Sector Description: What is Bitcoin Mining?
Bitcoin miners are responsible for verifying the legitimacy of new transactions on the network’s blockchain (e.g., to ensure there is no double-spending). In a nutshell, to verify and add new blocks of transactions to the blockchain, miners use specialized hardware to solve computationally intensive problems - this is known as “proof-of-work.” Although many describe the miners as solving difficult math problems, this is not necessarily the case - they are essentially making millions of guesses - or “hashes” - to produce a hash that is lower than or equal to the numeric value of a ‘target’ hash.
A hash is a fixed-length alphanumeric code that is used to represent words, messages and data of any length. New blocks are added to the blockchain at approximately 10-minute intervals. To incentivize miners to partake in this verification process, the first miner to successfully hash a block is rewarded with bitcoin - this is also how new bitcoin enters circulation. The amount of bitcoin rewarded for successfully verifying a block is halved every four years (approximately) - this, in combination with the network’s hard cap of 21 million bitcoin protects the asset from inflation.
Large Public Companies in the Sector
Marathon Digital Holdings Inc (NASDAQ:MARA) - Market Cap: $1.89B
Hut 8 Mining Corp (TSX:HUT_t). - Market Cap: $1.16B
Bitfarms Ltd (NASDAQ:BITF)- Market Cap: $744.2M
Opportunities for Broad Exposure
At the time of this writing (2/6/2022), there are no bitcoin mining ETFs listed on the NYSE. However, Valkyrie recently applied for a listing (proposed ticker: WGMI).
Key Metrics and Considerations
Hashrate: The average estimated number of hashes per second produced by a miner. For our purposes, we will generally use this as a measure of the combined hashrate of all miners belonging to a company. In general, if you can generate a higher hashrate relative to the rest of the miners on the network, you have a better chance of verifying new blocks.
Geopolitical stability: Over the last several months, countries around the globe have taken different regulatory stances toward Bitcoin mining. Some countries, like China, have outright banned mining. Others, like El Salvador, have been much friendlier toward the industry - in fact, El Salvador made bitcoin legal tender last September and plans to create government-owned mining operations. Many countries remain somewhere between these two extremes. Mining companies with large operations in countries with friendlier stances toward the industry may fare better than those with operations in less friendly areas of the world.
Bitcoin on balance sheet: Some bitcoin mining companies will keep a percentage of bitcoin mined on their own balance sheet. While long-term believers in Bitcoin might view this as a good thing, short- and medium-term investors might see this as a volatility risk, as the value of the company will fluctuate with the price of bitcoin.
Innovation: Bitcoin mining companies are competing with one another to find the most cost-effective solutions to mining bitcoin. Here are a few areas where a company might gain a competitive advantage: finding and utilizing cheap and reliable sources of energy, creating more efficient mining rigs, lengthening the life cycle of mining rigs. Incredible advances have already been made in all three of these areas, but there is still plenty of room for improvement.
Brandon’s Opinion on the Sector
I believe there are going to be winners and losers in the overall growing sector of bitcoin mining. The ones that will thrive will focus on bitcoin mining and not any other altcoins or anything related to the metaverse. These singularly focused mining companies will then find the best and most reliable sources of renewable energy and find a way to obtain that energy in an efficient and cheap manner. Once that energy is obtained and used for bitcoin mining successfully and reliably, that mining company would be one that I believe will be successful. Overall, I’m extremely bullish on the sector because I am bullish on bitcoin and the bitcoin network needs miners. I think the ETF would be great exposure to the overall sector and would consider investing in that when it gets put on the NYSE and I’d look into some individual mining companies.
Dan’s Opinion on the Sector
I am long-term bullish on the bitcoin mining industry as a whole. Not only do miners help protect the Bitcoin network, which I believe is here for the long haul, but they’re heavily incentivized to develop the most cost-effective products and processes to mine bitcoin. In my opinion, incentive-driven product/process development has a high potential for “spin-off” technologies. For example, the Great American Mining Company has developed a process that captures and converts natural gas flare offs to energy that can be used to power bitcoin miners. This process reduces wasted energy, converting it instead into an asset that is empowering financial and economic freedom for individuals around the world. As another example, to reduce incidents of miners overheating (which can improve miner performance and lengthen its lifespan), immersion cooling technologies have been developed. Immersion cooling has broad implications for a number of non-bitcoin mining-related industries.
Bitcoin miners can also help stabilize power grids by offering an interruptible baseload to the grid, with the ability to increase or decrease mining power usage based on the power demands of the grid. This differs from most other technologies operating on power grids - for example, interrupting Amazon (NASDAQ:AMZN) Web Services (AWS) could cost millions (if not far more) and limit the function of companies who rely on that service for operations. Another benefit of a baseload is that it guarantees a baseline level of consumption to energy providers who would otherwise be unprofitable due to a lack of power demands. Because of this, I believe bitcoin mining companies could form valuable partnerships with energy providers.
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