Crypto was not exactly having a good year in 2022 yet nobody expected the scandal-ridden gauntlet running the industry has gone in the last few months. What can be said about the crypto economy in 2023 in uncertain times like this? More than one would think – with the right focus: the fundamentals.
Bitcoin Price is King
The determining factor for the crypto economy in 2023, as in previous years, will be – Bitcoin price. And here is where the industry underpinning the entirety of crypto comes into play: Bitcoin mining. A look at miner’s operating costs and profit margins, and their projections, forecasts a price in the range of US$18,000 – 25,000.
Sabre56 has a unique proprietary set of mining revenue data going back to 2011 – showing the close connection between Bitcoin price range and miners’ businesses. While we will see the occasional spike reaching USD30,000, over the next year permanently elevated prices beyond this threshold are unlikely.
One caveat is that the global economy, and geopolitics, always hold all imaginable kinds of wild cards. But from the pattern we have observed in the past, this path is the most likely route for 2023, on the back of a slow but steady increase in adoption globally.
The key driver of the Bitcoin price cycle is the halving event – to happen approximately in Q2 2024. The price movements of the last two years – since the 2020 halving – have been largely in line with what we saw between 2016-2020. Thus, we can expect a last spike to happen in the latter part of 2023, due to uncertainty in the run up to the halving.
From Gold Rush to Dog-Eat-Dog
After crypto’s speculative frenzy ended in early 2022, the second half of this year witnessed a wave of lenders and Bitcoin miners go out of business, and this market capitulation is set to continue into 2023 and contribute to a muted crypto economy.
In its wake, opportunities will lead to a natural and widespread consolidation of digital asset mining companies. Bankrupt miners like Celsius or Compute North – currently undergoing chapter 11 procedures – will virtually be ‘picked apart’ by more savvy players, with their assets to be separated and re-deployed more efficiently by their new owners.
Smart money entering the market and injecting funds will help struggling but not fundamentally bankrupt miners out of financial trouble – temporarily at least. If these companies heed the warning shot fired, they could be able to reduce excess leverage and return to a sustainable business model.
One strategic mistake many cryptocurrency miners are struggling with is the location of their facilities – Texas. The southern state has not lived up to its alleged status as ‘Mecca of Bitcoin mining’, a hype that developed following miners’ mass exodus from China and now is largely rebuked. So even if they manage to sort out their financial troubles, the costs to relocate will contribute to continued industry hardship in the mid-term.
Others will not survive these headwinds, and possible casualties include Riot Blockchain, Inc., Mawson, Iris Energy, and Marathon Digital Holdings. HIVE Blockchain Technologies has the advantage of being debt-free – while at the same time lacking all mining capability. Hut 8 Mining looks strong in moving away from Bitcoin mining and into high performance computing. However, in the absence of clear proof they will be able to adhere to high ESG standards, their value proposition is limited.
Blockware Mining and Stronghold Digital Mining, on the other hand, face reduced growth to the point of stagnation. For them, the question is if liquidation will be the most profitable path, as they can sell their devalued, but still functional operations to larger miners with the financial wherewithal and appetite.
With unexpected solidity, Compass will likely be able to persevere until the next bull run, although with limited growth and consolidation of operations. Nonetheless, new management must sort out operational difficulties and delays in delivery, otherwise risk being left behind during their recovery phase.
The Robber Barons of Crypto Mining
Who will be the big winners? Emerging players to watch are Cleanspark, Crusoe, and Akron. These companies have managed their cash reserves expertly and can deploy capital in a market environment ripe with opportunity. They keep to the bonmot attributed to banking legend Lord Rothschild, “buy when there’s blood in the streets.” Provided these key players of the consolidation can keep their cool in a turbulent industry, they have good chances for exponential growth in the coming years.
From a 10,000-feet perspective, the digital asset mining industry is closely bound to wider crypto market adoption, as it provides the physical infrastructure for blockchain solutions. General market turmoil, geopolitical tensions, and the loss of trust caused by the causa FTX will hamper the speed of achieving a more balanced and thoughtful regulatory framework for crypto in 2023, and thus drive general adoption. This will be exacerbated if a recession is allowed to take hold.
In the end, however, the digital asset mining industry is on track to become a mature, serious industry. Operating data centres and hosting computing power in highly efficient, sustainable, and scalable facilities has use cases for a variety of industries. The crypto economy is just today’s driving force.
These trying times, which will continue well into next year, will determine the key industry players of the future – those with a proven track record and the ability to deliver, like Sabre56. It will be exciting to see which companies emerge as the Robber Barons of crypto mining.