All commodity markets have their leverage investment bets. Crude oil has wild exploration and production companies; Gold and precious metals let mining do the dirty work in the ground. A future commodity, bitcoin, is no exception to the rule that when there is a scarce resource in the world to be exploited and investors increasingly value it, miners will make their claim to the riches.
The recent wins on what is possibly the riskiest Bitcoin bet of all led Leeor Shimron, Vice President, Digital Asset Strategy at Fundstrat Global Advisors, to take a look at the "digital gold rush" in Bitcoin miners trading.
These mining companies are fairly new and young, they lack a track record, and some came to market through "detours" – and some of the largest, like Riot Blockchain, were scrutinized by regulators in their early days. They have also faced losses, but Shimon found they hit over $ 1 billion in market cap after investing heavily in the hardware and facilities that helped them in the current Bitcoin during the Bitcoin downturn -Bull market cycle "make it big".
High beta, high risk bitcoin trading
Shimron described the miners in a note last week to customers who expressed interest in the rising stocks as a "high beta play" for Bitcoin. During the recent bull run for the cryptocurrency, which saw Bitcoin jump 900%, the average return among the largest publicly traded miners was 5,000%, according to his analysis.
Bitcoin miners form the central backbone of the Bitcoin blockchain, according to Shimron, as they "burn electricity to make computer-generated guesses to solve cryptographic puzzles" and generate income in the form of mined Bitcoin. While the bitcoin is being mined, the miners sell the assets to cover their expenses. Many are also choosing to keep some of their mined bitcoin on their corporate balance sheet, a trend that is gaining traction among the digitally-minded, disruptive CEO class in the broader market, like Jack Dorsey at Square and Elon Musk at Tesla . Musk just added "Technoking" to his leadership title, and Tesla's CFO recently added "Master of Coin" to his. North American mining company Marathon Digital Holdings recently announced that it had purchased $ 150 million worth of Bitcoin to help keep it on its balance sheet.
The largest publicly traded mining companies the Fundstrat analyst examined include the two Nasdaq-listed companies Riot Blockchain and Marathon Digital Holdings, as well as the two over-the-counter market stocks Hive Blockchain and Hut 8.
In the past year, Bitcoin miners clearly outperformed Bitcoin, a momentum that Fundstrat Global Advisors said will continue as the bull market progresses but could turn violently downward with any correction.
Fundstrat Global Advisors
Shimron's analysis shows that the beta that these Bitcoin mining companies have generates a return of 2.5% for every 1% movement of the cryptocurrency. While there isn't enough historical data to draw firm conclusions, the miners' performance is clearly tied to the price of bitcoin and their trading profile amplifies the up and down movements, he said.
It's a "notoriously competitive industry," as Shimron puts it, where the ability to be profitable may be due to cheap electricity and access to specialized mining hardware. As Bitcoin prices rise, "miners are building new oil rigs or upgrading their hardware with more powerful and efficient machines."
Marathon recently closed a $ 170 million deal for 70,000 Bitmain S-19 ASIC miners that, when fully deployed later this year, will increase its mining output to 103,000 machines.
These high costs of doing business in Bitcoin mining result in low or negative free cash flow and subdued earnings, writes Shimron. However, for the time being, the mining companies have captured the growth of the current Bitcoin bull cycle due to their spending. (You also saw wild trading in the 2017 bitcoin boom.)
Now they have also caught the attention of some of the newest forces in the market, as a recent Bloomberg article on the Bitcoin miners discussion on the WallStreetBets forum on Reddit noted, which fueled the mania in GameStop stocks.
"For investors seeking exposure to miners, this beta is a great opportunity in the midst of a roaring bull market. … There are seizures and setbacks, but we still have plenty of room to grow here," Shimron said in an interview with CNBC.
Investing in Bitcoin in 2021 and beyond
It is the broader cryptocurrency bull market that has fueled the miners, and Shimon believes it can continue in 2021, driven by macroeconomic and demographic factors. Fears of inflation will prop up Bitcoin prices, and even with the recent pressure on returns from the 10-year Treasury Department that can impact cryptocurrency as well as tech stocks, the Fed signals suggest that the central bank will maintain its cautious policy in place until 2023.
Another driving force is the continued adoption of new digital technologies and digital assets among younger investors. "You can see that younger people are interested in Bitcoin and other digital currencies as opposed to gold and commodities, and that speaks for a demographic shift. … It is not crazy for them to interact with money purely digitally," he said opposite CNBC.
Last week, Morgan Stanley became the first major Wall Street bank to offer Bitcoin to its wealthy clients. Due to the risks involved, access to customers with at least USD 2 million was restricted.
There are already other avenues into the crypto market than the underlying currencies, such as the exchanges that trade coins and that will soon be available to more investors. Coinbase was recently valued at $ 68 billion in the private market and plans to list directly on the Nasdaq.
Waiting for a Bitcoin ETF in the US
There are three Bitcoin ETFs in Canada, and at some point a Bitcoin ETF may be available in the US. The most recent attempt at the Securities and Exchange Commission was filed by VanEck ETFs in mid-March, but investors don't have high hopes that the SEC will soon approve a Bitcoin fund. You're looking elsewhere for cryptocurrency investment ideas that go beyond buying Bitcoin itself.
Shimon, who ran an early-stage cryptocurrency and blockchain venture fund prior to joining Fundstrat, said he viewed the miners as the foundation of the crypto space. "The top companies will stay here," he said, citing the economies of scale in investing in equipment that newer entrants will face tougher.
After taking the "smart move" during the Bitcoin bear market to build operations, the current supply chain bottlenecks in the technology sector caused by Covid may further aid these miners' positioning after the capital they have already invested in special purpose machinery for space.
However, like many traders and hedge funds with gold miners and small cap oil explorers, he tends to trade the bitcoin miners in a bull market run rather than viewing them as long term investments.
Shimron continues to prefer Bitcoin as a long-term investment, as well as any ETF that has ultimately been 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 hits the market, the fees are low and it's the safest and easiest way to get into Bitcoin using traditional rails," he said.
The miners have been criticized for the enormous amount of electricity required to run Bitcoin, but Shimron's view depends on financial data and market performance. (He says there is also much to be criticized about the impact of the fiat monetary system on the world.)
"It's pretty clear that the US dollar as a global reserve currency is on its last legs and not disappearing anytime soon, but we are in the later stages of the US dollar as reserve currency and decentralized is the next stage."
While Bitcoin mining stocks pose too high a risk for most investors, he is confident that everyone should be talking about the cryptocurrency world. "This is where everything runs. Finances were the last holdover that the internet didn't touch," said Shimron.