While the current environment for Bitcoin miners may be challenging, there are opportunities for investment.
This is an opinion editorial by Glyn Jones, founder and CEO of Icebreaker Finance, a specialist capital advisory business with a focus on personal credit, DeFi and Bitcoin mining.
Bitcoin mining, an important aspect of the cryptocurrency industry and an increasingly important contributor to the economic development of the United States, is facing a fierce market situation in 2022. The strategy of “growth at all costs” supported by capital that many miners are implementing in 2021 and 2022. caused a wave failure and uncertainty in the midst of a long crypto future.
While 2023 has so far witnessed a modest improvement in unit profitability as bitcoin price growth has outpaced growth in the network, the path forward remains uncertain. It is reasonable to assume that in the event that the price of bitcoin continues to rally until 2023, capital will quickly flow to Bitcoin miners, thus raising the hash rate and reducing the miner’s unit revenue (the commonly preferred metric for understanding unit revenue is the “hash price.”). the miners is how the BTC rally will take and how long it will take to spend enough capital, so that the hash price returns to its equilibrium.
At Icebreaker Finance, our view is that only miners who generate attractive profits at “equilibrium” hash prices offer opportunities for long-term investors. While the hash price appears to be equilibrating at about 6 cents to about 8 cents per terahash per day, many miners continue to generate insufficient cash flow to cover general operating costs and fiat-denominated debt costs. In many situations, lenders roll over existing facilities on uneconomic terms as a better outcome than default. In the midst of this situation, ASIC manufacturers continue to bring stock to market and in many cases distribute new “unsold” ASICs for their own mining through extensive hosting agreements.
The public equity market reflects this pessimism. Many common miners are currently more than 90% below their peak and trade at valuations that provide very little intrinsic value to their businesses. However, they remain volatile and have a close relationship with the price of bitcoin.
In such a challenging environment, many describe the industry as “uninvestable.” Our views are different. Performance dispersion has grown dramatically and publicly traded miners provide an incomplete reflection of the extent of the dispersion. To better understand the relative power of miners in this environment, we show the various business models in the industry using a barbell analogy.
At one end, we have miners operating at scale and vertically integrated with mineral rights and energy generation. These companies are “behind the meter,” where Bitcoin mining can improve the economics of existing businesses to monetize their capacity to source, produce and distribute energy. These participants have not been significant players in the Bitcoin mining industry until now. If Bitcoin gains wider adoption and regulatory support for the role that Bitcoin mining can play in improving network resilience and decarbonization increases, we should expect energy majors to enter Bitcoin mining at scale with important implications for the equilibrium hash price.
At the center of the barbell are miners who operate at “on-grid” or “in-front-of-the-meter” scale and own infrastructure assets but not power generation assets. A wide range of results is expected for these participants, such that it is likely that only a small minority will be able to generate attractive returns for borrowers and equity investors through the cycle. Many participants in this industry segment, and especially those who use the influence of fiat denominations in their capital structure, may fail, even if they get short-term relief from short-term improvements in hash prices. Winners in this group must be highly sophisticated in site selection, energy contracts and financial practices.
On the other side of the barbell there are niche operators who usually operate “behind the meter” in small sites to monetize energy that is truly stranded, making them a long-term prospect for investors. They are often early in the evolution of business and monetize stranded gas, flared gas, methane from landfills or partner with renewable energy providers for off-take agreements. Identifying suitable sites and operating the grid requires miners to perfect a challenging multi-disciplinary competence that implies that the execution risk will be high. It can also be a challenging business to scale, which can limit the size of this industry segment, although there are good tailwinds from the ESG value of the activity.
Along with these niche operators, we also expect to see significant growth in “industrial augmentation” use cases where Bitcoin mining is introduced into complementary industrial value chains. This is a company that uses a lot of energy and there is an opportunity to monetize the heat generated from mining for other purposes or to monetize the energy that has been wasted. Greenhouses are an example of the industrial augmentation thesis, where water scarcity can lead to greater penetration of greenhouse production in agriculture. At the end of this barbell, whether niche operators or industrial augmentation players, many participants are actively exploring ways to monetize the new carbon credit market. As with all players entering the market today, infrastructure can be bought at a reasonable price.
For miners who have different energy propositions and techniques – which can happen anywhere on the barbell and especially at one end – which puts them in the top quartile of network production costs, the market is now a time to grow. Growth requires capital, and in some situations a small amount of debt may be appropriate. In such a situation, miners are understandably looking for the highest possible tenor and a favorable loan-to-value ratio, while lenders are looking for a security package that includes unrelated assets and the ability to introduce risk sharing into the loan so that lenders also can benefit. from the situation where the hash price increases while protecting the cash flow of the miners during the period of the equilibrium hash price.
This is a guest post by Glyn Jones. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.