While the current environment for Bitcoin miners can be challenging, investment opportunities are emerging.
This is an opinion editorial by Glyn Jones, founder and CEO of Icebreaker Finance, a specialist capital advisory firm that focuses on private credit, DeFi and Bitcoin mining.
Bitcoin mining, an essential aspect of the cryptocurrency industry and an increasingly important contributor to economic development in the United States, faced harsh market conditions in 2022. The “growth at all costs” strategy driven by the capital followed by many miners in 2021 and 2022 led to a wave of failures and uncertainty amid a prolonged crypto winter.
While 2023 has so far seen modest improvements in unit profitability, as bitcoin price growth has outpaced network growth, the way forward remains uncertain. It is reasonable to assume that in a situation where the bitcoin price continues to rise until 2023, capital will flow rapidly to Bitcoin miners, increasing the hash rate and reducing mining unit revenue (a commonly preferred metric to understand unit revenue is “hash price”). ”). The question for miners is how likely a BTC rally is, and how long it will take to implement enough capital expenditures, so that the hash price returns to equilibrium.
At Icebreaker Finance, our view is that only those miners who generate attractive returns on the “breakeven” hash price offer opportunities for long-term investors. While the price of hash has apparently found its footing at around 6 cents to around 8 cents per terahash per day, many miners continue to generate insufficient cash flow to meet their coin-denominated debt service and overhead costs. fiduciary In many situations, lenders are renovating existing facilities on uneconomic terms as a more favorable outcome than default. In the midst of this situation, ASIC manufacturers continue to bring stock to market and, in many cases, are deploying new “unsold” ASICs for self-mining through major hosting deals.
Public stock markets reflect this pessimism. Many public miners are now more than 90% below their peaks and are trading at valuations that attribute very little intrinsic value to their businesses. However, they are still very volatile and have a close correlation with the bitcoin price.
In such a challenging environment, many have described the industry as “non-investible”. Our vision is different. The spread of yield has grown dramatically, and publicly traded miners offer an incomplete reflection on how wide that spread is. To better understand the relative strength of miners in this environment, we segmented the different business models within the industry using a bar analogy.
At one extreme, we have miners that operate at scale and are vertically integrated with underlying mineral rights and power generation. These companies are “behind the meter” where Bitcoin mining can improve the economics of their existing business of monetization capacity to obtain, generate and distribute energy. Such participants have not been major players in the Bitcoin mining industry so far. If Bitcoin gains broader adoption and regulatory support for the role Bitcoin mining can play in improving network resilience and decarbonization grows, we should expect large energy companies to enter Bitcoin mining soon. scale with profound implications for the equilibrium hash price.
In the middle of the bar are miners who operate at scale “on grid” or “in front of the meter” and own infrastructure assets but not 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 over the cycle. Many participants in this segment of the industry, and particularly those that use so-called fiat leverage 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 extremely sophisticated in site selection, power contracting, and financial practices.
At the other end of the bar are niche operators who typically operate “behind the meter” on smaller sites to monetize the energy actually abandoned, making them an exciting long-term prospect for investors. They are often in the early stages of their business evolution and are monetizing stranded gas, flaring gas, methane from landfills, or partnering with renewable energy providers for purchase agreements. Identifying suitable sites and operating them off-grid requires miners to hone a challenging set of multi-disciplinary skills, suggesting execution risk will be high. It can also be a challenging business to scale, which can limit the size of this industry segment, even with favorable tailwinds from the ESG value of the business.
Along with these niche operators, we also expect to see substantial growth in “industry augmentation” use cases where Bitcoin mining is introduced into the value chain of complementary industries. These are companies that consume large amounts of energy and where there is an opportunity to monetize the heat generated by mining for other purposes or to monetize energy that is otherwise wasted. Greenhouses are an example of the industrial augmentation thesis, where water scarcity can drive further penetration of greenhouse production in agriculture. At this end of the bar, whether they are niche operators or industry upsurge players, many participants are actively exploring ways to monetize nascent markets for carbon credits. Like all players entering the market now, infrastructure can be bought at favorable prices.
For miners who have a truly differentiated power and engineering proposition, which can occur anywhere on the bar and particularly at either end, which puts them in the top quartile of grid production cost, today’s market is a time of growth. Growth requires capital, and in some situations, modest amounts of debt may be appropriate. In such situations, it is understandable that miners are looking for the longest possible term and favorable loan-to-value ratios, while lenders are looking for a security package that includes uncorrelated assets and the ability to introduce risk sharing into loans so that lenders also can benefit. of a situation where the hash price improves while miner cash flows are protected during hash price equilibrium periods.
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.
