BM Pro Daily - Mining Equity Performance Cycle
The purpose of this release in specific will be twofold; the first will be to update readers on the latest updates for publicly-traded miner hash rate, production, and bitcoin holdings. The second will be to present a framework for how to approach investing in bitcoin miners, with a focus on the publicly-traded sector in particular.
Public Miners Hash Rate Update
With the end of the month near, we will have another round of public miner production updates for all of May 2022 in a couple weeks. With the latest monthly production releases, April 2022 was yet another month of growing hash rate and held bitcoin, despite a slightly lower production month. The group of public miners we’re tracking below now make up roughly 18% of total network hash rate using their April numbers of 37.91 EH/s and the latest decline in total network hashrate to 209.91 EH/s.
Bitcoin holdings across miners are now up to 46,132 bitcoin worth over $1.3 billion at a $29,000 price. That’s roughly a 7% monthly increase when including miners with reported data for both March and April. All of this data is pre bitcoin’s market fall from $40,000 so the next month of data updates will be key to see if top public miners are scaling down their bitcoin holdings or hash rate in response.
Investing in Public Bitcoin Miners
Investing in publicly-traded bitcoin miners carries risks that buying bitcoin itself does not, due to the operational risk as well as the reality that public equities trade at multiples of future expected earnings. During environments where treasury yields rise significantly, this causes earnings multiples to fall, which is why equities as a whole have performed poorly over the course of 2022.
However, the dynamics involved with evaluating publicly-traded bitcoin miners is a bit different. Unlike other “commodity” producers, bitcoin miners often attempt to retain as much bitcoin on their balance sheet as possible. Relatedly, the future supply issuance of bitcoin is known into the future with near 100% certainty.
With this information, if an investor values these equites in bitcoin terms, significant outperformance against bitcoin itself is achievable if investors allocate during the correct time during the market cycle using a data-driven approach.
When is the optimal time to invest in publicly-traded bitcoin miners?
An extremely simply framework for investors is:
Hash price bull market = Bitcoin miners outperform bitcoin
Hash price bear market = Bitcoin miners underperform bitcoin
Hash price divides miner revenue by hash rate (daily miner revenue per 1 TH/s, as first coined by the team at Luxor).
While there are certainly other variables involved in valuing these companies, including the operational risks and the competence of the management team to just name a couple, this is a simple framework for investors to internalize and utilize going forward.
To start, let’s display hash rate since the start of 2020, which hash price is partially derived from.
Below is the hash price (daily miner revenue per TH/s) in both USD and BTC.
Currently, hash price is $0.118, which is above the 2020 low of $0.074 but falling rapidly as hash rate (and subsequently miner difficulty) continue to increase as price falls/consolidates.
Let’s take a look at the latest hash price bull and bear cycles and how the publicly-traded miners performed benchmarked not against dollars, but instead bitcoin (as this should be the entire purpose of investing in a mining operation).
Below is the hash price from its 2020 low to its 2021 high and the performance of a few publicly-traded miners ($MARA, $RIOT, $HUT) benchmarked to bitcoin. During the hash price bull market (where price rises faster than hash rate), these three names outperformed bitcoin by 318%, 207%, and 62% respectively.
Following the hash price top in October at $0.4222 dating all the way to today where hash price is $0.1182, these same names have returned the following against bitcoin:
While bitcoin itself has obviously drawn down significantly since its highs made in the fall of 2021 (down 57%), these publicly-traded miners have declined in value by significantly more with most down over 70%.
The point of this article is to dissect the cyclicality of the mining industry, and how to think of these securities when navigating the bitcoin market cycle.
Another important fact of the bitcoin market is that hash rate has continued to rise in an exponential manner over the course of its history, which in turn means hash price is in a secular downtrend in both USD and BTC terms.
To circle back to a point made earlier, the entire purpose of investing into a mining operation should be to get a return on investment in bitcoin terms. If you cannot achieve a positive ROI in BTC terms, it was likely not a good investment in the first place.
Thus, because of the diminishing block reward and rising hash rate, hash price in BTC terms is falling in lockstep in programmatic fashion with each subsequent positive difficulty adjustment and halving event.
In simple terms, this means that it is becoming increasingly more challenging to produce a marginal unit of bitcoin with a unit of hash, which is also why nailing the timing of investing in publicly-traded miners as well as the ASIC rigs themselves can be so lucrative.
While nothing is ever certain, using a data-driven approach, it is possible to achieve significant return on investment in bitcoin terms with bitcoin miners, in both the public and private sectors.
While achieving advantageous levels of relative performance requires a fair share of analysis (and luck) regarding both the bitcoin hash rate, the bitcoin price action, and increasingly the macroeconomic backdrop, we expect the opportunity to once again arise for mining investors to outperform in the not-so-distant future.
While that day may not be here today, our mission is to put forward transparent analysis around the bitcoin ecosystem, with an aim to help individuals and institutions alike make informed decisions regarding their savings/investments.
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