Hedge funds raise bets against bitcoin miners

Hedge funds have been upping their short positions against shares of cryptocurrency miners, betting that more will go to the financial brink after the collapse of the FTX exchange.

With the bitcoin price down by nearly two-thirds this year and the cost of the power that miners require to fuel their energy-intensive computers having risen sharply, hedge funds are wagering that some companies’ business models are still far from viable.

Bearish investors have been betting that the implosion of Sam Bankman-Fried’s FTX will further deepen the malaise for a corner of the crypto market that expanded rapidly last year, often with borrowed money, in the hope of cashing in on high prices of tokens like bitcoin.

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

“Because crypto is trading vastly below where it was before, and they [miners] have a lot of expenses, it’s not clear they will ever be able to turn a consistent margin,” said Chris Crawford, chief investment officer at Crawford Fund Management in Boston, which runs a hedge fund for Eric Sturdza Investments and has been shorting some crypto miners. Shorting means betting that prices in the future will be lower.

Short interest in US group Marathon Digital, one of the largest US listed miners, rose sharply again last month to more than 36 per cent of the outstanding shares in the weeks after FTX collapsed, according to data from Nasdaq.

Last year Marathon paid its former chief executive Merrick Okamoto just under $220mn in stock. This was driven by awarding him shares based on the company’s market capitalisation, which is heavily influenced by the bitcoin price. And in October this year it paid him $24mn to settle a dispute over previous stock awards.

The company has repeatedly been lossmaking. This year it has fallen well short of its own production targets set last year of mining 55 to 60 bitcoin a day and predictions of generating mining profits of between $86.5mn and $103.6mn a month.

Investors had already swelled their bets on Marathon in the past year and have been rewarded as the company’s shares have plummeted 86 per cent.

Funds have also more than doubled their bets against Stronghold Digital Mining — whose shares are already down 96 per cent this year — to nearly 10 per cent of the shares since the start of the year.

Short interest in Greenidge Generation has risen from less than 1 per cent to 4.7 per cent, while Hut 8 Mining and Riot Blockchain, the largest US listed operator, have also attracted more attention from short sellers this year.

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

“The profitability of miners is a discussion that comes up every time bitcoin is down — and then perceived as a problem for all crypto,” said Anders Kvamme Jensen, co-fund manager of the AKJ Digital Assets fund.

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

laurence.fletcher@ft.com