In my previous Iris Energy (NASDAQ:IREN) article for Seeking Alpha, I mentioned my belief that the company should consider flipping its treasury approach from a 100% production seller to some sort of hybrid model. This belief stems from the fact that Bitcoin supply emissions have been the largest driver of miner revenue by far. Thus, with a block reward halving happening overnight in a little under a year, all BTC miners theoretically benefit from holding BTC on the balance sheet to benefit from the theoretical increase in the coin's price.
Bitcoin has a history of increasing in price following halving events. This is a somewhat critical part of the coin's construction because without higher coin prices, the miners who process transactions and secure the network see revenue decline in perpetuity if fresh supply at a constant USD-denomination is the only source of income. This is theoretically while input costs remain unchanged. It's not a great recipe for success long term but there is a recent catalyst that might minimize the impact from declining block reward emissions.
Maybe HODLing Won't Be Necessary
In a previous article covering Bitfarms (BITF), I explained some of the recent developments regarding the Ordinals NFT protocol and the impact that NFTs on the block space have had on Bitcoin transaction fees. I won't re-write that section again here but the main takeaway is that Ordinals lead to more transaction fees for miners and the inscriptions from that protocol have continued to make new highs in recent weeks:
I detailed why I felt Ordinals had the potential to lead to a fee war within the Bitcoin community back in early February, and that assessment is closer to coming to fruition. Regardless of whether everyone within the Bitcoin community likes Ordinals or not, the potential stickiness of transaction fees is a significant fundamental development for the miners. Despite short-lived spikes to fees over the years, the industry has been almost entirely reliant on fresh BTC supply emissions from the block reward. We can see the impact from the transaction fee increases in May in the chart below:
Between January and April, the share of Bitcoin miner rewards coming from transaction fees averaged about 2.4%. Through the first half of May, that average has spiked to over 17%. While there are a couple clear outlier days on May 8th and May 9th that are helping to boost this surge in transaction fee share, even when we take those two days out of the average we still get a transaction fee share of total rewards of roughly 14% for the month of May.
I have to be clear that I'm not saying that Ordinals or BRC-20 tokens will be what causes transaction fees to continue higher. But I will go as far as saying something likely needs to be adjusted to the model for miners to remain profitable long term. This is an idea that has been explored previously by analysts who are much smarter than me. In my personal view, the simplest approach might be the one that aligns with the free market mentality that I believe most bitcoiners possess; market participants simply have to start paying a more realistic fee for the service they're using.
Surviving Crypto Winter
Things looked pretty bad for the Bitcoin mining industry in Q4-22 and Iris Energy was no exception. After scaling from under 1 EH/s in March 2022 to nearly 4 EH/s by October, the crypto market moved against the sector and Iris had to forfeit machines held through special purposes vehicles. This led to a dramatic month over month fall in BTC production for Iris from October to November of last year:
While it was unfortunate the company missed out on 5 months of BTC mining revenue at a time when the coin was staging a recovery, Iris structured it's machine collateralization in a way that allowed the company to live another day and try again. At the end of April the company had 4.0 operating EH/s. As of May 10th, Iris has 5.5 EH/s. In my view, this scaling of capacity in such a short amount of time is impressive and encouraging.
Iris is expecting to bring on another 1 EH/s of operating capacity, most of which is at the company's Childress site. Iris projects this will require an additional $35 million in capex to scale. On the last quarterly conference call CEO Daniel Roberts mentioned the machines required to bring on that additional EH/s have yet to be purchased and the company is being patient with those buys:
In terms of anticipated CapEx, we haven't procured miners at this stage. We will look to do that. Over time, we don't see the urgency. We can give some guidance on what that might cost. There have been some recent market benchmarks that people can refer to. We're looking to procure the BITMAIN S-19 XP mines as a priority.
Fortunately, ASIC prices are still cheaper than at any point in the last year and Iris has the cash to pull off this additional EH/s scaling without taking on debt. Finally, the company has proven to be in a class of its own when it comes to maximizing efficiency:
|Miner YTD Metrics||BTC Production||Avg BTC per EH/s|
|HIVE Blockchain (HIVE)||1,065||90.0|
|Bit Digital (BTBT)||447||87.4|
Sources: Company disclosures
Year to date, Iris Energy has proven to be the most efficient miner in the space based on average BTC mined per EH/s. I expect that to continue given the company's intention to buy S19 XPs.
To date, Iris Energy has not been a profitable business. As currently constructed, the company is highly reliant on the price of Bitcoin and consumer demand for BTC. Bitcoin has had quite a bit thrown at it in the last 12 months and it seems clear that US-based regulators are in the "fight them" phase of the crypto story. This could theoretically diminish demand for BTC and that could negatively impact Iris Energy's stock.
Crypto Winter has been devastating for many of the Bitcoin miners in the public equity markets. We've seen several examples of solvency issues, bankruptcies, and drastic reductions in production. Despite the hiccup in Q4, Iris Energy structured its obligations in an advantageous way and seems to have come out on the other side as one of the top companies in the industry again.
For me the combination of exahash growth and mining efficiency make IREN a buy for Bitcoin miner stock holders. While I've previously been slightly skeptical of Iris Energy's BTC treasury management approach, if there is long term stickiness to BTC transaction fees, securing the network can theoretically be a profitable business even when the reward from fresh supply issuance is halved next year. I've again taken a small long and will look to add on any weakness in the near future.
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