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

Bitcoin mining companies outperformed BTC price by a huge margin amid the recent bullish price action in the top cryptocurrency.

The average year-to-date gains in 2023 across the stocks of top nine public Bitcoin mining firms by market capitalization stood at 257.14%. The figure is almost three times higher than BTC’s gain in the same period.

The higher gains represent the leveraged beta effect that mining stocks enjoy. Leveraged beta suggests that during Bitcoin upside, these stocks outperform. Whereas, when Bitcoin slumps, they face deeper downside risk.

Due to a high levered beta, Bitcoin’s price performance will remain a crucial factor in determining the direction of mining stocks.

The trends within the mining sector show that miners are positioning themselves for the long-term by buying more machines. However, they have yet to exhibit accumulation levels that match previous bull markets, suggesting that the uptrend in the stocks could stall in the medium term.

Multiple mining companies made expansion moves in the past month which added to the positive sentiments and long-term value of the stocks. At the same time, the mining conditions improved with a dip in hashrate and price increase.

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

Mining companies make expansive moves

The public companies in the U.S. made aggressive moves in June, signalling long-term strength in the industry.

Hut 8 Mining Corp. (HUT8) merger with US Bitcoin Corp (USBTC) increased its total hashrate to 9.8 EH/s, making it the third largest public mining entity in the U.S. However, it also took a debt of $50 million from Coinbase.

Cleanspark (CLSK) invested $9.3 million to increase its hashrate by almost 1 EH/s.

At the same time, Riot Blockchain (RIOT) entered into a $170 million deal with mining hardware manufacturer MicroBT to nearly double its hashrate capacity by 2024 upon full deployment.

Mining stocks are prepped for a short squeeze

Marathon Digital Holdings is one of the most shorted stocks on Nasdaq with 25.06% of its float shares shorted, per data from Fintel. For reference, values above 10% are considered heavily shorted.

Similarly, Riot Platform’s 14.54% of float shares are shorted—an increase from 13.48% in May and Cipher Mining at 22.32%.

While the rest have between 5% to 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, shows that these addresses have reduced their holdings near a one-year low.

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

https://twitter.com/glassnode/status/1673635113261756416

Moreover, the miner holdings are still near a two-year low, which is likely due to low profitability for the most part of 2023.

The network’s total hashrate reached a new all-time high at the start of June, however, it has been dropping amid heatwaves in Texas. The dropping hashrate and increase in Bitcoin’s price above $30,000 is contributing toward increasing the profitability of running miners.

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

Notably, companies with mining farms in Texas such as Riot Blockchain can incur some losses due to the climate. However, it is likely that the company would have taken steps to hedge the heatwave risks as it is not the first time.

Related: Riot Blockchain’s Bitcoin mining productivity dropped 28% YOY amid record Texas heat

Nevertheless, despite the improvement in profitability, miners are unloading Bitcoins, 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 has yet to start.

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