- Bitcoin mining stocks have been big winners over the past year benefiting from the bull market in cryptocurrencies.
- The industry is quickly evolving with a profitable business model at current bitcoin prices.
- The 12 bitcoin mining stocks we're trading and where we see the value.
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Bitcoin mining has emerged as a vibrant new industry with several stocks in the segment benefiting from climbing cryptocurrency prices. The price of bitcoin (BTC-USD) near $60k is up over 100% just year-to-date with several tailwinds suggesting there is more upside ahead. Themes like the growing recognition of crypto among institutional investors as an alternative asset class along with early steps by major corporations to accept crypto as payments are adding to confidence that bitcoin is here to stay.
We sense that crypto miners remain poorly understood with many investors simply missing out due to some outdated dogma. The reality is that companies are generating significant cash flows and revenues in what is an exciting growth story. Recognizing that the main risk remains the direct exposure to the price of bitcoin which is expected to remain volatile, we are bullish on several mining stocks that we expect to outperform the price of bitcoin to the upside.
What is Bitcoin Mining
Bitcoin mining as a business model is relatively simple. The companies acquire and operate the specialized computer hardware equipment with application-specific integrated circuits "ASIC". The setup is typically installed in a warehouse or data center integrated into a system that continuously works to solve the bitcoin code to earn the network reward for the verified blockchain transactions.
Currently, the global bitcoin network awards 6.25 BTC per block, and each block is solved on average every 10 minutes as a protocol to the decentralized system. Over the course of a year, approximately 52,560 blocks are awarded on the network meaning 328,500 BTC are newly minted. At a market price of $55,000 per BTC, $18.1 billion are up for grabs.
As it relates to miners, the higher its computing power or "hash rate", the larger the proportion of each new block award the company can receive typically as a fraction of a bitcoin. Marathon Digital Holdings Inc (MARA), one of the largest publicly traded bitcoin miners my market cap, offers a good infographic explaining the concept in their recent investor presentation.
(source Marathon Digital)
The other side of the equation is the cost of production. The mining companies need to acquire the mining rigs which are in high demand. Operating the infrastructure generates a significant cost of electricity which has driven a trend by mining companies to establish facilities near low-cost power regions or source energy supplies directly. Some miners are even building their own generation facilities a focus on renewable clean energy as a response to concerns regarding the broader carbon footprint of the process.
The race in the industry right now is to acquire as many mining rigs as possible to increase production capacity through a higher hash rate. Canaan Inc. (CAN) and Ebang International Holdings Inc (EBON) are two key suppliers to the industry that have specialized in offering bitcoin and cryptocurrency-specific mining equipment with ASIC chips. Privately-held and China-based 'Bitmain Technologies Inc' is the largest industry supplier with its top-of-the-line 'Antminer S19' line recognized for efficiency.
A challenge right now is that most off-the-shelf hardware is currently sold out and upcoming bulk production from the major manufacturers already under contract. This means that there is a bottleneck for miners to materially expand production in the near term. It's worth mentioning that more basic hardware and older or less optimal systems can still mine bitcoins although miners are focusing on power efficiency to improve financial margins being more powerful machines that use less electricity.
There's Real Cash Flow and Earnings Potential
The main point here is that bitcoin mining in the current pricing environment is highly profitable. Looking at the Antminer S19j specifications pictured above, the unit has a hash rate capacity of 90TH/s "tera hash" with a specified 3,100 watts on-the-wall power consumption. Assuming a cost per KW/h of electricity at $0.05, which is reasonable for industrial users in several U.S. states, widely available bitcoin mining profit calculators online show that his single piece of hardware can generate a profit of approximately $30 per day at a bitcoin price of $55k taking into account average electricity costs. Over the course of a year, that $30 per day translates to an estimated gross profit of $10,950 would effectively pay back the $5,017 list price of the hardware equipment from Bitmain in under 6 months with is a compelling proposition.
