Mad Hedge Bitcoin Letter
June 30, 2022
Fiat Lux
Featured Trade:
(MINERS HEAD FOR THE EXITS)
(HIVE), (CAN), (MARA)
Posts
They could only do so much to hang on.
I am talking about the miners – the crypto miners who were operating under sub-optimal conditions.
I could make a case for Bitcoin at $35,000 as it relates to miners staying in the game before they can sell their coin when it goes back up to $65,000.
However, at a pitiful $20,000 per one BTC, mining BTC is a big loss-maker which is setting off a tidal wave of pain in the mining industry.
What once would be considered a story of tenacity for Bitcoin miners has now turned into utter capitulation of bankruptcy.
Like many other businesses, the cost of producing products is important and when the cost of oil is low, crypto miners laugh all the way to the bank.
That hasn’t been the case lately.
It was only just at the end of 2019 that the price of Brent crude was $20 and fast forward to late June 2022, it settled around the $110 per barrel mark today.
There is also a plausible case that we haven’t even seen the inflation caused by the Easter military conflict because inflation and especially inflation comes with a 6-month lag.
It was no coincidence that Bitcoin’s most recent meteoric rise took place when the nominal cost of energy was half of what it is today.
The most glaring unintended consequence is the distressed nature of Bitcoin miners whom many have gone out of business because they simply aren’t profitable amid uncontrollable energy prices and hyperinflation.
To dig deeper in the weeds, electricity comprises 90-95% of Bitcoin mining costs.
Miners also sell coins once they produce them to pay back the energy cost and then pocket the difference. That operation makes no sense today and there’s simply not enough money to pay the electric bill after the coin is sold.
Who are the publicly traded miners?
HIVE (HIVE) is a Canadian miner that produced 278 BTC in March of 2022. The company also mines Ethereum with 2,549 produced, so that can diversify the company away from BTC. However, the company draws down on its ETH holdings to fund its strategic deal with Intel (INTC). The company sold 10,000 ETH to fund BTC rigs.
Ironically, the company has an ETH mining operation in Sweden which is the very nation leading the charge against Bitcoin operations in Europe.
Hive has access to 50MW of power and has an operating margin of 74% at present.
Marathon Digital (MARA) is focused on North American operations, which would shield it from European legislation. Marathon produced a Record 1,259 BTC in Q1 2022, up 556% Year-Over-Year and its total Bitcoin holdings increased to 9,374 BTC.
In the short-term, cost challenges handcuff the best of them and the share prices of stocks like Marathon, Canaan (CAN), Riot, and Marathon are down in the dumps.
When there is either a military peace solution or a recession, the price of energy might come down to bearable levels.
Until then, tough luck for the crypto miners and avoid buying the dip. There’s more pain to come until something meaningfully changes to the underlying situation.
Mad Hedge Bitcoin Letter
May 3, 2022
Fiat Lux
Featured Trade:
(MINERS CHOKE ON HIGHER ENERGY COSTS)
(MARA), (RIOT), (CAN)
It represents strength that Bitcoin is holding the $38,000 level considering that energy costs have spiraled out of control.
I would consider this a relative victory for Bitcoin.
Like many other businesses, the cost of producing products is important and when the cost of oil is low, crypto miners laugh all the way to the bank.
That hasn’t been the case lately.
It was only just at the end of 2019 that the price of Brent crude was $20 and fast forward to 2022, the price touched $130 and has now settled around the $105 per barrel mark today.
It was no coincidence that Bitcoin’s most recent meteoric rise took place when the nominal cost of energy was half of what it is today.
The most glaring unintended consequence is the distressed nature of Bitcoin miners whom many have gone out of business because they simply aren’t profitable amid uncontrollable energy prices.
To dig deeper in the weeds, electricity comprises 90-95% of Bitcoin mining costs.
There was further news this week that a Russian Bitcoin miner had been included in the latest round of US sanctions. The Swiss-based Bitriver AG had moved its assets to Switzerland last year but found itself in the crosshairs, alongside 10 of its subsidiaries.
Bitriver claims to be the world's largest hosting provider for climate-friendly crypto mining (using renewable energy), and boasts a 100-megawatt data center in the Siberian city of Bratsk which it outsources to foreign miners from the United States and other Western nations.
HIVE (HIVE) is a Canadian miner which produced 278 BTC in March of 2022. The company also mines Ethereum with 2,549 produced, so that can diversify the company away from BTC. However, the company draws down on its ETH holdings to fund its strategic deal with Intel (INTC). The company sold 10,000 ETH to fund BTC rigs.
Ironically, the company has an ETH mining operation in Sweden which is the very nation leading the charge against Bitcoin operations in Europe.
