Bitfarms Stands To Gain From An Upcoming Nasdaq Uplisting

Summary

• Bitfarms is one of the top Bitcoin mining stocks.
• The OTC miners trade at a discount to their listed competitors.
• I believe Bitfarms will be the first to benefit from an uplisting catalyst.

Investment Thesis

While Bitfarms Ltd. (BFARF) shares have seen significant appreciation over the past several months they still trade at a substantial discount to their NASDAQ listed peers. A pending uplisting to the NASDAQ will lead to substantial further gains.

This is my third in a series of articles on the publicly traded Bitcoin (BTC-USD) miners. The most visible names in the industry are Marathon Digital Holdings (MARA) and Riot Blockchain (RIOT), both listed on the NASDAQ. I have articles under development on a number of other crypto mining stocks including Argo Blockchain (OTCPK:ARBKF), Bitfarms, HIVE Blockchain (HVBTF), and Hut 8 Mining (HUTMF). These latter four names trade either on the Toronto Stock Exchange or London Stock Exchange and are most readily available to US investors via the Over The Counter (OTC) market.

Despite individual differences, a central factor in my enthusiasm for the OTC stocks is the catalyst of an uplisting to a major exchange. In Bitfarms' last Corporate Update, they disclosed that they have, in fact, applied to the NASDAQ. Based on this, I believe they are likely to be the first of the OTC miners to experience this catalyst.

Bitfarms is Among the Leading Bitcoin Miners

As I stated in my article on MARA:

Each miner has its pluses and minuses. Some have experienced and transparent management, some have more BTC/cash on hand, some have better access to cheap/renewable power, some have better access to Next Generation hardware (though there are risks involved in “Chasing the CapEx Cycle”). Experience counts. Geography matters.

Bitfarms checks a number of these boxes. First, let's take a look at their current and projected hash rate. In a recent blog post, I compiled a table of hash rates, market caps, and BTC HODL. The hash rate data is excerpted here:

(Source: Author's calculations based on company releases and regulatory filings)

As we can see, Bitfarms is currently exceeding Marathon’s hash rate and they are neck and neck with Riot. Bitfarms' management has announced a “Corporate Goal” of 3.0 Eh by EOY but as this remains unsupported by definitive agreements, my 2021 projections will be limited to the 1383 Ph/sec they have confirmed.

2021 Projected Mining Revenue

In their latest Corporate Update, BFARF announced January production of 197 BTC and February production of 180. Difficulty increased significantly during March but they also added a fair amount of hash, so I am going to estimate March production of another 180 giving them Q1 production of 557 BTC.

They further stated that their existing fleet was mining approximately 8 BTC per day. As I discussed in detail in this blog post, which I urge readers to review, increasing network difficulty will reduce that number every 2 weeks through the remainder of the year. In my MARA article, I made projections assuming that Global Hash Rate will double by December 31. This is represented by a difficulty increase of 3.7% every two weeks.

Applying the same assumptions to Bitfarms that I did to Marathon, I project their current fleet will produce an additional 1350 BTC by the end of the year.

But BFARF will be adding capacity. If they light up 1500 MicroBT M31S+ rigs on June 31 and 700 Bitmain S19j on October 31 those new additions will produce an additional 95 BTC.

This leads me to a projection of total 2021 BTC mined of 2,003 BTC. At $58,000 per BTC, that’s 2021 mining revenue of approximately $116 million. With a current market capitalization of $775 Million that is an estimated Price to Sales Ratio of 6.7, significantly lower than that of MARA or RIOT.

Future Mining Revenue

On March 2 Bitfarms announced a “transformational purchase of 48,000 new miners to increase hashing capacity by approximately 5.0 EH.” That is a massive amount of hash rate which will contribute substantially to future revenue. To the best of my knowledge, no other firm has secured that much 2022 rig production. If they end 2022 with hash rate in excess of 8 Eh they will be on a par with Riot, but still trailing Marathon and Cipher Mining/Good Works (GWAC).

I believe that making estimates of Network Hash Rate, Network Difficulty, and BTC Price further than nine months out would cross the line from realistic projection to wild speculation. I am, at this time, unwilling to make revenue projections for ANY of the miners for 2022 or beyond. Suffice it to say that Bitfarms is positioned to be among the industry leaders based on a deployment of this magnitude.

Expansion to South America

On October 26, 2020, the company announced they had entered into an agreement to develop significant operations in South America. The Memorandum of Understanding was non-binding and details remain vague. The arrangement could lead to up to 200MW of renewable power at a cost of .02/kwh…approximately half their current rate.

MARA, by way of comparison, only has contractual access to 105MW (of coal power) at a cost of .028/kwh. Obviously, we need to see a deployment timeline, construction costs, and further details on the location (South America is a big continent) before reading too much into it, but the potential arrangement is noteworthy. There are obviously competitive reasons to keep details close to their chest until a binding arrangement is finalized and I am eagerly awaiting further details.

Potential NASDAQ Uplisting

The valuations of all of the OTC miners are significantly lower than those of their NASDAQ or NYSE listed peers. I expect at least two of them (and quite possibly all four) to gain an uplisting by the end of 2021.

A NASDAQ or NYSE listing should lead to significantly higher trading volume, substantially lower transaction costs for the retail investor, increased Analyst coverage, greater institutional holdings, and the issuance of CBOE-listed options. All of these are positives and the announcement of a NASDAQ listing will likely cause an immediate and substantial spike in share price.

When Might the Uplisting Occur?

Well, that's the real question. BFARF has met all of the criteria for a NASDAQ listing and management announced that they applied in late February. As they stated at the time:

“There can be no assurances of success, but we are working hard to make this a reality as soon as possible. We encourage interested investors to regularly access Sedar.com to watch for additional filings.”

In their Initial Listing Guide NASDAQ provides a timeline of four to six weeks. If that is the case the listing could literally be any day now, though I consider that unlikely. Bitfarms indicated that that their latest audited financials were a requirement of the process and their 2020 Annual Information Form just hit SEDAR on April 7, 2021, so perhaps six weeks from now?

Regardless of the exact timing…the clock is ticking.

While my professional career was largely dedicated to deciphering SEC filings, I have limited experience with Canadian issuers and the Canadian regulatory regime. Uplistings from the OTC market are beyond my area of expertise. While I am conducting independent due diligence, I am entirely relying upon publicly available information and the company’s own guidance.

Conclusion

While Bitfarms is unlikely to become the outright leader in hash rate, with their access to next-generation hardware and the potential for industry lowest electrical rates they are positioned to be a dominant force in the industry and currently have a compelling comparative valuation. While the exact timing remains unknown, the potential of an uplisting from the OTC market to the NASDAQ is an actionable catalyst.

Note:

Investors in cryptocurrency-related stocks should be aware that this sector is extremely volatile. The valuations of mining stocks are quite high by any traditional metric. I believe the valuation premiums the market is assigning the miners will persist in the near term, but I make no attempt to discern whether there is a rational basis for these premiums. My personal mining investments are short term, speculative, and in accounts with appropriate risk tolerance.

Analyst’s Disclosure: I am/we are long ARBKF, BFARF, BTC-USD, GBTC, GWAC, MARA, RIOT. 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.

I am long MARA and RIOT via call options. I am long GWAC via both common and warrants. I have a VERY small, "de minimus" short position via May $5 put options in SOS that I was egged into by a comment telling me to "put your money where your mouth is". I may establish a long position in HUTMF or HVBTF within the next 72 hours.