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Preface
Riot Blockchain, Inc. (NASDAQ:Riot) Is considered one of the largest companies in the mining industry.
When talking about a particular industry like Bitcoin mining, we have to consider many aspects.
Despite seeing a fair price After collapsing from a high of more than 70% from the March 2021 high, the company has improved some functions of its business.
Therefore, before we analyze the company in detail, let’s take a look at the features and key players in this industry.
Sector overview
The Bitcoin mining industry is capital-intensive, so few major companies make it up.
To be capital intensive requires a large amount of continuous investment. Therefore, those who do not invest properly are destined to lose market share quickly.
In this business, the weight of a company in the entire market can be expressed as the ratio of the hash rate of the company to the total hash rate of the network. The higher the hash rate of a company, the higher the ability of the company to mine Bitcoin (BTC-USD).
Therefore, as the overall hash rate and transaction complexity increase, continuous investment in new infrastructure is required.
The impact of Bitcoin on the miner’s business
Just as the business of oil companies is related to oil price trends, the business of Bitcoin mining companies is also deeply related to Bitcoin price trends.
Most mining companies keep their mined Bitcoins on their balance sheets (they need to raise their own money and sell only when traditional currencies are needed). It is clear how rising coin prices lead to higher value for a company’s assets. However, similarly, as the price of Bitcoin goes down, the company’s assets go down.
In the next graph, some major mining companies (Riot Blockchain (Riot Blockchain)Riot), Marathon Digital Holding, Inc. (Mara), Hut 8 Mining Corp. (Hut) And CleanSpark (CLSK) And the price of Bitcoin.
It is visibly clear how price changes are positively correlated.
This correlation makes mining companies attractive to those who do not want to be directly exposed to BTC but want to take advantage of the price increase.
Another important insight must be inevitably made in the phenomenon of Bitcoin being halved. Half of Bitcoin is when the amount of Bitcoin paid to the miner as a reward is halved. It happens every four years, and the next one is in 2024.
But how does halving affect the mining industry?
There are two effects. On the one hand, if you look at the BTC price trend after halving, you can see that it is constantly rising. This can be seen in the graph below.
BTC price after halving (Investopedia)
however, It should be pointed out that the BTC price increase did not go up just by halving it.And, as a result, it would have increased, albeit at the same pace as BTC’s increasing popularity.
Therefore, despite past increases, there is no guarantee that halving (and subsequent halving) in 2024 will lead to higher BTC prices. Anyway, if the BTC price rises, it will have a positive effect on corporate assets.
On the other hand, halving means dividing the profitability of mining by two. And in our opinion, this is the most risky aspect for all mining companies in the short term. Halving the profitability of a business means that you have to think twice about investments and acquisitions. Moreover, even if this half is absorbed, another half will occur in 2028 (that is, six years from now). This means that 2028’s mining activity will be one-quarter of what it is today. This is an important consideration in the analysis of both Riot and other mining companies.
Riot business model
Now that we have laid the foundations and assembled the characteristics of the industry, let’s analyze Riot concretely.
Riot has a business model that can be divided into three areas.
The first area is about mining activities. This is a central part of the business and impacted about 86% of the company’s total revenue in 2021.
As of March 2022, the company owns approximately 6,062 BTC, all of which comes from its mining business.
In addition, at the data release meeting in March 2022, the company will eventually acquire 53,379 miners, and the mining capacity from April 2022 will be about 5.4 EH / s (currently about 3.9 EH / s). I’m expecting it.
Mining capacity indicates the ability of mining devices to perform calculations faster, and thus the ability of miners to see transactions and receive BTC as a reward for operations.
Therefore, in such industries, the hash rate of a company’s mining device is a good indicator of competitiveness against its competitors.
As you can see from the graph below, Riot’s hash rate is constantly rising. This means a lot of investment and an increase in the competitiveness of the company.
