Thanks @clarksoucy for the presentation, waiting for you to join SN and send you some sats.
This was part of the last meetup held at BoBspace in BKK last Wed. Are you in Bangkok? Join us next Wed!
2013: 1st Gen Mining Machines Arrive
- Mining was done on home computers until 2013.
- The first mining machines were designed and shipped by Zhang Nangeng (Canaan) and Zhan Ketuan & Wu Jihan (Bitmain) in Beijing in 2013.
- The total network computing power (Hashrate) is measured in Exahash or quintillions of hashes per second. Bitcoin price and Hashrate have generally increased in tandem as a higher price incentivizes miners do deploy more mining machines.
Major Players Emerge
- Bitcoin mining computers (application specific integrated circuits - ASICs) is the sole segment of the global semiconductor industry that is dominated by Chinese companies. These companies design chips along the latest nodes and then outsource production to Samsung & TSMC.
- Bitdeer, led by a cofounder of Bitmain, Wu Jihan, is the newest entrant to the market.
- Intel already scrapped nascent ASIC business.
- Joules Per Terahash* (J/TH) as a measure of machine efficiency (lower is better)
- Leading machines from Bitmain/MicroBT are ~16-18.
- Canaan is 21.5
- Bitdeer recently announced 18, will ship in August 2024.
2017-2018: Rapid Growth in ASIC Sales
- Bitmain and Canaan both applied around the same time to go public on the Hong Kong Stock Exchange in 2018.
- Zhan & Wu court institutional investors (Sequoia and others) and grow much faster than Canaan.
- First 6 Months 2018 Financials:
- Bitmain Revenue: $2.8B USD (10X yoy)
- Bitmain Net Profit: $742M USD
- Canaan Revenue: ~$292M USD
- Canaan Net Profit: ~$30M USD
- Canaan’s total revenue in 2022 was $651M USD, so Bitmain’s scale today is probably larger than in 2018.
ASIC Sales Business Model
• ASIC manufacturers prepay for wafers 5-6 months in advance, so they must estimate future demand.
• ASIC demand is not entirely correlated with the Bitcoin price; it is also influenced by inventory levels of new and used machines, mining farm availability, and miner cash balances.
• ASIC sales are highly profitable during bull markets, but some ASIC manufacturers (Canaan) sold below cost during the last bear market.
• Mining is a highly capital intensive business and miners normally replace their machines every 2-3 years, depending on their power costs and profitability.
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Where is Bitcoin Mined?
- Mining used to be very concentrated in China due to low power costs.
- Neither mining nor machine sales are banned in China, instead mining was described as an undesirable industry that shouldn’t be expanded by government circulars in 2021.
- After China’s circulars, mining migrated worldwide, but the USA has probably become number one by deployed machines and has the most publicly listed miners. Other major markets for major private miners now include Central Asia, Southeast Asia, The Middle East, and South America. Precise location data is not possible to ascertain.
- Most major miners are looking for $0.05 cent per kilowatt hour or cheaper power.
- Some miners are using artificially cheap power.
There Are Multiple Mining Business Models
- Besides mining for themselves, some miners host others’ machines for a fee in their data centers to diversify revenue.
- Leveraging cloud mining, where machines are leased at a fixed price for a set term to a customer who directly receives the Bitcoin produced by said machines, BitFuFu was one of the only miners to have positive net income during the 2023 bear market1.
- Most miners hold most of the Bitcoin they mine, but some like Bitdeer and Iris Energy liquidate all or most of it immediately.
- Impact of change in FASB rules on net income of miners due to fair value accounting may be problem for miners as gains in the value of the Bitcoin they hold will be added to net income.
Bitcoin Mining Stocks & Public Capital Markets
Investors choose Bitcoin mining stocks because they have operational leverage on the Bitcoin price due to relatively fixed costs for power. As the Bitcoin price increases, so do miner margins.
Serious Dilution from ATMs and Convertibles
Many public miners are currently using equity issuance to order new machines and pay expenses. In the past cycle some felt compelled to sell Bitcoin or raise financing at difficult times with onerous, expensive terms.
Valuation Metrics - Market Capitalization
Valuation Metrics - Rank Miners By Capacity
Marathon, Bitdeer, Hut 8, and Core have the highest capacity, but with the exception of Marathon they have large hosting businesses and in Bitdeer’s case, cloud mining operations. Core recently emerged from bankruptcy.
The Cost To Mine
- Integration with power grids lowers costs (Riot demand response arrangement with Texas grid operator).
- Vertical integration, whereby miners control their own mining data centers, versus paying others to host their machines, is a key strategic question due to the higher cost of relying on hosting.
- Marathon, long mostly reliant on hosting, has been investing in vertical integration to lessen reliance on hosting partners and reduce costs.
Valuation Metrics - Revenue Multiples
- Low cost to mine, vertical integration, and cooperation with grid operators lead to higher valuations.
- Debt burdens at Core, Stronghold, Terawulf.
- Lack of large institutional shareholders across the sector absent sector ETFs.
Valuation Metrics - The Hosting Discount
Miners that engage in hosting and cloud mining have these operations valued lower by the markets. Pure play proprietary miners (Riot & Marathon, & Cleanspark) continue to enjoy valuation premiums.
Valuation Metrics - Bitcoin Held
The average miner is valued at 7.2X the value of it’s Bitcoin holdings, but there are serious divergences and the multiple will probably contract in the future.
Valuation Metrics - Projected Mining Results
Riot sold 57% of the Bitcoin it mined in the five fiscal years through 2023. Adding Bitcoin held to future mining projection is one possible valuation multiple for listed miners, after deducting Bitcoin sold to pay for costs
Conclusion: Mining is Diverging Between Two
Competing Strategic Models
- Industry leaders are choosing two distinct strategies:
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- Pure play proprietary mining (Marathon & Riot & Cleanspark)
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- Diversified mining operations that mix proprietary mining with cloud mining (BitFuFu), hosting (Hut8), and also ASIC sales and AI data centers (Bitdeer).
- Mining is a low barrier to entry arms race. The miners with the lowest cost of capital, electricity, and greatest capacity will pull ahead over the long term. But how to finance expansion? Sell Bitcoin or sell shares or take on debt? Or use hosting, cloud mining, and ASIC sales to cross subsidize operations?
- Expect continued emphasis on vertical integration and cooperation with power grids to lower mining cost.
Footnotes
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Six months 2023, updated figures not yet available as FUFU just went public ↩