Bitcoin has been the best-performing asset class over the past decade, by a wide margin. Critics like to focus on the large-scale corrections that often occur in the industry.However, Bitcoin’s average annualized return It has been 60% since 2014. By comparison, gold’s average annualized gains are 5%, the S&P 500’s 9%, and the Nasdaq 100’s 16%.
These massive declines have proven to be excellent buying opportunities in the 14 years since Bitcoin’s launch, and after a sharp pullback in 2022, the trend appears to be continuing, with prices rising into 2023 so far this year 60%.
Bitcoin mining stocks bring leveraged gains to investors during bull market cycles, but they also bring leveraged losses to investors during bear market cycles.I believe we are at A major bull cycle for the cryptocurrency industry, this could be a good time to buy crypto mining stocks at discount prices.
Bitcoin has several important catalysts on the horizon, but the most important one is the halving in April 2024, when the supply will be cut in half. This would reduce Bitcoin’s inflation rate from 3.6% to 1.8%. Historically, prices rise in the months leading up to the halving and then rise significantly in the months following the halving.
Another major near-term catalyst is the potential approval of the first spot Bitcoin ETF in the United States. While the SEC has previously rejected applications from smaller players, now the world’s largest asset managers are applying to list a spot Bitcoin ETF.
These include BlackRock, Fidelity, Invesco Galaxy, Franklin Templeton, WisdomTree, VanEck, GlobalX, ARK Invest, Valkyrie and Bitwise. It is estimated that these managers collectively have approximately $18 trillion in assets under management (AUM). If these managers put just 1% of the wealth they control into Bitcoin, it would mean $180 billion in new capital flowing into an asset with a market capitalization of just $500 billion.
Approval of spot ETFs by the U.S. Securities and Exchange Commission could lead to an influx of $300 billion into Bitcoin.
– Mark Yusko, CEO, Morgan Creek Capital
This estimate does not include any multiplier effects from other institutions eventually being allowed to begin investing. It’s worth noting that a spot Bitcoin ETF would be significantly different from the current iteration, as it would create real demand for scarce Bitcoin in the market. The expected surge in demand will occur when the proportion of Bitcoin held by long-term holders continues to increase and the amount available for trading on exchanges continues to decrease. This has the potential to lead to significant price increases, but currently prices are still 60% below the all-time high in late 2021.
The next SEC ruling on the BlackRock Spot Bitcoin ETF will take place on October 17. They may delay a decision again, but experts believe the likelihood of approval is increasing.
Bitcoin Mining Offers Leveraged Returns
Cryptocurrency mining is the process used by blockchain networks to complete transactions. It is called mining because it also releases new coins into circulation. Cryptocurrency mining requires the intense computing power of specialized machines built specifically to solve complex problems. These Application Specific Integrated Circuit (ASIC) mining rigs are the workhorse and primary capital investment of cryptocurrency mining companies.
Crypto miners ensure that every transaction is legitimate, helping to verify and secure the blockchain network. This mining process allows Bitcoin and some other cryptocurrencies to operate in a decentralized manner without the need for oversight by third parties such as banks. BlackRock, the world’s largest asset manager, has been snapping up cryptocurrency miners, potentially preparing ahead of the approval of a spot Bitcoin ETF and the upcoming Bitcoin halving in April 2024. They are now the second-largest shareholders in 4 of the top 5 cryptocurrency miners.
But BlackRock is not alone. Vanguard, the investment giant with $7.7 trillion in assets under management, has also accumulated stakes in top Bitcoin miners worth more than $600 million. This is mostly done indirectly through index funds, but is still important due to the sheer size of their investments. Fidelity was an early investor in the cryptocurrency miner, acquiring a 7.4% stake in Marathon Digital (MARA) for $20 million in July 2021.
Cryptocurrency companies also received good news this month
The Financial Accounting Standards Board (FASB) approved changes to fair value accounting. The company records its cryptocurrencies at the historical prices they paid and reviews its holdings for impairment on a quarterly basis. Even if the price of a cryptocurrency temporarily drops during the reporting period, the holding is considered impaired and the value cannot be revised upwards if the price recovers.
The new accounting rules mark an improvement over current methods, as companies will be able to record profits and losses immediately and classify crypto-assets such as Bitcoin and Ethereum as financial assets. The rule is expected to take effect in 2025.
The number of cryptocurrency miners has dropped significantly from its 2021 highs. During Bitcoin’s plunge from $69,000 to $15,000 (78%), most cryptocurrency miners experienced losses of more than 90%. Then, when Bitcoin doubled from $15,000 last November to over $30,000 this July, most cryptocurrency miners realized a 4 to 5x gain. During this period, upside leverage was significantly higher than downside leverage, providing investors with an attractive risk/reward setup.
As cryptocurrency prices have retreated from recent highs, with Bitcoin down about 12% from its July high, cryptocurrency miners have pulled back about 50% from the 2023 high. With the cryptocurrency industry facing some bullish catalysts, I believe the current pullback provides an excellent buying opportunity.
