Bitcoin Miners’ Stock Market Lifeline Becomes Irritant to Shareholders

The equity lifeline used by many Bitcoin miners to help weather the most recent crypto winter is beginning to irk some shareholders.

(Bloomberg) — The equity lifeline used by many Bitcoin miners to help weather the most recent crypto winter is beginning to irk some shareholders. 

The 12 major publicly-traded miners, including Marathon Digital Holdings Inc. and Riot Platforms Inc., raised about $440 million through stock sales in the second quarter, a jump of almost 60% from the previous three months, according to data complied by TheMinerMag. The companies have raised over $4.9 billion since the start of 2021. The cash pile has helped participants in the capital-intensive industry stay afloat after Bitcoin’s 2022 rout resulted in a loss of access for many to debt and lending markets.   

A first-half recovery in Bitcoin and a subsequent surge in the share prices of many of the miners helped to ease the blow of dilution for holders. Now with Bitcoin faltering in the second-half of 2023 and mining stocks retreating from recent highs, investors are beginning to voice concerns. 

“Some mining companies are diluting shareholders at an excessive rate,” said Mark Jeftovic, who runs the Bitcoin Capitalist newsletter, and holds stakes in Marathon, Hut 8 Mining Corp, and Bitfarms Ltd. “If they are diluting you faster than Bitcoin is going up, then you are going the wrong way on a treadmill.”      

Bitcoin mining is an energy-intensive process in which firms use expensive specialized computers to validate records of transactions on the blockchain and earn rewards in the form of the token. This is done by thousands of the computers, or Bitcoin mining rigs, stacked on top of each other in data centers that use high amounts of electricity. 

“The massive capacity expansions of public miners over the past couple of years have required enormous capital investment,” said Jaran Mellerud, a mining analyst at Luxor Technologies. “Miners have historically preferred to fund these investments with equity, leading to relatively high dilution.” 

Most notably, common shareholders in Cleanspark Inc. and Terawulf Inc. have experienced annualized dilution of 116% and 67% since January 2022. Other companies with significant dilution include Marathon and Riot, Mellerud said.

The issue can be a turnoff for investors that put more focus on cash flow and the return on invested capital.

“We are investing in companies that are doing debt financing and have the warrants attached to it,” said David Foley, co-managing partner at Bitcoin Opportunity Fund, which has made investments in privately-held miners. “That is far less dilutive, yet allows them to raise capital to grow their business.”  

That said, the share sales aren’t a deal-breaker for those that view the mining stocks as a leveraged proxy for Bitcoin.

“I actually don’t see this as much of an issue,” said Steven McClurg, chief investment officer at Valkyrie Investments, which has a crypto-mining equity ETF. “A lot of companies make the mistake of issuing debt when debt is expensive, they are afraid of diluting shareholders because of the short-term consequences.” 

But officials sought to quell the concern over share dilution during conference calls held after the release of second-quarter results. 

“Our growth plans are going to be very consistent with doing things that drive shareholder value accretion,” Marathon Chief Executive Officer Fred Thiel said during a call on Aug. 8. “We have been selling Bitcoin to cover our operating expenses this year. So we’re not diluting our shareholders to maintain operating expenses in that degree.” While miners have traditionally avoided selling newly minted Bitcoin as part of a strategic bet on price appreciation, some, like Marathon, took advantage of this year’s rebound. 

Terawulf Chief Financial Officer Patrick Fleury told investors that the company will use at-the-market equity offerings cautiously. 

“Unlike many of our peers, you will never ever see us issue hundreds of millions of dollars on the ATM in a quarter,” Fleury said during an Aug. 14 call. “That’s just not our game, and we’re focused on profitability, paying down debt, maximizing shareholder value, and then, obviously, returning capital ultimately to shareholders, whether that’s in the form of dividends or share buybacks.”  

Even so, more dilution may be on the way. Miners still need to pay down debt accumulated during the bull cycle in late 2021. Then there is the ‘halving,’ a preprogrammed Bitcoin code update that effectively cuts the token reward, which is the main source of revenue, in 2024. The update aims to reduce supply in the digital asset and maintain its 21 million cap. 

A plunge in digital assets and inflated power costs prompted Compute North and Core Scientific Inc., two of the largest mining companies by computing power, to file for bankruptcy, and a flurry of other firms to warn of liquidity crunches in late 2022. Crypto lenders, who had been a main source of debt financing that fueled miners’ rapid growth, scaled back or went bankrupt amid the market rout. Now Bitcoin’s price has stalled. 

“When selling Bitcoin isn’t that profitable in this environment and debt is too risky, you don’t have many choices,” said Wolfie Zhao, head of research at TheMinerMag.   

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