JPMorgan Reports Declining Profitability Amid Rising Hashrate

According to a research report published by Wall Street bank JPMorgan on Thursday, Bitcoin mining companies that have diversified their business into high-performance computing (HPC) have underperformed Bitcoin itself for the third consecutive month. This trend comes amid declining mining profitability in April due to a significant increase in the network hashrate and intensifying competition. The persistent underperformance raises questions about the effectiveness of the HPC diversification strategy that many mining companies have adopted to reduce their dependence on cryptocurrency market volatility.

Performance Gap Between Miners and Bitcoin

JPMorgan analysts Reginald Smith and Charles Pearce note in their report: “We note miners with HPC exposure (IREN, RIOT, WULF, HUT) underperformed BTC performance for the third consecutive month.” This trend is particularly interesting because many mining companies have actively invested in HPC in recent years, including providing computational power for the rapidly growing artificial intelligence (AI) market.

The diversification strategy into high-performance computing was designed to address several key challenges facing mining companies: volatile mining revenues, dependence on Bitcoin price, and periodic profitability declines following halvings. However, JPMorgan’s data calls into question the effectiveness of this strategy, at least in the short term.

“The contradictory results of companies with HPC exposure may indicate that the market is not fully convinced of their ability to effectively compete in the highly competitive high-performance computing market,” comments Michael Karpov, a cryptocurrency market analyst. “Success in the HPC segment requires a completely different set of competencies and technologies than Bitcoin mining, and not all companies can successfully make this transition.”

Declining Mining Profitability Amid Rising Hashrate

According to JPMorgan, one of the main reasons for the deteriorating performance of mining companies was the decline in mining profitability in April against the backdrop of a significant increase in the network hashrate.

The report states that daily block reward revenue declined 6% compared to March. At the same time, the monthly average hashrate increased by approximately 56 exahashes per second (EH/s), or 6% month-on-month, reaching 872 EH/s in April.

“This was the second largest sequential increase in the monthly average network hashrate on record,” the authors noted. The hashrate reflects the total computational power used to mine and process transactions on a proof-of-work blockchain and serves as an indicator of industry competition and mining difficulty.

Such a significant increase in hashrate indicates intensifying competition among miners, which inevitably leads to reduced profitability for each individual network participant. This is particularly relevant in the context of the recent Bitcoin halving, which cut the reward for mining a block in half.

“We’re observing a classic ‘arms race’ scenario in Bitcoin mining,” explains Elena Sokolova, Research Director at a blockchain consulting company. “Miners continue to increase computational power even in conditions of declining profitability, striving to maintain their share of the network’s total hashrate. This creates a paradoxical situation where growth of the industry as a whole does not lead to improved financial performance for individual companies.”

Individual Company Results and Market Capitalization

Despite the general trend of miners lagging behind Bitcoin, JPMorgan notes that the total market cap of the 13 U.S.-listed mining stocks that the bank tracks increased 12% from March. This indicates a certain optimism among investors regarding the prospects of the mining industry as a whole, despite short-term profitability issues.

Greenidge (GREE) stands out particularly, having demonstrated an impressive 46% gain in April. This result sharply contrasts with the general trend among miners with HPC exposure.

“Greenidge’s success may be related to their specific business model or strategic decisions that allowed them to better adapt to current market conditions,” suggests Alexander Petrov, Managing Partner of an investment fund specializing in cryptocurrency projects. “It may also indicate that the market is beginning to take a more selective approach to evaluating mining companies, paying attention to their specific strategies and operational efficiency, rather than viewing them as a homogeneous group.”

Outlook for Miners and Diversification Strategy

The current situation presents Bitcoin miners with a difficult strategic choice. On one hand, JPMorgan’s data indicates that diversification into high-performance computing is not yet yielding the expected results in terms of increasing share value. On the other hand, the continuing growth in hashrate and decline in mining profitability after the halving underscore the need to seek alternative revenue sources.

“Mining companies are in a transitional period, and the temporary lag of their stocks behind Bitcoin does not necessarily mean that the diversification strategy into HPC is flawed in the long term,” notes Irina Volkova, a professor of finance specializing in cryptocurrency markets. “Developing the direction of high-performance computing and AI requires time and significant investment, but ultimately could create a more sustainable business model with less volatile revenues.”

Some experts also point to the possibility that the market has not yet fully valued the potential synergy between Bitcoin mining and providing HPC services. Both activities require access to significant computational power and cheap electricity, which theoretically could create operational advantages for companies working in both directions.

“In the long term, mining companies with successful diversification strategies may find themselves in a winning position, especially if the AI and high-performance computing market continues its exponential growth,” believes Dmitry Soloviev, CTO of a company developing mining infrastructure. “However, in the short term, they will have to face the challenge of convincing investors of the viability of this strategy against the backdrop of declining mining profitability and growing competition in both sectors.”

The JPMorgan report highlights the challenges facing mining companies in current market conditions but also points to the ongoing evolution of business models in this sector. The ability of miners to adapt to changing conditions, effectively integrate new business directions, and convince investors of the viability of their strategies will determine their success in the post-halving period and in conditions of growing competition.