To get a sense of the scale the mining companies are going for, Marathon Digital in December announced a purchase of 70,000 of these machines in a contract worth $170 million although the full delivery is expected in batches through 2022. The company believes it can achieve an average production cost of $4,451 per BTC including a contracted electricity rate of $0.028/kWh through a partnership with a renewable energy company. Based on company estimates, if all the machines purchased were deployed today, Marathon would be mining 55-60 bitcoins per day which corresponds to over $1.2 billion in annualized revenue.
The economics are similar for other bitcoin mining stocks in the industry, although the calculations are a bit more complicated when considering the bitcoin network hash rate is expected to continuously climb over time. As processing power is added to the network with more mining hardware going online, the difficulty rate increases essentially diluting each miner's existing proportion of the bitcoin reward blocks. Effectively the "gross profit" will tend to decreases at a constant bitcoin price.
In 2020, the bitcoin hash rate climbed by about 50% as a function of more miners joining the network. Nevertheless, the current breakeven for the industry is estimated at a BTC price under $10,000 depending on the electrical rates suggesting there is a margin of safety in the industry where bitcoin mining makes sense.
How to Analyze Crypto Mining Stocks
For bitcoin miners, the key metric to follow is each company's hash rate capacity. From the chart above, the current global bitcoin network hash rate is 162.23 million TH/s which can be converted to 162,230 PH/s or 162.23 EH/s. These are simply different denominations of standard hashing computation power on the bitcoin network. 1 EH/s representing -one quintillion hashes per second equals 1,000 PH/s or -one thousand quadrillion hashes per second.
The companies are commonly disclosing either their PH/s "petahash per second" or EH/s "exahash per second" as a standard unit of measurement representing the proportion of the bitcoin mining network each company is responsible for. In this regard, regardless of how many mining machines each company is running, with different models and specifications, the total hash rate implies a current level of bitcoin production and corresponding revenue in dollar terms.
While Marathon Digital is now the most valuable publicly traded bitcoin miner with a market cap of $5.4 billion, the company is not the largest in terms of current production. That distinction goes to Bit Digital Inc (BTBT) which last announced a hash rate of 2,453.5 PH/s, representing about 1.5% of global bitcoin mining network capacity.
From there, at a given market price of bitcoin and the current network hash rate, we can calculate a corresponding approximate revenue run rate. What we find is that the market is pricing the various bitcoin mining stocks through a variety of factors that include:
- Existing hash rate
- Announced purchases for mining machine deliveries (future hash rate).
- Bitcoins/ digital currencies on their balance sheet (treasury positions).
- Electricity generation partnerships/ power purchase agreements
- Operating jurisdiction (China/US/Europe)
- Expansion strategy.
- Ancillary businesses.
- Corporate governance visibility.
How 12 Crypto Mining Stocks Rank
Today's we're looking at 12 bitcoin mining stocks that representative of the industry in the stock market. The group is diverse with several companies at different stages of deploying their mining operations that have resulted in a wide range of valuations. The table below highlights each company's last reported deployed bitcoin mining hash rate along with announced future hash rate capacity expectations. Each company's balance sheet bitcoin holdings data is also included if available.
Note that the list is not meant to be exhaustive. The "crypto" stocks segment includes many other companies focused on broader blockchain technologies and services along with some companies that only recently announced an intention to begin bitcoin mining.
(source: hash rate data from recent press releases, table by BOOX Research)
Considering the price of bitcoin has climbed by over 500% from under $10,000 back in October 2020 to a current price near $60,000, the performance of bitcoin miners has been even more impressive. From the group above, the average stock has returned about 1,400% since October and even more over the past year. Indeed, 2020 was a breakout year for bitcoin mining with a bullish case now being that the industry is just getting started.
Marathon Digital has been the biggest winner as the stock is up by over 2,760% in the last 6-months. The U.S.-based company has taken an aggressive expansion approach by announcing the largest investment towards bitcoin mining machines among any publicly traded miners. Riot Blockchain Inc (RIOT) with a market cap of $4.8 billion has also been a big winner up over 2,000% in the last 6-months.
