Bitcoin Miners’ EV-to-Revenue Valuations Now Rival Those Of Fast Growing Companies

After a dip in January 2021, Bitcoin has jumped around 50% over the last 3 weeks on news such as Tesla’s purchase of US$1.5 billion of Bitcoin and Mastercard’s announcement that it will enable the use of cryptocurrencies on its network. Stocks of Bitcoin miners have followed a similar pattern. 

Given the moves in these stocks, their valuations now equal or exceed some of the fastest growing, most fundamentally sound companies in the world. Consider the following reasoning.

On a global basis, Bitcoin miners have 147.315 Exahash per second (EH/s) of computing capacity (according to a February 4, 2021 Bitfarms Ltd. press release). Bitcoin miners solve extremely complex math problems, the answer to which is a long string of numbers, called a hash. In turn, the speed at which a miner’s suite of computers can reach such an answer is termed the hash rate. A miner which has a total of 1 EH/s of computing capacity can create one quintillion (one million trillion) hashes per second.

Perhaps the most liquid Bitcoin mining company in the world is Riot Blockchain Inc. (NASDAQ: RIOT). The company currently has 0.842 EH/s of computing power. It previously ordered 2,002 S19 Pro Antminers, state-of-the-art mining computers, and received this equipment earlier this month. When deployed, Riot’s capacity will jump to 1.06 EH/s.

The company has reserved 11,542 more Antminers, which should be received by October 2021. When installed, Riot would have computing capacity of 3.8 EH/s. So, by late 2021, Riot’s market share of the Bitcoin mining industry will be around 2.4% (3.8EH/s divided by total global capacity of around 160 EH/s by then). This assumes that all of Riot’s computing capacity will be dedicated to the mining of Bitcoin, and none to the mining of other cryptocurrencies.

Notably, these mining computers are not cheap. Such devices are advertised as being for sale on various internet sites for around US$5,400. So, the purchase of around 13,500 computers this year would entail capital expenditures in the vicinity of US$70 million.

Potential Revenues For Riot

According to the rules of the Bitcoin network, from May 2020 through May 2024 about 970 Bitcoins will be created per day (6.25 Bitcoin are awarded to the winning miner approximately every ten minutes, plus about 0.5 Bitcoins to compensate the winner for the cost of validating transactions and adding then to the blockchain). Since Riot will have about a 2.4% market share by late 2021, it should by then be awarded about 23 1/4 Bitcoins per day. If Bitcoin is priced at around US$50,000 at that point, Riot’s daily revenue would be around US$1.16 million. This of course assumes that Bitcoin holds its astonishing 800% ascent since March 2020.

We do note that according to the Bitcoin halving mechanism, only 3.125 Bitcoins will be awarded every ten minutes, plus transaction costs, beginning in May 2024. All things being equal, this will cut Riot’s daily revenue opportunity by about 50% at that time.

Riot’s annualized revenue run rate by late 2021 would then be about US$425 million (US$1.16 million times 365). Its current enterprise value (EV) is approximately US$3.3 billion, so the ratio of its EV to its potential future revenues is about 7.75x (US$3.3 billion divided by US$425 million). To put that valuation measure in perspective, Google, the rapidly growing technology bellwether with essentially a monopoly on internet search, has an EV-to-consensus 2022E revenue of around 5.75x. 

Consequently, Riot, a company with about a 2.4% future market share in a very competitive industry and which is linked to an extremely volatile underlying commodity, trades at a two-multiple point EV-to-revenue premium to one of the best positioned companies in the world.

The table below shows the current Bitcoin mining capacity, as well as company-stated year-end 2021 goals, for three largest Canadian-listed Bitcoin miners — Bitfarms Ltd. (TSXV: BITF), HIVE Blockchain Technologies Ltd. (TSXV: HIVE) and Hut 8 Mining Corp. (TSX: HUT) — as well as Riot. The EV-to-current expected annualized revenue run rate is also shown. On this measure, Bitfarms and Hut 8 mining have the lowest valuations.

Operating Hash Rate, in EH/s0.9651.0730.6530.842
Current Global Bitcoin Mining Market Share (A)0.7%0.7%0.4%0.6%
Hash Rate Goal By Year- End 2021, in EH/s3.01.5131.2293.8
Potential Market Share If Achieved1.9%0.9%0.8%2.4%
Expected Annualized Bitcoin Awards Based on Current Hash Rate2,3192,5791,5692,024
Assumed Bitcoin Price, in US Dollars$50,000$50,000$50,000$50,000
Annualized Revenue, Based on Current Hash Rate, US$ Millions$116$129$78$101
Stock Market Value, in US$ Millions$298$783$1,083$3,328
Net Debt, in US$ Millions (B)$23$8($10)($39)
Enterprise Value, in US$ Millions$321$791$1,073$3,289
EV-to-Current Annualized Revenue Run Rate2.86.113.732.5
Estimated 2/14/21
(A) According to Bitfarms, the current global Bitcoin mining capacity is 147.315 EH/s. (B) Net debt as of September 30, 2020.

A number of Bitcoin miners are trading at revenue multiples equal to or greater than those of fast-growing, extremely well-positioned companies which are subject to less underlying commodity volatility than Bitcoin miners. At a minimum, it would seem that for Bitcoin miners to maintain their valuations, the price of Bitcoin must at least hold its current levels.  

Bitcoin last traded at US$52,563 as of the time of writing.

Information for this briefing was found via Sedar 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.

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