With the falling price of bitcoin, opportunities abound for bitcoin mining operations with structured cash and efficient operations.
This is an opinion editorial by Ruda Pellini, founder and president of Arthur Mining, an ESG-focused bitcoin mining company.
I recently saw an article that mentioned the level of leverage and debt of a world famous Bitcoin mining company. Since the company is registered, it is easy to find the financial statements and clearly prove: this is a counter-cyclical business that requires efficiency and professional management.
For those who still wonder what mining is, I will explain it quickly: the term mining makes an analogy with the process of extracting gold and metals, because bitcoin miners are the “producers” of this digital commodity. In practice, mining involves allocating computing power and electricity to ensure the functioning of the bitcoin network, validating transactions and serving as the backbone of this decentralized system.
Investing in bitcoin mining is different from buying the asset directly. On the one hand, when investing in mining you have a constant and predictable cash flow and physical assets that can be liquidated in the event of market stress, making the investment more attractive for other investors who are accustomed to investing in businesses that generate cash flow. On the other hand, in addition to the risk associated with the asset, there is also the risk of the operation.
Currently, bitcoin is down more than 65% from the peak of November 2021. Moments like this cause anxiety and make investors ask themselves: is it an opportunity to increase investment or a risk?
For bitcoin mining operations with structured cash, the moment represents a great opportunity! To quote Warren Buffet: “Only when the tide is low will you know who is swimming naked.”
Bitcoin Price Impact On Mining
In general, bitcoin miners have seen reduced cash flow as bitcoin prices fall, so at first glance it is counterintuitive that lower prices are beneficial to mining companies.
However, since we are talking about industry, more important than the market price is the cost of production.
In production costs, the biggest cost is the cost of electricity, which is the main input for this data processing activity. Therefore, those who can get a good price for energy and efficiency can remain profitable even in bad market conditions.
Since not all miners can achieve the same level of efficiency, in this kind of scenario, many of them have production costs that are very close to the market price of the asset, leading to liquidate the asset and exit the market.
Because of this, as in most commodity markets, this market is also counter-cyclical, and these down times are the best time to expand operations. There is a positive correlation of the price of the mining computer with the price of Bitcoin, where the price ends up adjusted in more variations than the asset itself.
While the price of bitcoin fell by about 47% from April to August this year, the price of computers used in mining fell by about 60% during the same period.
Bitcoin Mining Company
In particular, I understand the mining industry in a similar way to the network infrastructure (cable) industry in the 1990s, where there were three major cycles of expansion and consolidation.
The first cycle was marked by geeks and technology enthusiasts, who started internet businesses and literally wired and set up the first network infrastructure. This is also the case with bitcoin miners since 2009.
In the second cycle, we have the entry of players interested in expanding capital quickly, neglecting the importance of efficiency by focusing only on the accelerated expansion of the structure and on short-term results.
In the third cycle, we have the consolidation of the industry, with the entry of players focused on efficiency and long-term vision, encouraging the entry of venture capital and the professionalization of the market. In the United States, the 50 largest cable companies in the late 1990s were reduced to four by the end of 2010.
Most of the big mining companies are now entering the second cycle, with too much focus on the short term and insufficient efficiency. This results in businesses that are not very strong and are very vulnerable during times of stress.
During bitcoin’s big up cycle between 2020 and 2021, many mining companies took advantage of the increase in profits to leverage themselves and expand their operations. This is very common in many industries, but in this case, in addition to using dollars, a good part of the registered miners end up keeping their cash in bitcoins in an attempt to maximize their results.
According to estimates from Luxor Technologies, estimates show that listed mining companies have between $3 and $4 billion in loan agreements that are being used to finance infrastructure expansion and computer purchases.
Yield In Uptrend, Sell In Downtrend
Mistakenly, this player does not consider that, as in any commodity producer, if you can increase production capacity, it makes sense to sell the shares you produce and reinvest, instead of keeping the assets you produce on your balance sheet.
In order to honor these commitments, mining companies first prove their liquid assets, in this case the bitcoins held on their balance sheets. This move further increased selling pressure during June and July, pushing prices to new highs.
Basically, the result of the cash management strategy adopted by these mining companies is to mine high and sell low, causing more financial losses in addition to the operational losses caused by the drop in bitcoin prices.
After selling bitcoins from their balance sheets, less efficient mining companies must sell computers to honor payments and maintain operations, opening up space for more efficient mining companies to consolidate their assets and operations.
Time To Develop
Like other commodities, bitcoin mining is an anti-cyclical business. As a result, the best time to grow is when prices are low, when inefficient miners face problems and exit the market.
At the moment the equipment is at a big discount and the investment made now will bring a faster return. So, despite the negative news and the last few months of falling prices, this is a good asymmetry moment, with reduced risk and high return potential to make an investment in bitcoin mining.
We are in a moment of great opportunity and those who invest now will be winners in the long run. In short, for businesses that are well structured and have strategic advantages that guarantee efficiency, all the turbulence of this harsh season points in the direction of a very favorable spring for growth.
This is a guest post by Ruda Pellini. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.