A risky bitcoin purchase in a bull market bigger than cryptocurrency

All commodity markets have their investment bets leveraged. Crude oil has pioneering exploration and production companies; gold and precious metals make mining operations do the dirty work of the soil. A commodity of the future, bitcoin, is no exception to the rule that when there is a scarce resource to explore in the world and investors are placing increasing value on it, miners rush to claim their rights to wealth.

Recent gains in what could be the highest risk bitcoin bet of all have led Leeor Shimron, vice president of digital assets strategy at Fundstrat Global Advisors, to take a look at the “digital gold rush” in the bitcoin miner trade.

These mining companies are relatively young and young, lacking track record and some have reached the market in “indirect ways” – and some of the larger ones, such as Riot Blockchain, attracted regulatory scrutiny in their early days. They have also been operating at a loss, but Shimon noted that they reached more than $ 1 billion in market capitalization after investing heavily during bitcoin’s slowdown in hardware and facilities that helped them “hit big” in the current bullish cycle of the bitcoin.

Shimron described the miners in a note last week to customers who expressed interest in bullish stocks as a “high beta bet” on bitcoin. During the recent bullish run for cryptocurrency, during which bitcoin rose 900%, the average return among the largest publicly traded miners was 5,000%, according to his analysis.

Bitcoin miners, in Shimron’s words, form the backbone of the bitcoin blockchain, as they “burn electricity to computer generated assumptions to solve cryptographic puzzles” and generate revenue in the form of extracted bitcoin. As bitcoin is mined, miners sell the assets to cover their expenses. Many also choose to keep some of their bitcoin extracted on their corporate balance sheet, a trend that is starting to gain traction with the disruptive and more digitally oriented class of CEOs in the broader market, such as Jack Dorsey at Square and Elon Musk in Tesla. Musk just added “Technoking” to his executive title and Tesla’s CFO recently added “Master of Coin” to his. North American mining company Marathon Digital Holdings recently announced that it has purchased an additional $ 150 million worth of bitcoins to keep on its balance sheet.

The largest publicly listed mining companies that the Fundstrat analyst has analyzed include the two Nasdaq listed companies, Riot Blockchain and Marathon Digital Holdings, and two over-the-counter stocks, Hive Blockchain and Hut 8.

Shimron’s analysis shows that the beta that these bitcoin mining companies display generates a 2.5% return for every 1% move in the cryptocurrency. Although there is not enough historical data to draw firm conclusions, the mining companies’ performance is clearly linked to the price of bitcoin, and their trading profile amplifies the advantages and disadvantages, he said.

It is a “notoriously competitive industry”, in the words of Shimron, where the ability to be profitable can boil down to cheap electricity and access to specialized mining hardware. As the price of bitcoin increases, “miners build new platforms or update their hardware with more powerful and efficient machines”.

Marathon recently entered into a $ 170 million deal for Bitmain’s 70,000 S-19 ASIC miners, which when fully deployed later this year, will increase its mining capacity to 103,000 machines.

This high cost of doing business in bitcoin mining results in low or negative free cash flow and smooth profits, writes Shimron. But mining companies, for now, have captured the growth of the current bitcoin bullish cycle as a result of their spending. (They also saw wild trade in the 2017 bitcoin boom).

Now, they have also attracted the attention of some of the newer forces in the market, as a recent Bloomberg article noted about bitcoin miners being discussed on the WallStreetBets message board on Reddit, which fueled the GameStop stock craze.

“For investors looking to gain exposure to mining companies, this beta is a great opportunity during a bull market. There are some leaps and bounds, but we still have a lot of room to grow here,” Shimron said in an interview with CNBC.

It is the broadest bull market in cryptocurrencies that has fed miners and Shimon believes that this could continue in 2021, driven by macroeconomic and demographic factors. Inflation fears will support bitcoin prices and, even in the midst of the recent 10-year Treasury yield pressure, which can act on cryptocurrency as well as on technology stocks, he said it is clear from the Fed’s signal that central bank wants to keep its peaceful policies in place until 2023.

Another driving force is the continued adoption of new digital technologies and digital assets by younger investors. “You see younger people gravitate towards bitcoin and other digital currencies instead of gold and commodities and that indicates a demographic shift. … For them, it is not crazy to interact with money in a purely digital way,” he said. to CNBC.

Last week, Morgan Stanley became the first major Wall Street bank to offer its wealthy customers access to bitcoin. It limited access to customers with at least US $ 2 million, given the risks involved.

There are already ways to enter the crypto market in addition to the underlying currencies, such as exchanges that trade currencies and will soon be available to more investors. Coinbase was recently valued at $ 68 billion in the private market and is planning a direct listing on Nasdaq.

There are three bitcoin ETFs in Canada and, at some point, there may be a bitcoin ETF available in the United States. The SEC will approve a bitcoin fund soon. They are looking elsewhere for cryptocurrency investment ideas that go beyond buying bitcoin itself.

Shimon, who managed an early-stage cryptocurrency and blockchain venture fund before joining Fundstrat, said he sees miners as a foundation for the crypto space. “The top companies are here to stay,” he said, pointing to economies of scale by investing in equipment that younger competitors will have a harder time with.

After making the “smart move” during the bitcoin bear market to build operations, the current scarcity of the technology sector supply chain caused by Covid may further help position these miners after the capital they have already invested in specialized machines into space.

Still, as many traders and hedge funds do with small-cap gold miners and oil explorers, he is inclined to trade bitcoin miners in a bull market race, rather than seeing them as investments in long term.

Shimron continues to prefer bitcoin as a long-term investment, as well as any SEC-approved ETF for U.S. investors. “It’s only a matter of time before the SEC approves an ETF bitcoin,” he said. “When a BTC ETF arrives, rates will be low and it will be the safest and easiest way to use traditional tracks to gain exposure to bitcoin,” he said.

Miners have faced criticism about the huge amount of electricity needed in bitcoin operations, but Shimron’s vision is down to finance and market performance. (He says there is a lot to criticize about the impact of the fiat currency system on the world as well.)

“It is quite clear that the US dollar as a global reserve currency is in its last stages, not disappearing anytime soon, but we are in the final stages of the US dollar as a reserve currency, and decentralized is the next stage.”

Even though bitcoin mining stocks are at very high risk for most investors, he is confident that the cryptocurrency world should be on everyone’s radar. “This is where everything is going. Finance is the last vestige that hasn’t been touched by the internet,” said Shimron.