Why Are the Public Miners Holding so much Bitcoin?

Public bitcoin mining companies collectively hold 34,000 bitcoin. Although that is less than 0.2% of bitcoin's 21 million maximum supply, it's still a significant amount given the value of these coins. With a stack of 11,300 bitcoin, Marathon is the biggest hodler of the public miners and the second-biggest of any publicly traded company after MicroStrategy.

A lack of publicly traded bitcoin investment vehicles started the hodl trend

For various reasons, many investors don't want to hold bitcoin directly but rather want indirect exposure through a publicly traded bitcoin investment vehicle. Arguably, the best option for such investors is a spot bitcoin ETF. Such ETFs exist in several countries globally but not in the US.

The lack of a US spot bitcoin ETF led to the emergence of public companies holding bitcoin on their balance sheets to serve the function of publicly traded bitcoin investment vehicles. Bitcoin miners continuously have bitcoin flowing into their wallets. Therefore, they were well-positioned to structure their companies as bitcoin investment vehicles to attract this large, previously unserved investor group.

This trend started at the beginning of the last bull market in late 2020. Around this time, some bitcoin mining companies seem to have made it part of their PR efforts to boast of their massive bitcoin holdings. Marathon is probably the best example, as it even purchased 4,813 bitcoin in 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 turning its company into a bitcoin investment vehicle was very successful. The company attracted enormous amounts of institutional capital, with prominent investors like Vanguard, Blackrock, and State Street. These asset managers are not yet ready to hold bitcoin directly on their balance sheet, so they instead build up indirect exposure by buying shares of companies that own bitcoin.

Marathon's success in serving as a bitcoin investment vehicle seems to have inspired other bitcoin miners, as most soon became quite adamant about never selling any bitcoin. Still, some bitcoin miners don't follow a hodl strategy, like CleanSpark and Iris Energy.

A miner hodling bitcoin must fund its operations with equity or debt raises

Bitcoin mining is a capital-heavy industry. Miners are continuously investing in new mining machines and new facilities, and they also have significant electricity and labor costs to pay. Therefore, many wonder how miners can fund these expenses without selling bitcoin.

Although many bitcoin miners have strived to hodl 100% of their bitcoin production, only two companies have been able never to sell one single coin: Marathon and Hut 8. Let's look at how these companies have financed their operations.

Marathon has financed most of its operations with equity and convertible notes. The company raised $650 million in convertible notes in late 2021 to purchase mining machines. Hut 8 has primarily focused on raising equity but has also taken on some debt backed by its bitcoin holdings.

The ability to take on debt collateralized by bitcoin has been a big reason why many bitcoin miners were able to hold so much of their mined bitcoin. These loans work very well as long as the bitcoin price increases but carry a significant risk that a bitcoin price decline could lead the collateral value to become too low compared to the loan value, a situation known as a margin call.

Capital markets were wide open for bitcoin miners in 2021, making it easy for public miners to fund their operations with external capital. The skyrocketing interest rate and the falling bitcoin price have made it much harder for these companies to raise equity and debt. As a result, some of these companies have recently been dumping their bitcoin holdings—more on that in the next section.

Some public miners were forced to dump most of their bitcoin holdings at firesale prices

This summer has reminded bitcoin mining companies of probably the biggest downside of the mine-to-hodl strategy. Holding bitcoin is easy in a bull market when the value of the stack goes up, and capital markets are wide open to funding your operation. It's not as easy in a bear market, as a falling bitcoin price can lead the liquid part of the balance sheet to evaporate.

Core Scientific was the second-biggest bitcoin holder of the public mining companies in late April, holding 9,618 bitcoin. The company didn't sell a single bitcoin during the first four months of the year, as it could pay its operating costs using debt and equity financing.

However, everything abruptly changed for Core Scientific in May when the bitcoin price started plummeting. The company suddenly diverged from its previous hodl strategy and sold 2,698 bitcoin in May at significantly lower prices than it had mined them. As the bitcoin price kept falling towards $20k, the company kept selling, dumping a monstrous 7,205 bitcoin in June.

After dumping their entire bitcoin stack, Core Scientific now only has 62 bitcoin left. The company is in severe financial difficulties and is now selling bitcoin as soon as it mines it. In hindsight, the company probably wishes it had sold some of the bitcoin it mined at higher prices and used the funds to pay down some of its massive debt.

Core Scientific was not the only publicly traded bitcoin miner who sold massive amounts of bitcoin during this bear market. As we can see on the chart below, the public miners' total bitcoin holdings steadily increased until reaching a peak of 46,026 bitcoin in May. Now they only hold a total of 34,002 bitcoin after dumping significant amounts. Other miners selling a considerable portion of their stack include Bitfarms, Argo, and Northern Data.

Miners who didn't encounter the same financial difficulties as Core Scientific, like Marathon and Hut 8, have managed to keep all their bitcoin. Still, by hodling through the bear market, they have seen the value of their holdings plummet. Ironically, Core Scientific has realized a higher value from its bitcoin holdings than Marathon and Hut 8 by dumping them all at prices between $20k and $30k, as the price now is below $20k.

Conclusion

The trend of public bitcoin mining companies hodling bitcoin started because these companies wanted to serve as bitcoin investment vehicles to investors. Some of these companies have built up among the biggest bitcoin stacks owned by publicly traded companies.

Many are wondering how miners can finance their operations without selling bitcoin. There are several options. They can raise equity or debt, but accessing these external forms of capital has become much more challenging recently as the bear market has wreaked havoc in the industry. As a result, many of these companies have been forced to dump their bitcoin holdings at fire sale prices to source liquidity.

Still, not all bitcoin miners pursue this hodl strategy. While some miners are adamant about never selling their coins, some engage in a more flexible treasury strategy, and some liquidate their produced bitcoin daily.

There are advantages and disadvantages to each treasury strategy, but I would say that exploiting the flexibility of the liquid part of the balance sheet is a wise decision. 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.

Therefore, the best treasury strategy is likely not 100% hodl, nor 100% sell, but instead continuously considering what to do with the bitcoin part of the balance sheet depending on the company's budgets and plans as well as the current market conditions.