All commodity markets have their investment bets leveraged. Crude oil has wild exploration and production companies; gold and precious metals make mining operations do the dirty work on the ground. A commodity of the future, bitcoin, is no exception to the rule that when there is a scarce resource to exploit in the world, and investors place increasing value on it, miners will be quick to stake their right to wealth.
Recent gains on what may be the riskiest bitcoin bet of all prompted Leeor Shimron, vice president of digital asset strategy at Fundstrat Global Advisors, to take a look at the ‘digital gold rush’ in miner trading. of bitcoins.
These mining companies are fairly new and young, lacking in track records, and some came to market indirectly, and some of the larger ones, such as the Riot Blockchain, attracted regulatory scrutiny in their early days. They have also been trading at a loss, but Shimon noted that they have reached more than $ 1 billion in market capitalization after investing heavily during the bitcoin downturn in the hardware and facilities that helped them “hit big” on the cycle. current bitcoin bull market.
Trading high-risk and beta bitcoins
Shimron described the miners in a note last week to clients who expressed interest in the rising shares as a “high beta bet” on bitcoin. During the recent bull run on the cryptocurrency, during which bitcoin surged 900%, the average return among the largest publicly traded miners was 5,000%, according to their analysis.
Bitcoin miners, in Shimron’s words, form the backbone of the bitcoin blockchain, as they “burn electricity to generate computer guesses with the goal of solving cryptographic puzzles” and generate revenue in the form of mined bitcoins. As the bitcoin is mined, the miners sell the assets to cover their expenses. Many choose to also keep a portion of their mined bitcoin on their corporate balance sheet, a trend that is beginning to gain traction with the most digitally oriented and disruptive class of CEOs in the broader market, such as Jack Dorsey at Square and Elon Musk. at Tesla. Musk just added “Technoking” to his executive title and Tesla’s CFO recently added “Master of Coin” to his. The North American mining company, Marathon Digital Holdings, recently announced that it had bought an additional $ 150 million in bitcoin to keep on its balance sheet.
The largest publicly traded mining companies the Fundstrat analyst reviewed include the two Nasdaq-listed companies, Riot Blockchain and Marathon Digital Holdings, and two OTC stocks, Hive Blockchain and Hut 8.
Over the past year, bitcoin miners largely outperformed bitcoin, a dynamic that Fundstrat Global Advisors says will continue as the bull market develops, but could turn violently lower on any correction.
Fundstrat Global Advisors
Shimron’s analysis shows that the beta exhibited by these bitcoin mining companies generates a 2.5% return for every 1% move in the cryptocurrency. While there is not enough historical data to draw firm conclusions, the performance of miners is clearly tied to the price of bitcoin, and their business profile amplifies the pros and cons, he said.
It’s a “notoriously competitive industry,” in Shimron’s words, where the ability to be profitable can come down to cheap electricity and access to specialized mining hardware. As the price of bitcoin rises, “miners create new platforms or upgrade their hardware with more powerful and efficient machines.”
Marathon recently made a $ 170 million deal for Bitmain’s 70,000 S-19 ASIC miners, which when fully implemented later this year will increase its mining power to 103,000 machines.
This high cost of doing business in bitcoin mining results in low or negative free cash flow and moderate profits, writes Shimron. But mining companies have so far captured the growth of bitcoin’s current bull cycle as a result of their spending. (They also saw wild trading in the bitcoin boom of 2017).
Now they have also attracted the attention of some of the newer forces in the market, as noted by a recent Bloomberg article on bitcoin miners that were discussed on the WallStreetBets message board on Reddit, fueling the craze in stocks. GameStop.
“For investors looking to gain exposure to miners, that beta makes it a great opportunity in the middle of a roaring bull market … There are starts and pullbacks, but we still have a lot of room to grow here,” Shimron said in a interview with CNBC.
Investing in bitcoin in 2021 and beyond
It is the broader bull market in crypto that has driven miners and Shimon believes it may continue into 2021, driven by macroeconomic and demographic factors. Fear of inflation will support bitcoin prices, and even amid recent 10-year yield pressure from the Treasury, which may act on the cryptocurrency as it does tech stocks, he said it is clear that the Fed indicates that the central bank wants to keep its policies moderate. effective until 2023.
Another driving force is the continued adoption of new digital technologies and digital assets by younger investors. “You see younger people gravitate towards bitcoin and other digital currencies instead of gold and commodities, and that speaks of a demographic shift … It’s not crazy for them to interact with money in a purely digital way,” he told CNBC.
Last week, Morgan Stanley became the first major Wall Street bank to offer its wealthy clients access to bitcoin. It limited access to clients with at least $ 2 million given the risks involved.
There are already ways to enter the crypto market in addition to the underlying currencies, such as coin-trading exchanges, which will soon be available to more investors. Coinbase was recently valued at $ 68 billion on the private market and is planning a direct listing on the Nasdaq.
Waiting for a bitcoin ETF in the US
There are three bitcoin ETFs in Canada, and at some point, there may be a bitcoin ETF available in the U.S. The latest attempt at the Securities and Exchange Commission was introduced in mid-March by VanEck ETFs, but the Investors don’t have high hopes that the SEC will soon approve a bitcoin fund, they are looking elsewhere for cryptocurrency investment ideas that go beyond buying bitcoin itself.
Shimon, who ran an early-stage cryptocurrency and blockchain venture fund before joining Fundstrat, said he does see miners as a foundation for the crypto space. “Major companies will be here to stay,” he said, pointing to the economies of scale they invest in equipment that new entrants will have a harder time competing with.
After making the ‘smart move’ during the bitcoin bear market to develop operations, the current shortage of the tech sector supply chain caused by Covid may further aid the positioning of these miners after the capital they have already put into machines. specialized for space.
Still, as many traders and hedge funds do with small-cap gold miners and oil explorers, he is inclined to trade bitcoin miners in a bull market, rather than seeing them as investments to hold for the long term. .
The performance of the SPDR Gold Shares ETF versus the VanEck ETF following an index of gold miners in recent history.
Shimron continues to prefer bitcoin as a long-term investment, as well as any ETF ultimately approved by the SEC for US investors. “It is only a matter of time before the SEC approves a bitcoin ETF,” he said. “When a BTC ETF arrives, the fees will be low and it will be the safest and easiest way to use traditional rails to get exposure to bitcoin,” he said.
Miners have faced criticism for the huge amounts of electricity required in bitcoin operations, but Shimron’s opinion comes down to finances and market performance. (He says there is also a lot to criticize about the impact of the fiat currency system on the world.)
“It is quite clear that the US dollar as a world reserve currency is in its last stages, it will not disappear anytime soon, but we are in the last stages of the US dollar as a reserve currency, and decentralization is the next stage.
Even if bitcoin mining stocks are too high a risk for most investors, he is confident to say that the world of cryptocurrencies should be on everyone’s radar. “This is where it all goes. Finance has been the last vestige left untouched by the Internet,” Shimron said.