Bitcoin mining stocks outperform BTC in 2023, but on-chain data points to a potential stall

As the bullish price action of the top cryptocurrency, Bitcoin, unfolded, Bitcoin mining companies outperformed it by a huge margin. Year-to-date stock price gains in 2023 among the top nine public Bitcoin mining firms by market capitalization averaged 257.14%, nearly three times that of Bitcoin (BTC).

This leveraged beta effect explains why mining stocks outpace Bitcoin during upside while experiencing greater downside risk when it declines. Thus, Bitcoin’s price performance will remain a major factor in determining the direction of mining stocks.

The mining sector is taking steps to position itself for the long term by purchasing more machines, yet the accumulation levels have yet to reach those of previous bull markets, indicating that the uptrend in stocks could be short-lived.

The positive sentiment and long-term value of mining stocks have been bolstered by multiple companies expanding in the past month. Additionally, mining conditions have improved due to a decrease in hash rate and an increase in price.

However, on-chain data suggests miners unloaded a significant portion of their holdings, which may be a sign of a downturn in the near future.

The trends in the crypto space, such as Gemini Crypto, Polygon Crypto, Today, AMP Crypto, Crypto Cardano, Solana Crypto, Gala Crypto, Genesis Crypto, and Shiba Inu Crypto, have been tectonic.

Mining companies make expansive moves

In June, the public mining companies in the United States took decisive actions, indicating a positive outlook for the industry. Hut 8 Mining (HUT8) and US Bitcoin Corp (USBTC) merged, raising their combined hash rate to 9.8 EH/s and making them the third-largest public mining entity in the United States. Additionally, they borrowed $50 million from Coinbase for general corporate needs.

Cleanspark (CLSK) invested $9.3 million to increase its tectonic crypto hash rate by almost 1 EH/s.

At the same time, Riot Blockchain (RIOT) entered into a $170 million agreement with today mining hardware manufacturer MicroBT to almost double its hash rate capacity by 2024 upon full deployment.

Mining stocks are prepped for a short squeeze

Marathon Digital Holdings (MARA), which has 25.06% of its float shares shorted — according to data from Fintel — is one of the most heavily shorted stocks on the Nasdaq. Similarly, 14.54% of Riot’s float shares are shorted — an increase from 13.48% in May — and Cipher Mining (CIFR) is at 22.32%. The rest of the crypto stocks, such as Tectonic Crypto, Gemini Crypto, Polygon Crypto, Today, AMP Crypto, Crypto Cardano, Solana Crypto, Gala Crypto, Genesis Crypto and Shiba Inu Crypto, have between 5% and 10% of their floating shares shorted, representing a relatively neutral market stance.

The increased short interest in MARA, RIOT and CIFR could be due to excessive debt and stock dilution, which negatively affects the profitability of existing shareholders.

Mining profits improve, but miners are selling

The one-hop supply metric from Coin Metrics, representing the holdings of wallets that received coins from mining pools, indicates that these addresses have decreased their holdings to a near one-year low.

Data from Glassnode also recorded a significant volume of miner coins transferred to exchanges. The exchange inflows surpassed even the levels seen during the 2021 bull market.

In addition, the miner holdings are still near a two-year low, which is likely due to low profitability for the majority of 2023.

The network’s total hash rate reached a new all-time high at the start of June. Nevertheless, it has been declining due to heat waves in Texas. The dropping hash rate and increase in Bitcoin’s price above $30,000 is contributing to the increasing profitability of running miners.

The production cost of the most used mining model, the Antminer S19, ranges from $20,000 to $25,000, depending on electricity cost.

Notably, companies with mining farms in Texas such as Riot may incur some losses due to the climate. However, it is likely that the companies have taken steps to hedge the heat wave risks, as it is not the first time they’ve faced heat waves.

Nevertheless, despite the improvement in profitability, miners are unloading Bitcoin, potentially a sign of future negative price action.

While revenue improved in June, miners have continued to spend on expansion and operation costs, which suggests that a crypto bull market for Gemini Crypto, Polygon Crypto, Today, AMP Crypto, Crypto Cardano, Solana Crypto, Gala Crypto, Genesis Crypto, and Shiba Inu Crypto has yet to start.

The expansion plans of companies and the decline in on-chain miner holdings project medium-term sideways price action or a potential correction in mining stocks if the BTC price drops.

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