What we are seeing is the miners are being rewarded for their production growth outlook in the context of rising bitcoin prices. While Marathon Digital's current capacity last reported at 710 PH/s (0.71EH/s) is on the lower end compared to the other in the industry. The attraction in MARA is the anticipation of the company deploying 10,370 PH/s in hash rate capacity by Q1 2022 which represents about 6.4% of the global bitcoin network at the current difficulty which is nearly 3x larger than any other company has currently announced. RIOT expects to increase capacity from a current 1,300 PH/s to 4,000 by the end of this year, also reflecting a well-capitalized expansion strategy.
Value in Bitcoin Miners
While MARA and RIOT as the two most valuable bitcoin mining companies have compelling growth outlooks, we also see value in some of the smaller bitcoin mining names. The table below ranks the bitcoin mining stocks in terms of their current hash rate capacity and annualized revenue run rates against their market value to establish a price to sales multiple.
(source: data sourced from company press releases/ table by BOOX Research)
Bit Digital with a market cap of $791 million stands out as trading at just 2.9x the value of its current bitcoin mining capacity. Assuming a constant bitcoin price of $55,000 and the current bitcoin network difficulty level of 162,230 PH/s, Bit Digital's 2,453 PH/s hash rate corresponds to 1.51% of the current bitcoin network. The company mined 427.9 bitcoin in February which puts it on track to receive approximately 4,967 bitcoins over a full year at its current hash rate.
One explanation for why Bit Digital trades at such a discount to the peer group is that the company maintains operations in China which is seen as a high-risk jurisdiction for bitcoin with an uncertain regulatory environment. In March, the Chinese government banned bitcoin mining from the Inner Mongolia region citing power consumption concerns effective later this month. SOS Limited Inc (SOS) is another bitcoin miner with operations in China that has faced questions regarding its operations in China.
Bit Digital addressed the situation in its annual report explaining it is in the process of migrating the infrastructure to avoid disruptions. Notably, the company is also shifting a larger portion of its operation to the United States with a current facility in Texas and Georgia. Nevertheless, the geographic and regulatory risk may explain what otherwise appears to be a depressed valuation. That said, we are bullish on BTBT, and view its valuation as simply too cheap to ignore.
Bitfarms Limited (BFARF) and Digihost Technology Inc (HSSHF) benefit from much more attractive jurisdictions with operations based out of Canada. Both stocks are trading at a 3.5x price to sales multiple utilizing the same analysis technique which we believe is compelling here.
At the other end, it can be said that Marathon Digital is trading at a price to sales multiple of 70.9x considering the annualized run rate of the 102.3 bitcoins it mined in March. Hive Blockchain Technologies Inc (HVBTF) and RIOT each trade at a current run-rate price to sales multiple of 57x and 37x by our estimates. Hive Blockchain is primarily focused on mining Ethereum (ETH-USD) cryptocurrency but has more recently taken steps to expanded its bitcoin mining capacity. Our price multiple for Hive only considers its BTC capacity, recognizing there is significant value in the broader operation.
Growth In Bitcoin Miners
Taking our analysis a step further to consider the future announced hash rate capacity and corresponding revenue potential, we calculate a "forward price to sales multiple". For Marathon Digital, assuming the company can reach 10,370 PH/s in hash rate capacity by Q1 2022, that level would be able to mine approximately 21,998 bitcoins over a full year and represent $1.2 billion in revenue at a bitcoin price of $55,000 and current network difficulty. By this measure, shares of MARA are trading at a more reasonable forward price to sales multiple of 4.9x looking ahead towards 2022.
(source: data sourced from company press releases/ table by BOOX Research)
The9 Limited (NCTY) is another stock that stands out as it expects to expand capacity to 3,558 PH/s by Q3 of 2022 from a current 693 PH/s representing an estimated forward price to sales multiple of just 0.9x. The main consideration here is that the company has been pushing a series of equity offerings to fund the purchase of the mining rigs which skews this valuation metric. Nevertheless, the potential for The9 to generate $396 million in revenue at its future hash rate capacity is significant against a current market cap of just $364 million.
