Bitcoin and the Public Markets, 4/11/22: Valuation Focus — The Framework Driving Our Bitcoin Reserve Approach to Miners
We focus attention this week on how we view our Bitcoin Mining Reserve framework translating into a valuation heuristic for Bitcoin miners. We point to a generic / anonymized miner with a $1billion market cap as an example. The intent is not to single out a particular miner but to develop our thought process further. Please click here to view the full report.
As we assessed previously, a Petahash/s of hashing capacity is projected to mine 1.424BTC in 2022 and 0.808BTC in 2023 (slide 4). From 1/1/2023 through 12/31/2030, our model projects 1PH/s to mine a total of 2.129BTC. 2023 represents ~38% of this 2.129 BTC, in part because of the impact of the 2024 halving.
We then used this “reserve” to show that Bitcoin miners traded at 96% (now 87%) of the value of their reserve, which is expensive compared with the oil producers (which trade at 23% of spot value of oil reserves) and gold miners (38% of spot value of gold reserves).
With a set of guidelines about the evolution of the technology / efficiency of state-of-the-art rigs, one can develop a rough estimate of power consumption required to generate 1 PH/s of hashpower in any given year, giving us a very approximate operating cost to run 1PH/s over a decade to extract Bitcoin from the “reserve”. We also assume an incremental capital cost of $30 per TH/s to upgrade / replace failures over the decade, not including upfront capex to get from current Hashrate to planed year-end 2022 Hashrate.
The valuation waterfall developed below illustrates our framework for a public miner:
This public miner has about $200mm in cash and $313mm in mark-to-market value of treasury Bitcoin. Based on their current and projected YE 2022 Hashrate, compared with our long-term network projections, they should produce a further 36000 BTC, which would be worth $1.5billion at current spot value. However, our model suggests that it would take $612mm in operating expenses, as well as $390mm in capex to run the Hashrate and to upgrade / replace rigs as needed to keep the company’s Hashrate flat. This “extraction cost” reduces the value of the Bitcoin reserve to the company enterprise value. Subtracting out any debt the company has leads to a hypothetical equity value of $855mm, a 14% discount to the current market cap of the company. Note that we have not discounted this future BTC revenue / expense to get to a present value, which would tend to further reduce fair market value.
•We suggest a new valuation framework to evaluate investments in Bitcoin miners
•We assess that miners in general appear moderately expensive…
•…But a paucity of investable alternatives that fit within the investment mandate for many fund managers helps support miner valuations
•Our thesis would be wrong if accelerating power efficiency of rigs reduced “extraction cost” or opex to extract reserve, closing the gap identified in the chart above