JPMorgan Warns of Slowing Bitcoin Mining Growth as Profitability Dips

Bitcoin miners faced a challenging month so far in September, with stocks declining due to a drop in profitability and increased competition as the network’s hashrate rose. Companies like Cathedra Bitcoin have shifted strategies and are moving away from mining to focus on increasing Bitcoin holdings, while big players like MicroStrategy continue to raise funds through debt offerings to buy even more Bitcoin. There is also still a lot of market uncertainty about what BTC’s next move will be as analysts are divided on how upcoming rate cuts and political developments will impact Bitcoin’s price.

Bitcoin Miners Face Tough Month

Bitcoin mining stocks experienced a decline during the first half of September, as the price of BTC remained below the $60,000 mark and the network’s hashrate increased, according to a report by JPMorgan. The bank noted that the hashrate, which measures the total computational power that is used to mine and process transactions on the Bitcoin network, has risen by 4% so far this month, reaching levels seen before the last halving event. This rise in hashrate suggests increased competition in the mining industry.

Marathon Digital’s stock price over the past month (Source: Google Finance)

The hashprice, which reflects the daily profitability of miners, dropped by 2% in September and is now more than 50% lower than it was before the halving. JPMorgan analysts warned that the combination of declining profitability and seasonal factors could lead to a slowdown in hashrate growth in the near term.

The report also revealed that U.S.-listed miners have increased their share of the network hashrate for the fifth consecutive month, reaching a record high of 26.7%. Despite this growth in market share, the total market capitalization of the fourteen U.S.-listed Bitcoin mining companies tracked by the bank dropped by 3% since the end of August, falling to just below $20 billion. Among the individual miners, Hut 8 saw an 11% gain, while CleanSpark underperformed with a 12% decline.

Additionally, the report shared that publicly listed U.S. miners are currently trading at a level just under twice their proportional share of the four-year block reward opportunity, compared to an average of 1.6 times since January of 2022. Another Wall Street bank, Jefferies, issued a similar warning last week which warned that September could continue to be a challenging month for Bitcoin miners.

Cathedra Bitcoin Moves Away from Mining

The struggles that were pointed out by JP Morgan are already causing some companies to move away from Bitcoin mining. Canadian Bitcoin miner Cathedra Bitcoin is shifting its focus from mining operations to buying Bitcoin on the open market, following the strategy of firms like MicroStrategy. 

In a Sept. 16 memo, Cathedra shared some details about its new plan to allocate all capital decisions toward increasing its Bitcoin reserves on a per share basis, a key metric for its largest shareholders. The company acknowledged that Bitcoin mining did not deliver sufficient shareholder value, and shared that nine of the ten largest Bitcoin miners by market cap now hold less Bitcoin per share than they did three years ago. Meanwhile, companies like MicroStrategy have adopted policies that are aimed at increasing Bitcoin per share and have been rewarded by equity markets.

While Cathedra will continue some of its mining operations, it plans to develop data operating centers that generate predictable cash flows, which will be used to buy more Bitcoin. The company also plans to issue equity, debt, or hybrid securities and borrow against its balance sheet assets to increase its Bitcoin holdings. Cathedra is very confident that its recent merger with computing infrastructure firm Kungsleden will help it boost Bitcoin on a per share basis.

Currently, Cathedra holds 23 Bitcoin, which is worth close to $2.5 million. This makes it the 45th largest corporate Bitcoin holder according to Bitcoin Treasuries data. Despite having a market cap of nearly $20 million on Canada’s TSX Venture Exchange, the firm has seen its share price drop by 91% since its peak in late 2021, when Bitcoin was nearing its all-time high. 

Cathedra Bitcoin share price over time (Source: Google Finance)

Despite the decline, Cathedra is still  optimistic about its long-term Bitcoin strategy, stating that it sees Bitcoin as poised to become a dominant global reserve asset over the next several decades. Cathedra was founded in 2017, and the company is based in Vancouver, British Columbia.

MicroStrategy Launches Another Debt Offering

Meanwhile, MicroStrategy announced its third debt offering of 2024, aiming to raise $700 million through the issuance of convertible senior notes due in 2028. The company plans to use the proceeds to pay off $500 million in existing senior secured notes and purchase additional Bitcoin. Any of the remaining funds will be allocated for general corporate purposes.

The notes will be unsecured and will start accruing interest in March of 2025. The offering will also only be limited to qualified institutional buyers. 

This decision from MicroStrategy follows two previous debt offerings earlier in the year: one in March raising $700 million and another in June for $500 million. Both were aimed at supporting the company’s Bitcoin acquisition strategy. MicroStrategy is one of the largest public holders of Bitcoin, and holds 244,800 BTC. This is worth about close to $14 billion.

The company’s huge Bitcoin holdings have impacted its financial results a lot. It reported a net loss of $102.6 million in the second quarter of 2024, compared to a net income of $22.2 million in the same quarter last year. The loss was mainly due to $180.1 million in digital asset impairment, a consequence of Bitcoin’s price volatility. 

MicroStartegy’s stock price over the past 12 months (Source: Google Finance)

Despite concerns from analysts regarding the company’s Bitcoin exposure, MicroStrategy’s stock has performed quite well, and increased by almost 295% over the past 12 months. On Sept. 16, the stock price reached $134.

Bitcoin Faces Uncertainty Ahead

For now, Bitcoin’s price outlook is still uncertain as it could drop as low as $53,000 or climb as high as $65,000 after the Federal Reserve’s rate decision on Sept. 18, according to Zerocap, an Australian crypto trading firm. Jonathan de Wet, Zerocap’s chief investment officer, shared that the market is currently pricing in a 62% chance of the Fed cutting rates by at least 50 basis points (0.5%), which already contributed to Bitcoin briefly touching $60,000 on Sept. 13.

Bitcoin 7d chart (Source: CoinMarketCap)

De Wet pointed out the difficulty in predicting Bitcoin’s direction due to the uncertainty surrounding rate cuts and the added complexity of the upcoming U.S. election. He believes that Bitcoin could target $53,000 on the downside after recent range lows or aim for $65,000 if it breaks higher from a descending wedge pattern. He also mentioned that risk-on conditions might lead to short-term positive sentiment, but the outcome is still very hard to predict until the election draws nearer.

Zerocap believes the Fed is likely to cut rates by 50 basis points, as opposed to a more conservative 25 basis points. This could signal the start of a rate-cutting cycle, which could be very supportive of risk assets like Bitcoin into the year’s end.

However, opinions on the rate cuts’ impact are divided among analysts. While rate cuts are usually seen as bullish for risk sectors, allowing cheaper borrowing and encouraging investment, some analysts warn that previous rate cuts in 2001 and 2007 preceded recessions. 

De Wet also pointed out that the upcoming U.S. election is a major source of uncertainty in the market, with investors closely watching how political developments might affect the crypto sector. He believes that if the odds shift back toward the Republicans, it could influence the market’s outlook on banks, energy, and Bitcoin.