By Igor K, Cointelegraph
Compiled by: TechFlow
Crypto miners are reducing their reliance on debt in favor of diluting equity to support their goals in AI and high-performance computing (HPC), but the returns from this strategy remain uncertain.
Debt-for-Equity Changes for Bitcoin Mining Companies
The crypto winter of 2022 caused major Bitcoin miners to file for bankruptcy due to over-reliance on debt financing. Most publicly traded miners have a debt-to-equity ratio of more than four, and more than two is generally considered unsustainable. Starting in the third quarter of 2022, the Bitcoin mining industry began to clean up its loans. The only exception was the second quarter of 2024, which was skewed by a $150 million investment in Hut 8.
In the crypto mining business, by reducing leverage, companies are able to reduce debt service costs due to rising interest rates and improve their credit profile. In addition, reduced debt levels allow miners to focus more on strategic developments, such as expanding high-performance computing (HPC) or developing financial management strategies.
Since the fourth quarter of 2023, mining companies have increasingly financed their operations by issuing equity. From the third quarter of 2023 to the second quarter of 2024, more than $4.9 billion was raised, 300% more than in the previous three quarters. The largest increase occurred in the first quarter of 2024, when nearly $2 billion was raised.
Bitcoin miners raised funds mainly for hardware upgrades to cope with the profit margin compression caused by the fourth halving. Companies need to upgrade their equipment to more efficient models to make up for the reduced rewards.
Miners are diversifying into high-performance computing (HPC), including AI computing, making equity funding more accessible to them. Bitcoin miners already have access to the U.S. electric grid, which has an average wait time of five years, giving them a competitive advantage in the HPC space. While converting Bitcoin mining infrastructure to an HPC data center requires investment, customers are often willing to provide equity financing, which reduces capital costs.
Diversification: AI and HPC as new revenue streams
Several companies, including TeraWulf, Iris Energy, Hut 8, Core Scientific, and Hive, have already started to move into the HPC and AI space. Currently, HPC and AI revenues only account for 1.43% of its total revenue, but this proportion is expected to increase as the demand for AI continues to grow.
Companies that adopted HPC and AI strategies saw their valuations grow more than those that did not. By the end of the second quarter, the stock value of miners that participated in AI and HPC had increased by 25% from the beginning of the year, while traditional miners had decreased by 3%.
How much market share these mining companies will gain in the HPC and AI space is still unknown, but competition is fierce. Currently, the industry is dominated by three giants - Amazon Web Services, Microsoft Azure, and Google Cloud, which together control 63% of the market share. As Bitcoin mining companies enter this field, they will face significant challenges in this already competitive industry.
Marathon Digital’s Bitcoin Holding Strategy
While most Bitcoin miners are raising funds by updating their equipment or diversifying into HPC, Marathon Digital plans to use the new capital to buy more Bitcoin. In a July 25 announcement, Marathon announced the purchase of $100 million worth of Bitcoin and shifted to a full holding strategy, reflecting the company’s confidence in the long-term value of Bitcoin.
Investors were skeptical. On August 12, the company disclosed plans to issue $250 million in convertible bonds, but the stock price fell that day. Equity investors may be concerned about Marathon's increased dependence on the price of Bitcoin. In addition, they are also worried that if the issued debt is converted into equity, it may lead to dilution of their holdings.
Despite recent purchases, Marathon's Bitcoin holdings only account for about 30% of its market value. For MicroStrategy, this proportion is over 50% and has the potential to increase further as the company recently submitted a $2 billion equity plan. MicroStrategy has historically accumulated Bitcoin through equity financing, and this strategy seems to be working. As of the end of the second quarter of 2024, the company owns more than 226,000 Bitcoins, with an average purchase price of $36,789.
