Bitcoin miners are taking an uncertain path in 2023, but opportunity is calling

While the current environment for Bitcoin-Miner may be challenging, new investment opportunities arise.

This is an opinion editorial by Glyn Jones, Founder and CEO of Icebreaker Finance, a specialist personal finance advisory firm, DeFi and Bitcoin mining.

Bitcoin mining, a vital aspect of the cryptocurrency industry and an increasingly important driver of economic development in the United States, faced difficult market conditions in 2022, prompting a wave of failure and uncertainty amid a long crypto winter.

While 2023 has seen modest improvements in unit profitability so far as Bitcoin price growth has outpaced network growth, the path ahead remains uncertain. It is reasonable to assume that in a situation where bitcoin price continues its rally into 2023, capital will quickly flow to bitcoin miners, increasing the hash rate and decreasing miners’ revenue (a commonly preferred metric to understand of revenue per unit is the “hash price”. The question for miners is how likely such a BTC rally is and how long it will take for sufficient investment to be made for hash price to return to equilibrium.

At Icebreaker Finance, we believe that only those miners who generate attractive profits at the “equilibrium” hash price offer opportunities for long-term investors. While hash price appears to have found its equilibrium at around 6 cents to around 8 cents per terahash per day, many miners continue to fail to generate enough cash flow to cover their fiat denominated general operating and debt servicing costs. In many situations, lenders roll over existing facilities on uneconomic terms as a more favorable outcome than default. Amidst this situation, ASIC manufacturers continue to release inventory and in many cases use “unsold” new ASICs to dismantle them themselves through large scale hosting agreements.

Public equity markets reflect this pessimism. Many public miners are now more than 90% off their highs and are trading at valuations that place very little intrinsic value on their companies. However, they remain very volatile and are closely correlated with the price of Bitcoin.

In such a challenging environment, many have labeled the industry “uninvestable.” Our view is different. The spread of performance has increased dramatically, and listed miners offer an incomplete reflection of how wide that spread is. To better understand the relative strength of miners in this environment, we segment the different business models within the industry using a barbell analogy.

On the one hand, we have these miners who operate at scale and are vertically integrated with the underlying mineral rights and energy production. These companies are “behind the meter” where bitcoin mining can improve the economics of their existing business to monetize energy procurement, generation and distribution capabilities. Such participants have not previously been significant players in the bitcoin mining industry. As bitcoin gains broader acceptance and regulatory support for the role bitcoin mining can play in improving grid resilience and decarbonization increases, we should expect energy companies to jump into bitcoin mining at scale, which will be profound will have an impact on the equilibrium hash price.

In the middle of the dumbbell are miners who operate on a large scale “on the grid” or “in front of the meter” and own infrastructure assets but no power generation assets. A wide range of outcomes are expected for these participants, so only a small minority are likely to be able to produce attractive returns for bond and equity investors throughout the cycle. Many participants in this segment of the industry, and particularly those using fiat-denominated leverage in their capital structure, could fail even if they are relieved of near-term improvements in hash prices in the short term. The winners in this group must be extremely discerning in terms of site selection, energy contracting and financial practices.

At the other end of the spectrum are niche operators that typically operate “behind the meter” in smaller locations to monetize truly stranded energy, making them an exciting long-term prospect for investors. Often in the early stages of their business development, they monetize beach gas, flare gas, landfill methane, or partner with renewable energy providers for offtake agreements. In order to identify suitable sites and operate them off-grid, miners will need to perfect a set of challenging multidisciplinary skills, suggesting that execution risk will be high. It can also be difficult to scale the business, which can limit the size of this segment of the industry, even with a favorable tailwind from the activity’s ESG score.

Alongside such niche operators, we also anticipate significant growth in “industrial augmentation” use cases, where bitcoin mining is introduced into the value chain of complementary industries. These are all companies that use large amounts of energy and have the opportunity to monetize the heat generated during mining for other purposes, or to monetize otherwise wasted energy. Greenhouses are an example of the industrial expansion thesis, where water scarcity can lead to greater penetration of greenhouse production in agriculture. At this end of the dumbbell, be it niche operators or industrial augmentation players, many participants are actively seeking ways to monetize the emerging carbon credit markets. Like all market participants now entering the market, infrastructure can be purchased at cheap prices.

For miners who have a truly differentiated power and engineering offering – which can occur anywhere on the bar and particularly at either end – that places them in the top quartile of network production costs, the current market is a time of growth. Growth requires capital, and in some situations modest debt may be appropriate. In such situations, miners are understandably looking for maximum maturity and cheap loan-to-value ratios, while lenders are looking for a security package that includes uncorrelated assets and the ability to introduce risk-sharing into loans so that lenders too can benefit from a situation where the Improved hash price while protecting miner cash flows during times of equilibrium hash price.

This is a guest post by Glyn Jones. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.