bitcoin has consistently outperformed all major asset classes over the past decade, cementing its role as a benchmark for digital asset investors. For those committed to the long-term vision of bitcoin, the ultimate financial goal often shifts from acquiring more dollars to maximizing their bitcoin holdings.
bitcoin is the rate of return
bitcoin is to digital assets what treasury bonds are to the legacy financial system: a fundamental benchmark. While no investment is risk-free, bitcoin held in self-custody eliminates counterparty risk, dilution risk, and other systemic risks common in traditional finance.
With btc outperforming all other asset classes in 9 of the last 12 years (by orders of magnitude)it is no surprise that it has usurped treasuries as the “risk-free rate” in the minds of many investors, especially those knowledgeable about monetary history and thus the appeal of bitcoin's verifiable scarcity.
Another way of putting this would be that the financial goal of investors in digital assets is to acquire more btc instead of acquiring more dollars. All investments or expenses are viewed through the lens that btc is the opportunity cost.
MicroStrategy has demonstrated what this looks like in the business world with its new KPI: btc Yield. To quote your September 20, 8-K form: “The Company uses btc Yield as a KPI to help evaluate the performance of its strategy of acquiring bitcoin in a way that the Company believes is beneficial to shareholders.” MicroStrategy has made the most of the tools it has at its disposal as a multibillion-dollar public company: access to low-interest-rate debt and the ability to issue new shares. This KPI shows that they are acquiring more btc per outstanding share even though they are engaging in the traditionally dilutive activity of issuing new shares.
Mission accomplished: they are acquiring more bitcoins.
But MicroStrategy has an advantage that the average fund manager or retail investor doesn't: It's a publicly traded company with the ability to access the capital markets at little or no relative cost. Individual holders cannot issue shares on the public market to raise capital and acquire btc. We also cannot issue convertible notes and borrow dollars at an interest rate close to zero percent.
So the question arises: how can we accumulate more bitcoins? How can we have a positive 'btc yield'?
bitcoin Mining
bitcoin miners acquire btc by contributing computing power to the bitcoin network and receiving a greater amount of btc than it costs in electricity to operate their machines. Now this is easier said than done. The bitcoin protocol enforces a predetermined supply schedule through “difficulty adjustments,” meaning that more computing power dedicated to bitcoin mining results in finite block rewards being split into smaller pieces.
The most effective bitcoin miners are those that maximize their computing power and minimize their operating costs. This is achieved by purchasing the latest and most efficient bitcoin mining hardware and operating at the lowest possible electricity rate.
In current market conditions (as of 11/21/2024), 1 bitcoin is priced at ~$98,000. However, an Antminer S21 Pro miner with an electricity rate of $0.078/kWh is capable of producing 1 btc for ~$40,000 in electricity. This is an operating margin of almost 145%. A company is generally considered to have “healthy profit margins” if they are in the 5-10% range; mining easily overcomes this. This is despite the fact that as of the April 2024 bitcoin halving, they earn half of btc per unit of compute.
The growth of prices exceeds the growth of difficulties
The price of a financial asset – specifically bitcoin – is set at the margin. This means that the price of the asset is determined by the most recent transactions between buyers and sellers. In other words, the price reflects what the ultimate buyer is willing to pay and what the ultimate seller is willing to accept.
This, in part, is what enables btc's notoriously volatile price action. The lack of sellers at price x means that buyers must bid a price higher than x to find the next marginal seller. Conversely, the lack of buyers at price x means that the seller must reduce his demand to find the next marginal buyer. btc can rise or fall quickly based on the lack of sellers or buyers in a specific range.
Consequently, the speed at which the price of bitcoin can move is much greater than the difficulty of network mining. Substantial growth in network mining difficulty is achieved not through marginal bid-ask spreads, but through the completion of ASIC manufacturing, power production, and mining infrastructure development. The time and human capital required to increase the total computing power on the bitcoin network cannot be shortened.
This dynamic is what creates opportunities for bitcoin miners to accumulate large amounts of bitcoin.
The chart here illustrates the explosive growth in bitcoin mining profitability that takes place during bull markets. “Hashprice” measures the amount of revenue bitcoin miners earn per unit of compute daily. Year after year, the hash price has risen more than 300% at the height of each bitcoin mining cycle. This means that miners' profit margins have tripled in a span of 12 months.
Over the long term, this metric tends to decline as more entities begin mining bitcoins, miners upgrade to more powerful and efficient machines, and the block subsidy halves every four years. However, during bull markets, the combination of forces that are a positive catalyst for mining difficulty (and therefore net negative for mining profitability) pales in comparison to the rapid growth of the price of bitcoin. .
Price volatility in bitcoin mining hardware
In addition to wider profit margins during bull markets, bitcoin miners have the simultaneous benefit of the fact that ASIC prices tend to move in tandem with the price of bitcoin. During the 2020 – 2024 cycle, the Antminer S19 (most efficient ASIC at that time) started trading at ~$24/T. In November 2021, when the btc price was peaking, they started trading above $120/T.
bitcoin mining hardware that retains resale value is becoming more prevalent with each new generation of hardware. In the early days of bitcoin mining, technological advances were rapid and forceful, to the point that new ASICs would render older models obsolete overnight. However, the marginal gains from new ASICs have declined to the point that older models can remain competitive for several years after their release.
Given that the S19 was launched in 2020 and retains a non-zero market price today, it is reasonable to expect that the S21 line of machines can retain its value for even longer. This gives miners a significant advantage when it comes to accumulating bitcoins, because the initial cost of purchasing machines is no longer “sunk.” Their machines have a price, one that is correlated to bitcoin, and there is a resource available to obtain liquidity.
Block Software Market
Developed block software this platform to allow any investor, institutional or retail, the opportunity to gain direct exposure to bitcoin mining. Market users can purchase bitcoin mining rigs hosted in one of Blockware's Tier 1 data centers and have access to industrial energy prices. These machines are now online, eliminating long lead times that have historically caused some miners to miss those key months of the cycle when price exceeds network difficulty.
Furthermore, this platform is built by Bitcoiners, for Bitcoiners. Meaning that the machines are purchased using bitcoin as a medium of exchange, and the mining rewards are never retained by Blockware – they are sent directly to the user's wallet.
Lastly, this gives miners the aforementioned opportunity, but not the obligation, to sell their machines at any time and price. This allows miners to take advantage of ASIC price volatility, recoup the cost of their machines, and accumulate more btc faster than they would with a traditional “pure play” approach.
This innovation removes the obstacles that have historically made hosted mining difficult, allowing miners to focus on the mission: accumulating more bitcoin.
For institutional investors looking for wholesale prices on mining hardware, Contact the Blockware team directly.
