A risky acquisition of bitcoin on a larger bullfighting market than cryptocurrency

All commodity markets have leveraged investment. Oil has wild cat exploration and production companies; gold and precious metals have mining operations that do the dirty work in the ground. A commodity of the future, bitcoin, is no exception to the rule that when there is a limited resource to exploit in the world, and investors place increasing value on it, miners will rush to seize the wealth.

Recent gains in what could be the biggest bitcoin bet of all have prompted Leeor Shimron, vice president of digital assets strategy at Fundstrat Global Advisors, to take a look at the “digital gold rush” in bitcoin mining trading. .

These mining companies are fairly new and young, have no records, and some have come to market in “roundabout ways” – and some of the largest, such as the Riot Blockchain, attracted regulatory scrutiny in the early days. They also ran at a loss, but Shimon noted that they reached more than $ 1 billion in market capitalization after investing heavily during the bitcoin recession in hardware and facilities that helped them “reach” it. in the current bitcoin market cycle.

Shimron described the miners in a note last week to customers who expressed interest in the growing shares as a “big beta game” on bitcoin. During the recent cryptocurrency race, in which bitcoin grew by 900%, the average yield among the largest publicly traded miners was 5,000%, according to its analysis.

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

The largest listed mining companies that Fundstrat analyst analyzed include the two Nasdaq listed companies, Riot Blockchain and Marathon Digital Holdings, and two market shares, Hive Blockchain and Hut 8.

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

It is a “notoriously competitive industry”, in Shimron’s words, in which the ability to be profitable can be reduced to cheap electricity and access to mining hardware. As the price of Bitcoin rises, “miners are producing new platforms or upgrading their hardware with more powerful and efficient machines.”

Marathon recently completed a $ 170 million deal for Bitmain’s 70,000 S-19 ASIC miners, which, when fully deployed by the end of this year, will increase their operating power to 103,000 cars.

This high cost of activity in bitcoin mining results in a low or negative free cash flow and low earnings, writes Shimron. But mining companies have so far picked up on the current bitcoin bull cycle as a result of their spending. (They also saw wild trading in the bitcoin boom of 2017.)

Now, they have also attracted attention from the latest market forces, as a recent article from Bloomberg mentioned that bitcoin miners were discussed in the WallStreetBets message forum on Reddit, which fueled the mania in the actions of GameStop.

“For investors who want to get exposure to miners, that beta makes it a great opportunity in the middle of a bull market. … There are crises and beginnings and retreats, but we still have a lot of room to grow here, “Shimron said in an interview with CNBC.

The wider bull market of cryptocurrencies has fueled mining and Shimon believes it can continue in 2021, driven by macroeconomic and demographic factors. Inflation concerns will support bitcoin prices and even amid recent pressure from the 10-year Treasury yield, which may act on cryptocurrencies, as it does on technological stocks, he said, from the Federation signaling that the central bank wants to keep the right policies. instead until 2023.

Another driving force is the continued adoption of new digital technology and digital assets by younger investors. “You see young people gravitating towards bitcoin and other digital currencies as opposed to gold and commodities and referring to a demographic change … It’s not crazy for them to interact with money in a purely digital way,” he told CNBC .

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

There are already other avenues in the crypto market other than base currencies, such as currency exchanges, and they 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 the Nasdaq.

There are three bitcoin ETFs in Canada and at some point there may be one bitcoin ETF available in the US. The latest attempt at the Securities and Exchange Commission was filed in mid-March by VanEck ETFs, but investors do not support high hopes the SEC will soon approve a bitcoin fund, looking elsewhere for cryptocurrency investment ideas to surpass the bitcoin purchase itself.

Shimon, who led a venture fund for cryptocurrency and blockchain before joining Fundstrat, said he believes miners are a foundation for the cryptocurrency space. “Top companies will be here to stay,” he said, noting the economies of scale in investing in equipment against which new entrants will have a harder time competing.

After making the “smart move” during the bitcoin bear market to build operations, Covid’s current supply chain deficiencies in the technology sector may continue to help position these miners by the capital they have already invested in specialized machines. for space.

However, as many traders and hedge funds do with gold miners and low-capacity 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 ETF that is eventually approved by the SEC for US investors. “It’s only a matter of time before the SEC approves a bitcoin ETF,” he said. “When a BTC ETF comes, taxes will be reduced and it will be the safest and easiest way to use traditional rails to gain exposure to bitcoin,” he said.

The miners have faced criticism over the huge amounts of electricity needed in bitcoin operations, but Shimron’s view boils down to financial performance and the market. (He says there is much to criticize about the impact of the fiat currency system on the world.)

“The US dollar is quite clear, as a global reserve currency is on its feet, it is not going away any time soon, but we are in the later stages of the US dollar as a reserve currency, and decentralized is the next step.”

Even though bitcoin mining stocks pose too much of a risk to most investors, he is confident that the world of cryptocurrencies should be on everyone’s radar. “Everything goes here. Finances were the last vestige that was not touched by the internet,” Shimron said.