Hedge funds raise bets against bitcoin miners

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Hedge funds have been increasing their short positions against shares of cryptocurrency miners, betting that more of them will hit the financial cap after the FTX exchange collapses.

With the price of bitcoin falling by nearly two-thirds this year and the cost of the energy miners need for their power-intensive computers rising sharply, hedge funds are betting that some companies’ business models are still far from viable.

Bearish investors are betting that Sam Bankman-Fried’s FTX implosion will further deepen the malaise of a corner of the cryptocurrency market that expanded rapidly last year, often on borrowed money, hoping to cash in on high cryptocurrency prices. tokens like bitcoin.

Miners, who use a network of powerful computers to solve cryptographic calculations in exchange for new tokens, face the constant need to update their technology and are also highly dependent on the price of the cryptocurrencies they sell.

“As cryptocurrency is trading much lower than where it was before, and they [os mineradores] have a lot of expenses, it’s not clear that they’re going to be able to make a consistent margin,” said Chris Crawford, chief investment officer at Crawford Fund Management in Boston, which manages a hedge fund for Eric Sturdza Investments and is short selling some cryptocurrency miners, that is, betting that prices will fall in the future.

Short holdings in US group Marathon Digital, one of the largest listed miners in the United States, surged again last month to more than 36% of outstanding shares in the weeks after the FTX collapse, according to Nasdaq data.

Last year, Marathon paid its former chief executive Merrick Okamoto nearly $220 million (R$1.16 billion) in stock. This was prompted by granting shares to him based on the company’s market capitalization, which is heavily influenced by the price of bitcoin. And in October of this year, it paid Okamoto $24 million (R$126.7 million) to settle a dispute over prior stock grants.

The company has repeatedly been loss-making. This year, it fell far short of its own production targets set last year, of mining 55 to 60 bitcoins a day, and forecasts of generating mining profits of between $86.5 million and $103.6 million ( BRL 547 million) per month.

Investors had already increased their stakes in Marathon last year and were rewarded with an 86% devaluation of the company’s shares.

The funds also more than doubled their bets against Stronghold Digital Mining – whose shares have already dropped 96% this year – to nearly 10% of shares since the start of the year.

The short stake in Greenidge Generation increased from less than 1% to 4.7%, while Hut 8 Mining and Riot Blockchain, the largest listed operator in the US, also attracted more attention from short sellers this year.

Already hit hard by the bear market for risky assets this year, cryptocurrency prices fell further last month following the dramatic bankruptcy of FTX, once valued at $32 billion and whose former chief executive, Sam Bankman- Fried, was arrested in the Bahamas this week after US government prosecutors filed criminal charges.

“Miner profitability is an issue that comes up every time bitcoin is down — and then perceived as an issue for all cryptocurrencies,” said Anders Kvamme Jensen, co-manager of fund AKJ Digital Assets.

“Bitcoin mining misses the whole point behind digital assets: after all, the point is to decouple from the traditional world and all its players, not go backwards camping with the power grid,” he added.

Translated by Luiz Roberto M. Gonçalves.

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