Although the current environment for Bitcoin miners may be challenging, there are new investment opportunities.
This is an opinion piece by Glyn Jones, Founder and CEO of Icebreaker Finance, a capital advisory firm focused on private credit, DeFi and Bitcoin mining.
Bitcoin mining, a vital aspect of the cryptocurrency industry and an increasingly important contributor to economic development in the United States, faced fierce market conditions in 2022. The strategy of “ capital-fueled growth at all costs” pursued by many miners in 2021 and 2022 has led to a wave of failure and uncertainty amid a prolonged crypto winter.
While 2023 has so far seen modest improvements in unit profitability, with bitcoin price growth outpacing network growth, the way forward remains unclear. It is reasonable to assume that in a situation where the price of bitcoin continues its rally into 2023, capital will quickly flow into bitcoin miners, thereby increasing the hash rate and reducing miners’ unit revenue (a commonly preferred metric to understand unit revenue is the “hash price”). The question for miners is how likely is such a BTC rally and how long will it take for sufficient capital expenditure to be deployed so that the hash price returns to its equilibrium.
At Icebreaker Finance, we believe that only miners that generate attractive profits at the “equilibrium” hash price offer opportunities for long-term investors. While the price of hash has apparently found its balance between around 6 cents and around 8 cents per terahash per day, many miners continue to generate insufficient cash flow to meet their general operating and mining service costs. fiat-denominated debt. In many situations, lenders renew existing facilities on uneconomic terms, which is more favorable than default. In this situation, ASIC makers continue to bring inventory to market and in many cases roll out new “unsold” ASICs to self exploit through substantial hosting deals.
Stock markets reflect this pessimism. Many public miners are now more than 90% below their highs and trading at valuations that attribute very little intrinsic value to their activities. However, they remain highly volatile and have close correlations with the bitcoin price.
In such a difficult environment, many have described the industry as “uninvestable”. Our point of view is different. The dispersion of performance has increased significantly and listed miners offer an incomplete reflection on the magnitude of this dispersion. To better understand the relative strength of miners in this environment, we segment the different business models within the industry using a dumbbell analogy.
At one end we have the miners who operate at scale and are vertically integrated with the underlying mineral rights and energy production. These businesses are “behind the meter,” where Bitcoin mining can improve the economics of their existing business by monetizing the ability to source, generate, and distribute energy. These participants have not been significant players in the Bitcoin mining industry so far. 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 are entering large-scale Bitcoin mining with profound implications for the equilibrium hash price.
In the middle of the bar are miners that operate at scale “on-grid” or “before-the-meter” and own infrastructure assets but no power generation assets. A wide range of outcomes are expected for these participants, so it is likely that only a small minority will be able to generate attractive returns for debt and equity investors throughout the cycle. Many players in this segment of the industry, and especially those that use fiat-denominated leverage in their capital structure, may fail even if they get short-term relief from short-term price improvements. of hash. Winners in this group must be extremely sophisticated in site selection, energy contracts and financial practices.
At the other end of the bar are niche operators who typically operate “behind the meter” on smaller sites to monetize truly stranded energy, making this an exciting long-term prospect for investors. They are often early in their commercial evolution and are monetizing stranded gas, flared gas, landfill methane or partnering with renewable energy providers for off-take deals. To identify suitable sites and mine them off-grid, miners must hone a challenging set of multidisciplinary skills, which suggests the risk of execution will be high. It can also be a difficult business to scale, which can limit the size of this segment of the industry, even with tailwinds from the ESG value of the business.
Alongside these niche operators, we also expect substantial growth in “industrial augmentation” use cases where Bitcoin mining is introduced into the value chain of complementary industries. These are all businesses that consume large amounts of energy and where it is possible to monetize the heat generated by mining for other purposes or to monetize otherwise wasted energy. Greenhouses are an example of the industrial augmentation thesis, where water scarcity can lead to greater penetration of greenhouse production into agriculture. At this end of the bar, whether niche operators or industrial augmentation players, many participants are actively exploring ways to monetize nascent carbon credit markets. Like all players entering the market today, infrastructure can be purchased at bargain prices.
For miners who have a truly differentiated energy and engineering proposition – which can occur anywhere on the bar and particularly at either end – that puts them in the top quartile of grid production cost, the current market is a period of growth. Growth requires capital, and in some situations modest debt may be appropriate. In such situations, miners naturally seek the longest possible duration and favorable loan-to-value ratios, while lenders seek a collateral package that includes uncorrelated assets and the ability to introduce risk sharing into lending. so that lenders can also benefit. of a situation where the hash price improves while protecting the miner’s cash flow during equilibrium hash price periods.
This is a guest post by Glyn Jones. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.