If Bitcoin rallied 15% back to recent highs, this could equate to a 60% to 80% increase in the value of mining stocks (if recent trends repeat). If Bitcoin prices can return to their late 2021 highs of around $69,000, Bitcoin’s 155% rise could equate to more than 600% gains for top crypto mining stocks.
Marathon Digital reported non-GAAP direct costs per coin in the latest quarter of approximately $18,900. The company reported total profit margin, excluding D&A, of 32.5% of revenue. Most Bitcoin miners report gross profits in 2023 but are still at net losses. The reason is selling, general, administrative, depreciation and amortization expenses. That’s why we include a ratio of SG&A to revenue to understand how lean each company operates.
I estimate that Bitcoin price would need to rise into the $35,000 to $40,000 range for most miners to start seeing positive net income. Our current year-end Bitcoin price target is $45,000, so Bitcoin miners are likely to report substantial cash flow and positive net income in 2024.
Comparative Analysis of Top Bitcoin Mining Stocks
Given our view that cryptocurrency prices are likely to move significantly higher over the next 12 months, and the leverage exhibited by the top Bitcoin mining stocks, I decided to conduct a comparative analysis of the top miners.
The analysis looks at various metrics measuring valuation, growth, profitability, operating efficiency, balance sheet health, Bitcoin mining efficiency, and the Bitcoin held on each company’s balance sheet relative to its overall enterprise value .
I highlight the best data points in each category by assigning a gold, silver, or bronze shade. I gave each gold medal 3 points, each silver medal 2 points, and each bronze medal 1 point to come up with an overall score and ranking.
Then I summed up all the points to get an overall ranking. Clean Spark (NASDAQ: CLSKBased on our rankings, Hive Digital Technologies (HIVE) is ranked #1, Hive Digital Technologies (HIVE) is #2, and Marathon Digital Holdings is #3.
CleanSpark has the lowest price-to-book ratio at less than 1, the lowest debt/assets ratio at just 8%, and ranks second in quarterly revenue growth (Y/Y), gross margin, and latest Bitcoin mined. A quarter of the processing power per exahash. CleanSpark also ranked third in EV/sales at 4.6, with a three-year compound annual growth rate (CAGR) of 139%. I would like to see them work on reducing administrative costs and increasing Bitcoin holdings in anticipation of the next halving.
CleanSpark is a leading Bitcoin mining company listed on NASDAQ and registered in Nevada. They own and operate five Bitcoin mining facilities in Georgia and have miners deployed in upstate New York.
The company has a deployed computing power of 9.3 EH/s and is fully funded at 16 EH/s when fully deployed. CleanSpark’s computing power increased by 210% year-on-year. They have established facilities in areas where electricity costs are as low as 1.5 cents, averaging 4.1 cents per kilowatt hour (kWh). This is quite impressive considering the average commercial electricity price in the United States is 12.8 cents per kilowatt hour (kWh).
By running at maximum operating power when power costs are lowest, and optimizing when power costs are higher, we have been able to achieve the best profit margins and highest achieved computing power in the industry.
-Gary A. Vecchiarelli, Chief Financial Officer
The company not only used Bitcoin’s bear market cycle to increase its hashrate (mining power), but it also used this period of lower prices to significantly increase the number of Bitcoins held in its vaults. As you can see from the chart below, they went from holding 100 BTC in February this year to holding 1,677 BTC in August, an increase of nearly 17 times!
CleanSpark mined 659 Bitcoins in August, 1,624 Bitcoins in the third quarter, and 4,729 Bitcoins so far in 2023. Third-quarter revenue was $45.52 million (a year-over-year increase of 46.8%), and GAAP earnings per share were -$0.12, but exceeded expectations by $0.05. The loss, driven primarily by depreciation and amortization and another measure of profitability, Adjusted EBITDA, was $13.3 million in the third quarter, an increase of $8.2 million, or 160%, year over year.
Mining operations require significant capital expenditures in hardware and infrastructure. Bitcoin mining companies like CLSK are currently losing money and may require additional funding to dilute shareholders if cryptocurrency prices fail to rebound as we expect.
Rising energy prices and hashrate increases could negatively impact profit margins. The higher the Bitcoin hash rate climbs, the more computing resources are required to solve problems and mine Bitcoin. The hash rate recently hit an all-time high and may continue to climb. This means higher overall hardware costs for miners and reduced profitability.
The upcoming Bitcoin halving in April 2024 will reduce block rewards in half, which will have a negative impact on the finances of mining companies. This is because the miner who solves the problem first and gets the Bitcoin will get half of what they are currently getting. For the mining companies mentioned in this article, Bitcoin prices would need to rise significantly to return to reporting positive earnings.
While I advocate physical Bitcoin cold storage as the best overall way to participate in the industry, investors may also want to consider investing in Bitcoin miners as they often offer leveraged returns and can provide a form of diversified exposure to the cryptocurrency industry Methods.
CleanSpark is my top pick, but investors might consider owning a smaller basket that includes other top names like HIVE Blockchain Technologies (HIVE) or Marathon Digital Holdings. As Bitcoin prices move higher in the coming months, all of these companies will see significant increases in revenue, earnings before interest, taxes, depreciation, and amortization (EBITDA), profits, and valuations.