Bitcoin miners currently find themselves in an unprecedented squeeze within the network’s history. A recent report from Wintermute contends that passively awaiting the next bull market is no longer a viable strategy.
Wintermute asserts that miners must transform into infrastructure and treasury managers to successfully navigate to the next halving.
Jasper De Maere, an analyst at Wintermute, indicates that the present mining cycle is fundamentally different compared to those in 2018 and 2022. While Bitcoin’s design entails a halving of block rewards every four years, this cycle differs as the price has not similarly doubled, resulting in a contraction of miner revenues in real terms.
During this four-year epoch, Bitcoin has yielded only approximately 1.15x returns, significantly below the 10x to 20x multiples observed in earlier cycles.
In past cycles, substantial price appreciation masked numerous challenges, with miners relying on bull markets to compensate for weakened margins following each halving.
Currently, however, with the inclusion of institutions, ETFs, and corporate treasuries, Bitcoin behaves more like a traditional macro asset, making the prospect of explosive 20x returns less probable.
For miners who established their operations under the assumption of continuous hypergrowth, Wintermute suggests that they are now facing a regime change rather than merely a poor quarterly performance.
Margin Compression
Bitcoin mining operates under a straightforward cost structure centered around energy and computational power. This simplicity limits the options available for protecting profits when revenues decline. Wintermute’s analysis reveals that gross margins during this current epoch peaked at approximately 30%, a level that previously indicated the bottom during earlier bear markets, rather than the top.
Earlier epochs allowed miners to enjoy prolonged periods of 70% to 80% margins; presently, what are considered “good times” resemble prior stress events.
Transaction fees have also failed to provide a sufficient buffer. Although fee spikes associated with hype cycles and mempool congestion are observable, they are fleeting and rarely contribute more than a modest percentage to total miner revenues over time.
Wintermute notes that even with fee integration, the margin metrics for each cycle demonstrate little variance, particularly in the current epoch. This indicates that the protocol’s inherent “second revenue stream” has not served as a reliable safeguard.
Opportunities Arising from the AI Pivot
A potential solution gaining attention involves pivoting towards high-performance computing (HPC) and AI workloads. Major technology firms and AI startups are competing to secure power and data center capacity, preferring not to wait five to ten years for new grid connections and infrastructure development.
Miners, who already possess access to affordable energy and established sites, represent a logical shortcut for these companies.
Wintermute highlights that facilities previously valued at approximately $1 to $7 per watt for mining operations have transitioned to valuations nearing $18 per watt upon being repositioned for AI computing, aided by partnerships like HUT’s collaboration with Google and Anthropic.
Investors in public markets have responded positively, rewarding miners that launch credible AI initiatives with enhanced valuations and lower capital costs through equity and convertible debt.
However, it is important to recognize that not all miners possess the ideal location, balance sheet, or operational capacity to successfully evolve into data center businesses.
Leveraging Idle Bitcoin Holdings
Wintermute identifies a second, underutilized strategy: active balance sheet management. Collectively, miners hold nearly 1% of all Bitcoin, a reflection of the “HODL” strategy that prevailed in earlier cycles.
Concurrently, several public miners have been liquidating portions of their treasuries to address tighter margins and debt, with a few even depleting their holdings entirely.
Rather than allowing reserves to remain dormant until they are divested during a liquidity crisis, Wintermute advocates for miners to consider BTC as an actively managed asset. This “active” approach entails employing derivative strategies such as covered calls and cash-secured puts to generate yield on holdings, albeit with some exposure to market risk.
On the “passive” front, miners can allocate coins to on-chain lending markets, including a novel wrapped-BTC market on Wildcat that Wintermute has spotlighted, to earn interest income.
Wintermute concludes that while Bitcoin’s design continues to function effectively, the era of ease for miners has ended. Although difficulty levels may still adjust, they cannot counterbalance the issues of slower price growth, an underdeveloped fee market, and escalating energy costs that diminish every block reward. The AI pivot is poised to reshape the upper echelons of the industry, transforming certain miners into fully-fledged infrastructure companies.
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