A case can be made that miners like DMG Blockchain Solutions (OTCQB:DMGGF) and Bitfarms Limited each with a forward price to sales multiple of 1.1x and 1.4x, along with BTBT and NCTY deserve a closer look in the context of the bullish sentiment across the broader crypto sector. At the end of the day, bitcoin is a commodity, and the "brand" of which mining company produces it doesn't matter. While the market has thus far chosen MARA as the torchbearer for the industry, we are more bullish on the smaller miners that can benefit if their valuation spreads converge higher with a multiples expansion.
(source: DMG Blockchain Solutions)
A recent development has been scrutiny towards the power consumption of the industry forcing miners to seek clean energy and renewable electricity sources. We expect the miners that can ramp up production while utilizing environmentally conscious energy sources can be rewarded by the market with a higher growth premium. DMG Blockchain, Bitfarms, and CleanSpark Inc (CLSK) are each building their own power-generating infrastructure.
Finally, it's worth mentioning that the various bitcoin mining companies have accumulated significant treasury holdings of bitcoin and other digital assets. A pattern we observe is that the miners with relatively large treasury holdings are getting a premium in the market as it represents some level of intrinsic value.
Hut 8 Mining Corp (HUTMF) last reported 3,233 BTC on its balance sheet representing nearly $190 million, or roughly 20% of the stocks' current $920 million market value. Backing out the BTC position from the balance sheet, the stock is trading at a 5x multiple on its future hash rate capacity value of 1,300 PH/s.
(source: Hut 8 Mining)
Risks To Consider
Our key takeaway here is that bitcoin mining is a profitable business at current market pricing levels and the industry is quickly maturing. Miners are evolving into major corporations that are building up a long-term strategy.
It goes without saying that the main risk in trading bitcoin mining stocks is the price of bitcoin price which is expected to remain volatile. This remains a high-risk industry that requires both a long-term outlook and the price of bitcoin to at least remain elevated. A significant selloff in bitcoin below $30,000 and an extended period at depressed prices would likely be significantly bearish for the group of miners compared to the current level and force a reassessment of the long-term outlook. Many of the stocks we referenced above are small-caps or trade over-the-counter which adds to their speculative nature.
Be aware of potential regulatory challenges to bitcoin and other cryptocurrencies which could limit the appeal of the asset class as an investment. Last month, it was reported that the country of India is considering an outright ban on holding or trading cryptocurrencies citing concerns related to financial system stability. While not confirmed and still up for debate, a finalized measure in India could set the tone for other countries to follow.
Investors interested in any bitcoin mining stock should only consider a small position in the context of a diversified portfolio. We also recommend investors average into trades over days and weeks to secure a low-cost basis by adding gradually to any weakness.
There's no secret here other than recognizing that if the price of BTC is going to continue climbing higher, the bitcoin mining stocks have significant upside. In a scenario where the price of bitcoin takes a leg higher towards $75,000 or beyond by the end of the year, the revenue potential can balance out some of the hash rate difficultly increases as the bullish case. In the near term, the goal for miners is to grow their own hash rate faster than the overall network to stay ahead of the curve. A rising price of BTC also allows the economics to maintain a positive net present value.
We presented a simple price to sales valuation technique based on each company's hash rate that we believe can serve as a good starting point for further due diligence. The questions investors should be asking are how credible each company's management team is and how the growth strategy is being funded. Monitoring points in the upcoming quarters include each company's update on mining capacity and realized production level.
Overall, we are bullish on the group with a view that a rising tide can carry all boats. A breakout in BTC above $60k would likely support higher valuations across the industry.
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This article was written by
Dan Victor, CFA is a market professional with more than 15 years of investment management experience across major financial institutions in research, strategy, and trading roles.
Dan leads the investing group Conviction Dossier, where his focus is on helping investors stay ahead of market trends and inflection points. Dan’s investing vehicles of choice are growth stocks, tactical exchange-traded funds, and option spreads. He shares model portfolios and research to help investors make better decisions, via his Investing Group’s active chat room.
Analyst’s Disclosure: I am/we are long BTBT, HSSHF, BFARF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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