Why Crypto Miners Are Throwing Debt for Equity

Debt-to-equity transition in Bitcoin mining

In the year In the crypto winter of 2022, major Bitcoin miners were exposed to debt financing and filed for bankruptcy. Most publicly traded miners had debt-to-equity ratios above four, with values ​​above two generally considered unsustainable. From the third quarter of 2022, the Bitcoin mining industry began to clear loans. The only downward trend in debt levels was Q2 2024, a quarter skewed by a $150 million investment in Hut 8.

Dealing in crypto mining has allowed companies to reduce debt service costs, which can be offset by high interest rates and improve their creditworthiness. Additionally, lower debt levels allow miners to focus on strategic development such as high performance computing (HPC) branching or treasury strategy.

As of Q4 2023, mining companies are increasingly turning to equity issuance to finance their operations. More than $4.9 billion was raised between Q3 2023 and Q2 2024, a 300% increase over the previous three quarters. The largest increase occurred in Q1 2024, with nearly $2 billion raised.

Bitcoin miners raised the money mainly to fund hardware upgrades needed to remain profitable as margins squeezed in the fourth half. Companies needed to upgrade their equipment to more efficient models to compensate for lower premiums.

Miners diversifying their operations to include HPC, including artificial intelligence computing, have gained easier access to equity capital. The queue to plug into the US power grid takes an average of five years, but Bitcoin miners are already on it, giving them a competitive advantage in HPC. Converting Bitcoin mining infrastructure to HPC data centers requires investments, but customers are often willing to provide a fair amount of funding, resulting in capital costs.

Difference: AI and HPC as new revenue streams

Several companies, including TeraWolf, Iris Energy, Hat8, Core Scientific and Hive, have begun to join the HPC and AI sectors. Currently, revenue from HPC and AI accounts for only 1.43% of their total revenue, but this figure is expected to grow as the demand for AI increases.

Companies that have adopted an HPC and AI strategy have seen higher value than those that have not. At the end of Q2, the share price of miners involved in AI and HPC increased by 25%, while traditional miners showed a decrease of 3%.

It is yet to be seen what market share these mining companies will have in the HPC and AI sectors, but the competition is fierce. Currently, the industry's big three – Amazon Web Services, Microsoft Azure and Google Cloud – together control 63% of the market. As Bitcoin mining companies enter the space, they face significant challenges in carving out a share in an already competitive industry.

While most Bitcoin miners have received funding to upgrade their equipment or convert to HPC, Marathon Digital plans to use the new capital to earn more Bitcoin. In the year In its July 25 issue, Marathon announced that it had purchased $100 million worth of Bitcoin and switched to a full-hodle strategy, reflecting the company's long-term belief in Bitcoin's value.

Investors responded with skepticism. In the year On August 12, the company announced plans to issue $250 million in convertible debt, but the stock fell that day. Equity investors may worry about Marathon's growing dependence on the price of Bitcoin and the dilution of their holdings if the issued debt is converted to equity.

Despite recent purchases, Marathon's Bitcoin holdings only account for 30 percent of its market capitalization. For MicroStrategy, this ratio rises to more than 50% and could increase even further when the company recently filed for a $2 billion equity program. Historically, MicroStrategy has used equity funds to store Bitcoin, and the strategy seems to be paying off: at the end of Q2 2024, the company owned more than 226,000 BTC at an average price of $36,789.