Bitcoin Mining shares look cheap. Why investors are still skeptical.

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Costs per bitcoin mined range from $4,500 to $16,000 across the industry.

The time of dreams

A recovery in the price of Bitcoin should fuel gains for mining companies that process transactions on the crypto network. Still, stocks face hurdles beyond the price of digital currency.

Bitcoin miners operate the computers that process transactions on the blockchain, receiving payment in Bitcoin itself for their work. The process works through brute force computing to solve a mathematical puzzle for each block of transactions. Miners consume large amounts of electricity in an attempt to earn a block reward, competing with other miners around the world for each block.

Based on their operating costs – mainly electricity – most miners seem solidly profitable. Costs per bitcoin mined range from $4,500 to $16,000 across the industry. With Bitcoin price above $44,000 and rising as of late, miners should be very profitable on an operational basis. Many miners also hold Bitcoin on their balance sheets. And several of them use renewable energy or blocked electricity, such as excess electricity that is not used by a regional grid, to reduce their carbon footprint.

Mining stocks also look cheap. One of the greatest miners,


Marathon Digital Backgrounds

(ticker: MARA), trades at just 11 times estimated 2022 earnings per share and 6.5 times 2023 estimates.


Riot Blockchain

(RIOT) goes for 15 times 2022 EPS and 9 times 2023 estimates. Meanwhile,


Basic scientist

(CORZ) recovers 10 times the 2022 estimate and 7 times the 2023 forecast, based on consensus estimates.

Stifel analyst Suthan Sukumar launched coverage of several Canadian miners on Friday, saying the mining economy looks attractive as stocks remain cheap.

“Bitcoin mining profitability at an industrial level remains healthy with an average gross mining margin profile of +70%,” he wrote in a note. His first choice is


Hut 8 Mining
(


HUT
), a Canadian miner he believes has the best combination of scale and diversification. He has an $11 target on Hut, which traded around $6 on the Nasdaq stock exchange on Friday.

Yet miner actions are not just pure bitcoin games. One of the challenges is that the network’s mining difficulty, known as its hash rate, increases as the price of Bitcoin increases, attracting more miners to compete for each block reward.

A rising hash rate also implies that each miner’s share of the block rewards will fall unless they add more capacity to keep pace, fueling a computer arms race.

And as the hash rate increases, daily revenue from miner transactions decreases. Miners on the network now collectively earn an average of $40 million a day in Bitcoin, up from an average of $60 million last fall, reflecting an increase in the network’s hash rate, according to data from Blockchain.com.

A continued expansion of network hash rates leads to “increasingly challenging mining fundamentals as competition increases,” Sukumar said, while saying the economics of mining still look attractive to companies. individual.

Stocks have not kept pace with Bitcoin this year. While the crypto is down 4% year-to-date, Marathon is down 10%, Riot is down 6%, and Core is down 21%. The hut is at 25%.

Investors seem concerned that miners will have to spend a lot on more rigs and/or find ways to reduce energy costs as network hash rates increase. The amount of bitcoin rewarded per block, currently 6.25 coins, is expected to halve in 2024. And the price of bitcoin itself has been stuck in a trading range between $35,000 and $45,000, affecting both miner operating margins and the market value of crypto. on their balance sheets.

A recovery of Bitcoin to its 2021 highs near $70,000 would likely give miners a big boost. If the crypto does not rebound, however, stocks could continue to trade low, reflecting investor skepticism that mining profits are unsustainable.

Write to Daren Fonda at [email protected]

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