May 28 - With mining rewards halved, mining difficulty

elevated and the shiny new bitcoin exchange-traded funds (ETFs)

stealing investor capital, it's been a tough year for bitcoin

miners.

Marathon Digital ( MARA ) and Riot Platforms ( RIOT ), among

the biggest U.S.-listed miners, have dropped about 10% and 33%

respectively so far this year, even as bitcoin has climbed 60%

year-to-date to $67,859, after hitting a record level in March.

Mining stocks closely track bitcoin as a higher price boosts

their profits margins.

However, market analysts said the launch of the 11 bitcoin

ETFs at the start of this year prompted some investors to rotate

out of mining stocks - earlier among the few stocks offering

exposure to bitcoin - in favour of the ETFs that track the spot

price.

"There's been a lot of institutional money flow into the

ETFs as opposed to using the miners as a proxy for exposure to

bitcoin," said Pascal St-Jean, president at the global digital

asset investment manager 3iQ.

Power-hungry miners compete to solve complex mathematical

puzzles to build the bitcoin blockchain and earn rewards in the

form of new bitcoin.

Their rewards were halved in April to 3.26 bitcoin per block

in a technical adjustment that occurs roughly every four years,

designed to reduce the rate at which new bitcoins are created.

As a result, miners revenue per transaction has fallen from

over $192 in March to just $60 currently, the lowest since last

September, as per Blockchain.com data.

Bitcoin's network difficulty - a measure of how difficult it

is to mine one bitcoin block - has climbed fairly steadily since

the start of the year, as per Blockchain.com data, touching an

all-time high in early May.

"Miners have to work hard to increase their efficiency,

which typically involves spending on better hardware," said

David Morrison, analyst at brokerage Trade Nation.

The 14 U.S.-listed miners, which account for 23% of the

global bitcoin mining power, are better positioned to take

advantage of the new environment, J.P.Morgan said in May.

This is mainly due to greater access to funding and, in

particular, equity financing which "helps them to scale their

operations and invest into more efficient equipment," J.P.Morgan

analysts said.

The listed bitcoin miners raised more than $3 billion in

equity capital in the first quarter of 2024, the most in the

past two years, J.P.Morgan added.

To rein in energy costs some players are resorting to moving

their operations to countries where energy prices are more

affordable, and governments friendlier to digital assets.

"We are less optimistic about the U.S. because of the ...

potential risks like tax discussions," said Youwei Yang, chief

economist at Bit Mining, who noted new establishments in

Ethiopia.

M&A AND DATA CENTRE EXPANSION

As their revenue falls, market analysts expect to see more

mergers among bitcoin miners, where those with more capital

target less efficient miners to stay competitive.

CleanSpark ( CLSK ) has purchased more mining rigs and acquired

smaller mining facilities at the beginning of the year.

"The market remains bifurcated with companies that have

access to capital in a position to grow, while those less

fortunate most likely selling owing to reduced revenues post the

halving," said Gregory Lewis, analyst at brokerage BTIG that

covers the U.S.-listed bitcoin miners.

In search of more revenue, some crypto mining companies are

hitching their wagon to the artificial intelligence craze,

taking advantage of their existing stashes of energy hungry

computing power to meet the needs of AI systems.

Miners such as Bit Digital ( BTBT ), Hut8 Iris

Energy ( IREN ) and Core Scientific ( CORZ ) have ventured into

AI services or high-performance computing.

"There are just too many bitcoin mining operators operating

subscale, while demand for generative AI and computation dense

data centers continues to grow and create competition for land

and power," said Bernstein analyst Gautam Chhugani said.