Bitcoin Miners Dramatically Underperform During Recent Bitcoin Correction; Could Create Opportunity

In the first three days of December, the price of Bitcoin declined around 8% as it tracked the declines of many high multiple, high beta tech stocks traded on the NASDAQ. Fears surrounding the potential impact of the Omicron variant, the Fed’s potentially accelerating the taper of its bond purchases, and traders attempting to squeeze out the same door as they decided to lock in profits for calendar 2021 all contributed to the poor performance of risk assets.

As the group generally does, Bitcoin miners declined significantly more than the underlying digital currency during this time of stress. (The miners likewise typically outperform Bitcoin during periods of euphoria.) The weakness in the Bitcoin miners, particularly in Bitfarms Ltd. (TSXV: BITF), may have created an interesting opportunity for risk-tolerant investors. The stocks of Bitfarms and two other leading miners, Riot Blockchain, Inc. (NASDAQ: RIOT) and Marathon Digital Holdings, Inc. (NASDAQ: MARA), lost 17.8%, 19.6% and 18 .0%, respectively, of their value just over the December 1-3 period.

Based on the companies’ most recent Bitcoin monthly production rates — 339 and 466 in November for Bitfarms and Riot, respectively, and 1,054 using pro forma calculations for Marathon — and the miners’ average production costs, we compute the current annualized EBITDA run rates for all three firms. See table below for details. (Marathon produced only 196 Bitcoin in November, but mined about 34 units of the digital currency on December 1 alone. The company’s power plant in Hardin, Montana and its mining computers began operating at about full capacity on that date.)

December 20211,054 (A)
November 2021339466196
October 2021343464418
September 2021305406341
(A) Marathon’s potential mining rate in December 2021 coud be 1,054 as it mined 34 Bitcoin on 12/1/21 alone.
Total Bitcoin Mined January 1, 2021 – November 30, 20213,08933872712
Number of Bitcoin Owned as of November 30, 20212,9734,4647,649
Current Hash Rate (EH/s):
     Goal – December 20214.6
     Goal – March 20223.08.0
     Goal – Mid-year 202213.3
     Goal – Year End 20228.09.0
Bitcoin Network Hash Rate as of December 3, 2021 (EH/s)177.7177.7177.7
Company Percentage of Bitcoin Network Hash Rate1.2%1.6%1.8%
Installed Electric Power Capacity, in Megawatts:
     December 31, 202069
     December 3, 2021106
     December 31, 2021 E168350
     December 31, 2022 E370457
Estimated Production Cost Per Bitcoin Mined (US$)$6,900$13,814$5,612
Bitcoin Price (US$)$53,780$53,780$53,780
Cash – 9/30/21 for BITF and RIOT;  12/1/21 for MARA (US$ millions)$43$58$624
Debt – 9/30/21 for BITF and RIOT;  12/1/21 for MARA (US$ millions)$21$8$650
Stock Market Value (US$ millions)$1,150$3,287$4,209
Enterprise Value (US$ millions)$968$2,997$3,824
Annualized EBITDA Based on Most Recent Monthly Production Rate (US$ millions):
    Using  Current  Bitcoin Price of US$53,780$191$223$609
    Using  US$40,000  Bitcoin Price $135$146$435
Enterprise Value/EBITDA Run Rate at Current Bitcoin Price5.113.46.3
Enterprise Value/EBITDA Run Rate at US$40,000 Bitcoin Price7.220.58.8

At the current Bitcoin price of US$53,780, Bitfarms’, Riot’s and Marathon’s current annualized operating cash flow capacities are approximately US$191 million, US$223 million and US$609 million, respectively. At an assumed US$40,000 Bitcoin price, those estimates cycle down to US$135 million, US$146 million, and US$435 million, respectively.      

Giving effect to the market values of the three companies’ most recently disclosed Bitcoin holdings (2,973, 4,464 and 7,649 for Bitfarms, Riot and Marathon, respectively), the enterprise values (EV) of the companies differ markedly: only US$968 million for Bitfarms, US$3.0 billion for Riot, and US$3.8 billion for Marathon.

As a consequence, Bitfarms trades at an EV-to-run rate EBITDA ratio of only 5.1x assuming the current Bitcoin prices hold for the next twelve months. A 5.1x cash flow ratio is generally considered quite low for a company with the growth profile of Bitfarms. Indeed, it expects to increase its computing power, or hash rate, to 8.0 Exahash per second (EH/s) by year-end 2022 versus its current capacity of 2.1 EH/s. None of this increase is reflected in our pro forma cash flow estimates.

At current Bitcoin prices, the pro forma EV/EBITDA multiples for Riot and Marathon are higher — 13.4x and 6.3x, respectively.

Interestingly, the same set of calculations done at a much lower Bitcoin price, US$40,000, yields cash flow multiples of 7.2x, 20.5x and 8.8x for Bitfarms, Riot and Marathon, respectively. Even at this lower digital currency price, down 25% from current levels, Bitfarms’ cash flow valuation looks quite reasonable.

Information for this briefing was found via Edgar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

Leave a Reply