26 Sep 2022

Most public bitcoin miners have racked up losses in their lifetimes

The financial statements of public bitcoin mining companies look grim, revealing that most of them have lost money in their lifetimes.
Source: All these companies’ Q2 2022 reports
Retained earnings is an accounting term showing a company's accumulated net income in its lifetime. Most public miners have retained earnings deeply in the negative, revealing that they have lost money over the years.Last week, we showed how much the public mining companies spend on administrative activities. This massive spending, along with unfavorable investments in bitcoin and overexpansion during the bull run in 2021, has led their retained earnings to go deep in the negative.
Core Scientific has lost the most money in its lifetime
Core Scientific has the biggest accumulated deficit, losing $1.3 billion in its lifetime as a company. As I showed in my article on administrative expenses, Core Scientific has been one of the biggest spenders on share compensation and other non-mining expenses.In addition, Core was at one point the biggest bitcoin hodler of any public mining company, keeping a stack of 9,618 bitcoin at the peak in April this year. At that point, the indebted company started feeling the wrath of the bear market and realized it had to improve its financial position. It did so by selling enormous amounts of bitcoin going into the summer and now holds only 1,409 bitcoin.Since Core held this massive stack of bitcoin through most of the bear market, it was forced to book a bitcoin impairment loss of $150 million in Q2 2022 alone. While the company, along with most other public miners, held onto its mined bitcoin in hopes that it would leverage its financial position, what ended up happening was the bitcoin position dragged its financials further down during the bear market.Although Core's administration expenses and bitcoin impairment have eaten up a significant share of its profits, most of the company's lifetime loss stems from the impairment of goodwill related to a massive acquisition the company most likely overpaid for. Core Scientific bought bitcoin mining company Blockcap in July 2021 for $1.2 billion, of which total identifiable net assets made up only $142 million.This possible overpaying has, along with other impairments, resulted in Core booking an impairment of goodwill of $788 million in Q2 2022, ultimately resulting in an accumulated deficit of $1.3 billion.Still, it's important to know that Core Scientific is not alone in making these mistakes. Most bitcoin miners held onto their bitcoin stack during the bull market only to sell significant parts of it for cents on the dollar during the bear market. In addition, most other miners also have high administrative costs, and some share Core's experience of overpaying in acquisitions.
Even after the golden year of 2021, these companies managed to lose money
Everyone knows that 2022 has been a terrible year for bitcoin mining. Let's look back to one of the best years ever in the bitcoin mining industry to see if the companies could take advantage of the bull market and accumulate some profits for their shareholders.2021 was a super profitable year in the bitcoin mining industry. A golden combination of ever-increasing bitcoin price and lagging hashrate gave these companies their chance of a lifetime to rake in enormous profits. At the bull market's peak in November, a miner using an energy-efficient machine could generate bitcoin worth $577 per MWh while buying an MWh for around $40, pocketing the 1,260% margin. This margin has shrunk to 85%, which is not that high considering that it should cover other operating expenses like salaries and equipment depreciation.
Source: All these companies’ (except Core Scientific) 2021 annual reports, Core Scientific's Q1 2022 report
So did the public miners use the bull market to rake in profits? No. Even after the super-profitable 2021, all these miners, except for Argo and Bitfarms, had enormous accumulated deficits. That these companies didn't even manage to build up retained earnings after the year-long bull market in 2021 is a bad sign, to put it mildly.
But remember: The retained earnings don't give the complete picture
Retained earnings are an important accounting term that I often use as an investor to get a birds-eye overview of a company's ability to generate value for its shareholders over time. Still, it's essential to know that retained earnings don't give the complete picture, and you have to dig deep into the details to understand the actual value-generating ability of a company.The massive accumulated deficits of these companies paint a more grim picture than reality. Firstly, most miners are rather aggressive in their depreciation of equipment. Depreciation is a significant cost component, resulting in their net incomes being underestimated on the financial statement.In addition, share compensation, which historically has been a significant cost component for these companies, is a non-cash cost and doesn't affect the cash balance. It's therefore seen as a "milder" cost than most operating expenses.
Most public mining companies have lost money in their lifetimes. It's understandable that they lost money as the bear ravaged in 2022, but unfortunately, 2021 was also a year of major losses due to enormous share compensation programs.If bitcoin mining companies managed to lose money even after the mining bull market of their lifetimes in 2021, it should serve as a warning signal that costs may be out of control in some of these companies.In addition, these companies were not prepared for a bear market due to overexpanding and taking on too much risk during the bull market. Adopting proper risk management strategies and reducing administrative costs should be top priorities for these companies going forward.
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