Hive has access to 50MW of power and has an operating margin of 74% at present.
Marathon Digital (MARA) is focused on North American operations, which would shield it from European legislation. Marathon produced a Record 1,259 BTC in Q1 2022, up 556% Year-Over-Year and its total Bitcoin holdings increased to 9,374 BTC.
Like almost everything else that touches money in Europe, European regulation wants to tax and regulate galore which is what countries do when they are highly uncompetitive.
Europe has never produced an influential tech company from scratch and this is one of the biggest reasons why.
Sweden is in the process of regulating HIVEs ETH mining operations out of business in the name of climate change.
The obsession with climate change in Europe leading to the Stockholm syndrome attachment to green energy is just in its early innings.
It’s crystal clear to me that Europe will kick out all of its crypto miners and now there will be a sense of urgency since there is an energy crisis occurring within the European zone.
This all means that crypto miners will migrate to Russia and America with higher margins in Russia because the cost of energy is so low.
Although that is the long-term prognosis of the mining industry, in the short-term, cost challenges handcuff the best of them and the share prices of stocks like Marathon, Canaan (CAN), Riot, and Marathon are down in the dumps.
When the cost of oil retraces nearer to $70, I believe that will be the elixir for higher crypto mining share prices. Until then, rising interest rates and higher energy are something that miners must navigate or go bust.
Mad Hedge Bitcoin Letter
November 18, 2021
Fiat Lux
Featured Trade:
(A LEVERED BET ON BITCOIN)
(BTC), (MARA)
Like gold and gold miners, bitcoin miners are also a levered play on the price of bitcoin.
In layman’s terms, when the price of bitcoin goes up, the miners go up more.
The largest scale Bitcoin miner in the US is Marathon Digital Holdings (MARA) and readers should take notice.
The stock is up over 1,100% in the past 365 days as the miner has ridden the elevator up with the price of Bitcoin.
Marathon has legs and doesn’t live in fear of them if you are a believer of Bitcoin like I am.
Deploying resources in this stock has some weight especially after we received a 27% discount when the stock dropped after they announced a $650 million convertible senior notes offering to fund its purchases of additional Bitcoin miners.
Almost as important, they disclosed a Securities and Exchange Commission (SEC) subpoena that requested documents related to its data center contracts in Hardin, Montana.
Last year Marathon reorganized itself as a Bitcoin mining company and placed a long-term order for more than 100,000 high-end ASIC miners from Bitmain.
At the end of 2020, Marathon only held 126 Bitcoins. But in March it purchased an additional 4,813 Bitcoins for $150 million at an average price of $31,168.
This brilliant move in hindsight means they are playing with house money now.
Marathon operated 27,280 miners at the end of October, and it expects to expand its fleet to 133,000 miners by mid-2022.
But those miners cost more than $10,000 per unit each, and Marathon expects to remain unprofitable as it takes on more debt to fund those purchases.
Last year, Marathon only generated $4.4 million in revenue and posted a net loss of $10.4 million.
Marathon's $650 million senior convertible debt offering gives a chance for the company to grow out of its loss-making model.
It’s hard to run away from the exorbitant costs to expand its mining fleet, but once the scale is realized, they will be able to focus on earnings growth.
As for the SEC subpoena, it's related to Marathon's deals with Beowulf Energy and other parties to build a data center in Hardin last October.
In particular, the agency is investigating Marathon's issuance of six million shares of restricted common stock to fund those deals and might trigger problems for Marathon, since it relies on Beowulf's lower energy prices to mine Bitcoin at cost-efficient rates.
Even if something were to come from this, I doubt it will be a deal-breaker and maybe even a possible fine.
The silver lining is that Bitcoin must drop significantly for Marathon to become unprofitable.
They are doing everything they can to scale their business as fast as possible.
Taking on more leverage to corner the bitcoin miner supply market is scary for some people but after the pandemic, much of this activity is normalized.
After factoring in energy and hosting costs, the breakeven rate on Bitcoin for Marathon is around $6,500.
Even though the company is levered, they are insulated by their unit economics.
Certainly, it’s expensive to scale in a fragmented market and it’s not a guarantee that energy costs will be advantageous for Marathon for the long term.
As many have read, there are various breakdowns in the global energy market that could reverberate onto Marathon’s balance sheet even if not yet.
The breakeven estimate serves as a reminder of how this is just a numbers game and reducing the cost of energy makes it almost unfair to compete against.
Daily miner revenue is hovering near record highs and Marathon has among the lowest mining costs per coin.
The stock has iron-clad support around $37 and I would be buying MARA stock incrementally all the way down to $37 if we ever get there.
I have a hunch that we will never dip below the low $40s.
