, each mining machine can be easily turned off and on. However, in actual operation, mining companies do not flexibly adjust the start and stop of mining machines based on BTC prices or electricity prices. Instead, Bitcoin mining companies are often led by fluctuations in Bitcoin prices, and even continue to mine in unprofitable market environments. Therefore, Bitcoin mining companies need to implement flexible and effective "financial management strategies", rather than being limited to the thinking of "holding all mined BTC". This strategy requires Bitcoin mining companies to sell some of the mined BTC based on market conditions (such as BTC prices starting to fall, electricity prices starting to rise, or both happening at the same time) in exchange for funds to support business operations.

Secondly, pay attention to the company's cash flow. For listed Bitcoin mining companies, public market investors not only focus on whether the company's valuation has upward potential, but also on the predictability of the company's cash flow. The problem now is that many Bitcoin mining companies have serious cash flow shortages. Here, the importance of a financial management solution must be emphasized again, because an appropriate financial management solution must be able to predict the profitability of Bitcoin mining companies and make timely decisions when imbalances occur. For example, not allowing mining companies to hold BTC as much as possible during a bull market (hoping to sell at a high price), and not allowing them to engage in additional financial arbitrage business (because the main business of mining companies is mining), so that Bitcoin mining companies can more easily cope with market pressure.

Summary

In 2023, no matter what happens, we hope that those Bitcoin mining companies who experienced market storms and downturns in 2022 can make some changes, especially those large listed mining companies. They should re-examine their strategies in order to achieve sustainable development in the future.

Hopefully Bitcoin mining companies can learn something from the brutal market lessons of 2022.