Rockdale, a little town of 5,600 people an hour outside of Austin, lost a key employer when Alcoa closed its aluminium smelter in 2008. However, the electrical infrastructure that Alcoa left behind is being repurposed for a new purpose: Bitcoin mining.
At the old Alcoa facility, more than 11,000 computers hum 24 hours a day, performing billions of operations every second to help run the Bitcoin network. Riot Blockchain is in charge.
Riot earned $54 million from the machines’ “mining” of 1,292 Bitcoins in the third quarter. Rockdale is now one of North America’s largest Bitcoin production facilities. Riot intends to add 63,000 machines by the end of 2022, more than doubling its mining capacity.
“We intend to make it one of the world’s largest Bitcoin mining assets,” adds Riot CEO Jason Les. The Alcoa site contained a big electrical switching yard, which was excellent for a miner looking to expand to 700 megawatts of capacity, which would be enough to power 650,000 homes.
Because of this level of electricity use, some argue that crypto mining contributes to carbon emissions. However, if you believe in Bitcoin’s promise, the miners provide an alternative to holding the coin by betting on the network’s high-tech plumbing and potential for substantial returns.
Riot is interesting due to its expanding market share and efficiency improvements as it expands. Core Scientific, a miner that plans to go public through a merger with a special purpose acquisition company, or SPAC, is another stock to consider.
Acquisition of Power and Digital Infrastructure Marathon Digital Holdings (MARA) may also emerge victorious. The stock dropped this week after the Securities and Exchange Commission revealed an investigation into the past issuing of restricted shares.
“There is no allegation that we did anything improper,” Marathon CEO Fred Thiel tells Barron’s. Marathon, he adds, is flying in mining “rigs” from Malaysia and expects to more than triple its Bitcoin capacity in the coming year.
This year, mining stocks have gained an average of 291 percent as Bitcoin has doubled, significantly outpacing the Nasdaq Composite’s 25 percent gain. However, they are extremely vulnerable to changes in Bitcoin values and investor mood. Marathon, for example, was up 628 percent this year before losing about a third of that gain on news of the SEC enquiry, as well as an enhanced convertible bond offering.
(1) Next year, XPDI is planned to combine with Core Scientific. Data for the post-merger Core Scientific.
(2) Price change from earlier this year’s IPO. E=estimate.
Despite the unpredictability, large-scale miners are profitable, as measured by adjusted earnings before interest, taxes, depreciation, and amortisation, or Ebitda. According to consensus forecasts, Riot’s income would increase to $464 million next year from $220 million this year. Ebitda is predicted to rise from $125 million to $324 million.
Core, situated in Bellevue, Washington, is likewise emerging as a market leader. The firm now operates in Kentucky, Georgia, and North Carolina, and is establishing operations in North Dakota and Texas, with the goal of reaching 1,000 megawatts of total capacity by the end of 2022, outpacing every other North American miner. Core’s goal is to host infrastructure for other miners while also producing its own currencies, resulting in more reliable cash flows than if it were a standalone miner.
Core also aspires to be nett carbon neutral through the use of renewables and carbon credits. “They have solid long-term contracts with energy providers,” says one investor who owns more than 5% of XPDI. He anticipates that the stock will reach $20, up from $13.75 recently. Investors can cash out at $10, like with any SPAC, when the merger is put to a vote, which is expected in January.
According to D.A. Davidson analyst Christopher Brendler, Core is a “best in class” operator that should increase earnings as it expands. He expects the company’s revenue to more than double to $1 billion in the next year, with adjusted Ebitda of $565 million.
Marathon, for one, is betting on an asset-light business, contracting with hosting facilities for energy and investing practically all of its capital in mining machinery. The company employs only ten people and outsources the majority of its activities. Thiel claims that the company is buying machines in bulk at 30% of the industry norm, resulting in Bitcoins costing around $6,200, significantly below the industry average of $10,000. Wall Street anticipates that Marathon’s sales would more than triple between 2021 and 2022, reaching $750 million, resulting in an Ebitda of $581 million.
