Bitcoin miners are on the ropes.
This year has delivered a barrage of jabs and hooks that have left them bruised and bloodied.
A 76% drop in bitcoin’s price, scandals from reckless centralized platforms, a surge in energy prices, a Federal Reserve hell-bent on draining liquidity from capital markets…
Those are just a few headwinds that bitcoin miners have dealt with in 2022.
As a result, their share prices have been crushed. At the time of this writing, the top five bitcoin miners by market cap are down an average of 81% since the start of the year.
However, while investors have all but given up on these companies, we’ve identified a little-known catalyst that could spark their resurgence.
It’s a change that can significantly improve their financial performance, from their reported profits to the state of their balance sheets.
This catalyst may also kick off a surge in bitcoin buying by companies, both large and small.
Companies holding bitcoin for the long term go hand in hand with our Super Halving thesis we introduced to you last year.
The bitcoin halving is when the new supply of bitcoin is cut in half every four years. It’s hardwired into bitcoin’s programming code. So it’s 100% guaranteed to happen.
The Super Halving isn’t a code or program. Instead, it refers to bitcoin miners being able to stop selling their mined crypto to fund their operations.
Miners are the people who provide the computing power necessary to run the bitcoin blockchain. They solve complex equations to verify transactions and keep the network humming along.
The incentive for devoting their time and processing power is a daily bitcoin reward for their efforts.
Thanks to institutions embracing bitcoin, miners can access traditional lines of finance through equity raises and borrowing. This allows them to maintain ownership of the mined bitcoin on their balance sheets.
This will cut off the incoming market supply of new bitcoin… and with no new bitcoin hitting the markets, we expect prices to soar. That’s why we call it the Super Halving.
Our timing on the Super Halving was obviously off this year. But we still believe this catalyst will go a long way in repairing miner fundamentals and soaking up the supply of bitcoin in the market.
But an even greater tailwind is stirring… and when the market turns from bearish to bullish, it could push bitcoin – and bitcoin miners – to even greater highs.
An Accounting Loophole for Bitcoin
On October 24, the Financial Accounting Standards Board (FASB) recommended new standards that could be a new catalyst that helps increase bitcoin adoption.
FASB establishes the rules for how U.S. companies report their financial standing under generally accepted accounting practices (GAAP) – and more specifically, how companies should report bitcoin holdings on their financial statements.
Current guidance views crypto assets as indefinite, intangible assets on company balance sheets. This means when the price of the bitcoin drops below the company’s purchase price, the companies must lower the reported value of their BTC.
However, the companies can’t subsequently raise the value of their bitcoin if they rise again. In fact, they’re prohibited from raising the reported value of their cryptos once it’s lowered.
So even if bitcoin stages a spirited comeback, under the current policy, it will remain a black eye on balance sheets.
Plus, the companies must report an “impairment charge” on their income statement if their crypto value falls below their purchase price. They must record this as an operating expense, which lowers companies’ reported profits.
As a result of these standards, owning an asset like bitcoin has been a huge headache for companies… Because no matter how high the crypto soars, only the losses are accounted for.
But under the new policy, companies would account for crypto assets based on their fair value… Meaning companies report the crypto’s value based on its current level.
Plus, companies will no longer have to comply with the impairment charge requirement. Any change in the price of the crypto asset would not affect a company’s reported profits.
Bitcoin miners would be the most direct beneficiaries of this proposed change.
Impairment expenses have walloped bitcoin miner profits. In fact, the three largest bitcoin miners have recorded over $497 million in impairment expenses so far this year.
Those three miners earned over $680 million in revenue over that period. That means the impairment charges ate up 73% of revenue.
Now, we’re not suggesting that this prevented miners from posting an operating profit. They still had over $1 billion combined in operating expenses.
However, this policy change would remove a large headwind for these companies’ recorded profits.
Additionally, reporting bitcoin at its fair value would immediately create more transparency surrounding the financial health of bitcoin miners.
So as bitcoin rebounds from its lows, this proposed policy would boost the value of liquid assets on their balance sheets… And it would be more apparent to the market that their financial standing is getting healthier.
That’s good news for bitcoin miners… but the policy’s effects would also make bitcoin a more attractive asset for any company to hold on its balance sheet.
Many companies are still reluctant to hold bitcoin. This is partly due to bitcoin’s intense volatility. However, it’s also because of the accounting rules that have essentially forced companies to reflect the lowest value their bitcoin ever reached.
We’re not suggesting this ruling would suddenly make companies run to buy bitcoin. Investor sentiment is low right now.
But when sentiment turns positive and bitcoin inevitably rises, you’ll see more companies choosing to hold it.
Even if those companies don’t believe in the true value of bitcoin, they won’t turn down a chance to earn a positive return.
FASB is currently deliberating this decision and we will continue to monitor its progress.
There has been a chorus of calls from over 500 companies that have submitted requests for this change. The fact that FASB is deliberating it is a great sign it will pass.
It’s important to note this policy change would only apply to companies – miners or otherwise – that follow U.S. GAAP accounting principles.
This means it’ll apply to half of the 10 largest bitcoin miners on the market.
However, it’s a change that will go a long way in turning public sentiment toward bitcoin miners… and it may just be the catalyst for bitcoin miners to get off the ropes and begin gaining ground in 2023.
Analyst, Palm Beach Daily