11 May 2022

Why are the public miners hodling so many bitcoin?

Many public miners are laser-focused on never selling the bitcoin they mine, and some of them own some of the largest bitcoin treasuries out there. Why do they pursue this hodl strategy, and how can they pay for costs if they never sell bitcoin?
top 10 bitcoin treasuries.svg
Source: Production updates (Marathon, Core Scientific, Hut 8, Riot, Bitfarms, Hive, Argo, Bit Digital, CleanSpark, Cathedra)
The chart above shows the top ten bitcoin holdings of public mining companies. Some of them own thousands of bitcoins, and six of the ten largest bitcoin treasuries held by public companies are bitcoin miners.Marathon is the largest holder with 9,673 BTC on their balance sheet, closely followed by Core Scientific, which owns 9,618 BTC. Core Scientific has more than double the hashrate of Marathon, so it should overtake Marathon's position as the top hodler very soon.Why are the miners so focused on building bitcoin treasuries?
There's a lack of exchange-traded bitcoin investment vehicles
The market has thirsted for a US spot bitcoin ETF for several years. The preferred way to get bitcoin exposure for many investors is not to purchase bitcoin directly but to buy into an ETF or other exchange-traded investment vehicles. Such an investment structure is more in line with existing regulations for investment companies. Also, it allows people to get bitcoin exposure through their IRAs and similar tax-advantageous investment accounts.For people not looking to hodl bitcoin directly, the best investment product is undoubtedly a spot ETF, but with no spot ETF in sight in the US, what opportunities are there for Americans who want indirect exposure to bitcoin?Several bitcoin futures ETFs have been listed in the US, but they come with high costs since the futures contracts are usually priced higher than bitcoin in the spot market. The Grayscale Bitcoin Trust (GBTC) has also been an alternative for several years, but it has failed to track the bitcoin price and currently trades at a significant discount to its bitcoin holdings.Due to the lack of exchange-traded bitcoin investment vehicles, some public companies have emerged to serve this function for bitcoin-thirsty investors. The most notable example is Microstrategy, which has amassed almost 130,000 bitcoin and become the largest bitcoin hodler of any public company by far.Buying Microstrategy's stock purely as a bitcoin proxy is not viable since the company has a significant non-bitcoin business that will impact the stock's direction.So, all of these indirect bitcoin investment vehicles come with their drawbacks. Which other opportunities exist? Enter public bitcoin miners.
Public miners as bitcoin investment vehicles
Because of the lack of bitcoin investment vehicles, bitcoin miners are taking advantage of their continuous inflow of bitcoin and correlation to the bitcoin price, hoping to serve as bitcoin investment vehicles for investors who want to get indirect exposure to bitcoin.This strategy allows miners to attract new investors who invest in these companies to get bitcoin exposure. Because of this investor demand, several mining companies try to stay as correlated as possible to the bitcoin price, and the best way to do this is to amass massive amounts of bitcoin. Therefore, many public miners have explicitly stated that they intend never to sell the bitcoin they mine. This strategy is called the mine-to-hodl strategy. Some public miners are more aggressive than others in their mine-to-hodl strategy. An example is Marathon, which even purchased 4,813 bitcoin at the end of December 2020, stating in a public filing that this purchase "established the company as one of the only pure-play bitcoin investment options". Marathon's strategy in marketing itself as a bitcoin investment vehicle has undoubtedly successfully attracted investors and pumped up their share price. Their stock has historically been valued higher than most other mining stocks, based on their operating hashrate and earnings. Marathon has a much larger share of institutional investors than the other mining companies, with 41%. Many of these investors, like Vanguard (9% of the shares), Blackrock (6%), and State Street (2%), want to have exposure to bitcoin without holding the asset directly. Since Marathon was one of the earliest miners to employ the mine-to-hodl strategy, it managed to attract these institutional investors. To sum up, miners have incentives to hodl bitcoin because it makes their stocks attractive to a more extensive investor base. But how are they able to hodl all the bitcoin they mine? Don't they have costs to pay?
Miners raise capital to finance their operations without selling bitcoin
The biggest mining companies hodl enormous amounts of bitcoin, and they keep adding to their holdings every day. Using Marathon as an example, they have steadily increased their bitcoin holdings from below 5,000 in January 2021 to almost 10,000 now. Marathon, and many other miners, have kept all the bitcoin mined, never selling a single satoshi. They can do this by raising equity and debt to pay for operating expenses. The access to capital has drastically improved for miners over the past year, allowing miners to tap into various capital markets to finance their operations.
Source: Marathon
There exist several ways for these companies to raise capital. Raising equity in the public markets has become a popular way, especially during the mining stock frenzy of 2021. This year these companies could raise enormous amounts of equity relatively easily and quickly, and we saw a plethora of mining companies going public. In addition to issuing equity, miners can use debt financing. 2021 gave miners several new creative ways of using debt financing. Miners can finance machine purchases by collateralizing the machines, and they can also finance operations by borrowing against their bitcoin holdings. Several bitcoin-focused lenders like Blockfi, Nydig, and Galaxy Digital have emerged, giving miners more financing options. Using Marathon as an example again, on March 31st, they had a total debt of $729 million, with a significant share of this debt being used to purchase machines last December.
Are there any disadvantages to this hodl strategy?
Yes, the mine-to-hodl strategy allows miners to attract a more extensive investor base. Still, the strategy has its drawbacks. First of all, being tied to a "mandate" of never selling the most liquid part of your balance sheet removes a lot of options for a company. In addition, machines are expensive and make up a significant portion of a miner's balance sheet. The machine prices generally follow the price of bitcoin, meaning that from a balance sheet perspective, the value of mining companies is already correlated to the bitcoin price. Therefore, buying bitcoin to increase this correlation may not be worthwhile. Also, as explained in the previous section, to pursue the mine-to-hodl strategy, a miner must finance its operations with capital from outside the company, which is often debt secured by its bitcoin holdings. What will then happen if the bitcoin price plummets 80% in a few months, which it has on several occasions historically? In such a scenario, the companies who leveraged their bitcoin balance sheet can potentially be in trouble and will not have the dry powder available to pursue opportunities like purchasing the assets of other mining companies with financial difficulties. The more flexible a miner is regarding its balance sheet, the better. Bitcoin is one of the world's most liquid assets, and not taking advantage of this liquidity is a poor decision from an operational perspective.
Mining companies started to hodl bitcoin to become more attractive to investors looking for bitcoin investment vehicles. The demand for bitcoin investment vehicles has been fueled by the US's lack of a bitcoin spot ETF. Miners have several options to finance their operations without selling bitcoin, for example, issuing equity or raising debt with their machines or bitcoin holdings as collateral. This was easy during the raging mining bull market in 2021 when capital was flowing around. The market conditions are now entirely changing, and as a result, we will likely see more mining companies diverge from their hodl-at-any-cost strategies. Even the prime example of a hodl miner, Marathon, recently announced that they might start to sell some of their bitcoin, following Riot's announcement a few weeks earlier. We will likely see more mining companies deciding to pursue a more flexible balance sheet strategy, fully exploiting the liquidity of their bitcoin holdings, which will be especially important now as times are getting tough and capital is drying up in the mining industry.
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