Bitcoin mining is not the same as extracting gold from the ground. Instead, it entails creating Bitcoins as a byproduct or reward for authenticating transactions on the blockchain network. Miners accomplish this by continuously operating computers in an attempt to guess a string of alphanumeric characters for each block of transactions. Correctly guessing validates the block, adding it to a chain of preceding blocks (hence the term blockchain). The main benefit for coming in first is payment in Bitcoin, which the network’s programming distributes at a rate of 6.25 Bitcoins every block.
Along with the price of Bitcoin, one important element is mining difficulty—how many guesses per second the network makes to validate, or “hash,” the next block. This hash rate is expressed in exahashes, or 10 to the 18th power hashes per second. According to Thiel, it is presently about 170 exahash and could more than double in the next year if miners lock in power agreements and make their machines operational.
What is the significance of this? Because increasing the hash rate decreases the potential payouts for each miner. The rate fell this summer after China stopped Bitcoin mining, but it has since risen. Analysts predict that it will climb, potentially making it more difficult for miners to obtain Bitcoin rewards and necessitating more electricity for each currency.
“We’re dead set on winning this weapons race.” However, it will get more difficult in the future.”
Increased Bitcoin prices attract more miners, increasing the network’s hash rate. Miners are consequently engaged in a never-ending arms race, constantly expanding and improving equipment in order to meet production targets. They also have a tendency to raise funds in a serial fashion for new infrastructure and machines, potentially diluting stock owners or straining their balance sheets. Riot, for example, spent $651 million to acquire mining assets in Rockdale and intends to invest $160 million in infrastructure development. Marathon raised $650 million lately.
Rising hash rates have another repercussion: a higher carbon toll. According to the Cambridge Bitcoin Electricity Energy Consumption Index, miners consume 0.5 percent of the world’s electricity. As mining becomes more difficult, corporations may consume more electricity, thereby increasing carbon emissions even as many countries aim to reduce them.
According to industry associations, 58 percent of worldwide Bitcoin manufacturing is currently carbon neutral, relying on renewable energies. El Salvador, where Bitcoin has become an official currency, is mining with geothermal energy derived from a volcano. However, a significant amount of Bitcoin is still created using coal in areas such as Kazakhstan.
North America is also becoming a mining hotspot, accounting for more than 40% of worldwide hash rate. According to the industry, renewable energy currently accounts for one-third of US output, potentially lowering the carbon footprint. One novel approach:
“Miners do not contribute to carbon emissions in properly constructed energy markets,” argues Peter Cramton, an economist and former Texas energy regulator. He points out that miners in particular markets absorb renewables that would otherwise be wasted as surplus power. This can generate demand for wind and solar power providers, incentivising them to develop renewables with long-term clients. “Excess power companies are looking at Bitcoin mining as a way to create baseload consumption for renewables,” Thiel says.
Riot intends to increase capacity in Texas as well as construct a “immersion cooling” system to keep circuits functioning at lower temperatures. According to Riot, the cooling baths should increase the machines’ hash rate by 25% while decreasing downtime and increasing overall performance by up to 50%.
“It will result in fewer machines providing the same hash rate,” says Kevin Dede of H.C. Wainwright, who rates the company as a Buy with a $50 price objective.
Mining stocks are popular on Wall Street due to their capacity expansion plans and high gross margins. The stock’s multiples are significantly lower than those in other areas of crypto, including exchanges like Coinbase Global (COIN) and mining chip maker Nvidia (NVDA) are both trading at much greater prices.
The discounts given to miners indicate concerns about their capital intensity as corporations compete for output, wagering on higher prices for a risky and contentious asset. Investors have witnessed this scenario play out in other cyclical industries, most notably Texas’ century-old oil field.
Bitcoin mining will become more difficult as the hash rate increases. The Bitcoins awarded for validating blocks will be cut in half in 2024, to 3.125 per block, prompting miners to increase capacity to compensate for lost revenue. Costs remain low enough that large, efficient operators can be tremendously profitable. However, as margins shrink, scaling will become more important than ever. “We’re dead set on winning this weapons race,” Thiel says. “However, it will get more difficult in the future.”