The Weekly Hash, 1/13/21: Institutional fund allocations support Bitcoin price long term, ushering second golden age of mining
Bitcoin pulled back ~19% from its peak on 1/9, and is down slightly from a week ago but up over 75% from a month ago. Meanwhile, Difficulty reset to an all-time high of 20.6T as expected (+10.8%), taking the target Hashrate to 147EH/s. Total BTC earnings per PH/s are now ~7.18mBTC / PH/s, down from 7.55mBTC last week. (1mBTC or milliBTC = 1/1000 BTC.)
Market volatility drove Transaction Fees (Tx fees) up 460bps week-on-week (WoW) to 15% of miner rewards. Large on-chain volumes have driven the Mempool to 76,000 Tx awaiting confirmation, equivalent to 130 blocks or almost 22-hour confirmation times. We believe Tx fees will continue to rise in the near term, reflective of the price impact on network congestion amid elevated Bitcoin movements across wallets.
Bitcoin mining revenue increased to $242 / PH/s and $265/MWh despite the higher Difficulty reset.
The BitOoda North American Hash Spread™ dipped 6.4% WoW to $230, having peaked at $311 on 1/9.
We define the BitOoda Hash Spread™ as the difference between the cost of power per MWh and the Bitcoin mining revenue per MWh. This gives miners a quick sense of the surplus generated by their business to cover personnel, overhead, depreciation, and profit. EIA data shows a weighted average peak/off-peak U.S. wholesale industrial power price of $34.36 / MWh, leading to an aggregate spread of $230 across 8 power markets, which is 6.4% lower than 1/6.
Older generation S9-class devices saw their hash spread dip 9.6% WoW to $40 / MWh. S17-class devices, the bulk of the current installed base, see a hash spread of over $159 / MWh.
With spreads so robust, capital investment payback periods are modest: We examine a hypothetical scenario of outfitting an existing building with power infrastructure and S19-class rigs for a 25MW project. Under our assumptions, it would take 180 days to the mine the first BTC with a $32mm investment. By day 398 (218 days of mining), the rig investment would be recovered, with an IRR of ~80% and a 524-day payback period including the long-lived power infrastructure.
We assume prices are static at $36,000 for the project duration, while difficulty could rise 6–8x before daily revenue dips below operating expenses. If price appreciates along with difficulty, returns would be healthier still, with shorter payback periods.
We appear to be in a new golden age of mining, one with significant corporate interest and investment in mining operations. Mining is now lower risk, considering the growing liquidity in robust hedging solutions, from CME Futures and Options to our proprietary BitOoda Hash Contract™. Mining offers investors who fundamentally want long exposure to Bitcoin the opportunity to acquire BTC at a discount to spot.
The accelerating number of traditional investors entering the space creates a steady demand for BTC. With the net new supply of about 900BTC per day, $30mm of daily fund inflows are needed to absorb supply at current prices. This translates to $11B of annual new money allocations to BTC, which would be somewhat higher if the broader crypto asset space is included. While these numbers represent 2% of BTC market cap, they represent a negligible portion of the ~$20 Trillion in global savings in 2020. High volatility notwithstanding, allocations to the crypto asset class are highly supportive of medium-to-long-term price appreciation.
This is a great time to seek Bitcoin exposure through mining, and increasing liquidity in hedging products can help mitigate some of the risk, while allowing investors to acquire Bitcoin at a discount to the spot market.
Long-term price growth is supported by news flow surrounding accelerating fund allocations to the asset class. While investors need to navigate price and difficulty risk that can pose existential threats to unhedged mining operations, we are optimistic about the long-term outlook for well-capitalized, appropriately-hedged businesses.
Email us at email@example.com to discuss how we can help manage your risk or gain exposure to the space.