Crypto Miners Strike Gold
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For Traditional Finance (TradFi) investors seeking exposure to the crypto realm, the situation resembles a scene from a unique cheese shop, reminiscent of John Cleese’s encounter in Monty Python. The options have been notably scarce.
The demand is evident—just look at Michael Saylor’s feat of selling billions in equity and convertible bonds at a substantial premium to Bitcoin’s implied price. Yet, the choices for investors within the crypto equities market have been limited to the SEC-disapproved Coinbase and a less-than-appetizing array of Bitcoin miners.
Historically, miners, whether dealing with bitcoin, gold, or other resources, have not been the most alluring investments. The combination of volatile spot prices, high fixed costs, substantial capital requirements, governance concerns, and operational challenges has confined the mining sector to a niche for specialized investors. Even those bold enough to venture into this domain may find the economics of Bitcoin mining less than appealing.
Navigating the turbulent waters of cryptocurrency involves contending with its inherent volatility, accelerated depreciation of mining rigs due to constant technological advancements, diminishing rewards with each bitcoin halving, and relatively low entry barriers. In challenging times, bitcoin mining can seem like an unappealing business model.
Despite these challenges, exchange-listed bitcoin miners have managed to attract investors from the captive audience of Traditional Finance (TradFi) asset managers seeking exposure to the crypto space. However, the days of such captivation are numbered.
Anticipating the approval of the spot bitcoin ETF, expected in January, miners will soon need to secure investment capital based on their individual merits rather than merely serving as a proxy for bitcoin.
Fortunately, just as this transition looms, bitcoin miners are undergoing a transformation into more robust businesses. Transaction fees are surging, constituting roughly 25% of mining revenue, thanks to the increased demand for Bitcoin blockspace driven by Ordinals. Electricity costs are decreasing as miners embrace affordable renewable energy, sometimes partnering with power plants to utilize otherwise stranded energy.
Moreover, revenue streams are diversifying as some miners offer computing capacity to the AI industry. The specialized Bitcoin GPUs they employ happen to possess the rare high density required for AI computing. This “GPU as a service” business positions bitcoin miners among the select few sectors where AI is boosting companies’ profits more rapidly than it’s elevating their costs.
In brief, the current landscape presents an exceptionally opportune moment for those immersed in the world of Bitcoin mining. According to Bill Papanastasiou, a research analyst specializing in digital assets at Stifel Financial, the economics of bitcoin mining are currently so favorable that the payback period for new mining equipment is less than a year—a remarkably swift return.
While It’s Not Yet Up to a One Year Duration
This kind of rapid return on investment should undoubtedly pique the interest of investors across the spectrum. Papanastasiou notes a growing institutional interest in this sector, but it’s likely that crypto miners will remain a somewhat specialized investment focus for a while, possibly until the industry demonstrates sustained profitability across a full cycle.
Institutional investors may still harbor memories of the industry’s near collapse in the recent downturn. Generalists, on the other hand, require time to grasp the intricacies of the business model and establish methodologies for valuing mining stocks. Papanastasiou, for instance, evaluates miners primarily based on “EV-to-contracted hash rate,” a unique metric that might take some time for non-specialists to become accustomed to.
As a consequence, the small cohort of crypto enthusiasts within Traditional Finance (TradFi) may continue to have the sector largely to themselves for an extended period.
The More Careful Mouse Will Eventually Get the Cheese
In the ever-evolving world of bitcoin mining, it’s often said that the second mouse gets the cheese. The present economics of bitcoin mining, though seemingly favorable, are likely part of a cyclical pattern inherent in mining operations. However, amidst this cyclical nature, recent positive developments such as increased transaction fees, reduced energy costs, and the advent of new revenue streams from AI appear to have a more lasting, structural impact.
If these trends persist, bitcoin miners could evolve beyond being merely a cyclical wager tied to the fluctuating price of bitcoin. While the listed miners have experienced significant gains this year, it remains uncertain whether these developments are already factored into their current valuations. The upcoming landscape holds the key to further unraveling the dynamics of this intriguing industry
The Bitcoin Halving Will Initiate a Decline
However, as outlined in their forward-looking analysis this week, the digital assets team at VanEck anticipates a remarkable surge, predicting that at least one publicly traded mining stock will experience a tenfold increase by year-end. Given that many of these stocks have already demonstrated triple or quadruple growth this year, an additional tenfold rise could certainly capture the attention of even the most casual investors, prompting a renewed interest in crypto-related equities.
Should this prediction unfold, those exploring the crypto market will discover a significantly enhanced selection at the metaphorical cheese shop.