By the beginning of 2023, the company expects the hash rate to be around 12.8 EH / s, an increase of about 315% compared to the hash rate in early 2022.
rear The last half (July 2016), the observable global hash rate CAGR was about + 135% annually for almost 6 years. Compared to RIOT’s forecasts, we expect to gain market share in the coming months.
Riot hash rate (Riot Investor Presentation)
Looking at the hash rates of other companies in the industry, Riot is Core Scientific (CORZ) For hash rate.
Therefore, the company is in an advantageous position and competitive in the industry. However, increasing the hash rate does not mean a competitive increase for the company, as other companies will definitely increase the hash rate as well. Therefore, it is possible that some companies will outpace Riot in terms of hashrates and the industry as a whole will grow faster than past growths in hashrates.
Comparison of competitor hash rates (Riot Investor Presentation)
The second business area is data center hosting. This business segment focuses on providing colocation services to institutional Bitcoin mining companies. To run this business, the company purchased Whinstone Facility. Today, this business impacts about 12% of total revenue.
The third business area is engineering. They entered the business by acquiring their strategic partners Ferrie Franzmann Industries, LLC (“ESS Metron”). The acquisition will give Riot access to key electrical components and engineering services for developing and improving its infrastructure.
This business accounts for only about 2% of total revenue.
Expected riot growth and expected growth of other miners
Riot is investing heavily in developing new technologies that can grow faster in terms of hashrates than global networks. A clear example is the ongoing development of immersion cooling miners. With this type of miner, implementing Riot will improve performance by about 50% over air-cooled miners. This means that the hash rate will increase by about 25%.
Riot expects to reach 12.8 EH / s by January 2023, but let’s take a look at some of our competitors and see what the industry will look like in the coming years. Calculating overall growth in 2022 starting from 3,1 EH / s (3,1 EH / s)Hash rate capacity at the beginning of the year), 316% growth is expected for 2022 as a whole.
Growth in terms of hashrates and mined BTC will affect Riot as well as all other companies in the industry.
Some examples: Marathon (Mara) Is expanding its fleet of miners and expects it to be carbon neutral by 2023 with a hash rate capacity of approximately 23 EH / s. (Marathon Digital Holdings publication Bitcoin production and mining operation updates in March 2022). Therefore, given that MARA was 3.9 EH / s at the beginning of the year, when it reaches 23 EH / s, the company’s capacity is expected to increase by 497% of its hashrate capacity across 2022.
Another example: CleanSpark (CLSK) Expected to grow from the current 2.9 EH / s to over 10 EH / s by the spring of 2023 (CleanSpark) publication Bitcoin production in March 2022). This means 244% growth in 2022.
Core Scientific (CORZ), The actual reader in terms of hashrate capacity has a capacity of 13.5 EH / s at the beginning of the year and expects to reach it. 40 EH / s between the end of 2022 and the beginning of 2023.. This means that the EH / s capacity will increase by 196%.
Conclusion
For forward multiples, we can see that RIOT’s EV / sales ratio is between MARA, CLSK and CORZ.
Despite being one of the leading companies already, RIOT expects to be able to expand capacity at one of the fastest speeds in the industry, if there is no major shock to Bitcoin prices, which is good. It has the potential to maintain good profit growth. Of course, this is not a zero cost. For example, RIOT had to invest $ 274.8 million last year, primarily as a security deposit for equipment for miners. In addition, the company is pursuing various acquisitions, which further dilutes its shareholders.
Over the next few years, more investment will be needed to continue the company’s solid policy. This makes it unlikely that RIOT will have a profitable level of free cash flow.
Overall, in our opinion, the high degree of capital intensity needed to keep a company growing, and all the other companies in the cryptocurrency industry, are seemingly unattractive.
However, we believe that investing in BTC is more conservative and less risky, as earnings are heavily dependent on Bitcoin. Cryptocurrency miners may be better off in the short term if BTC rises significantly, but it requires a lot of investment to sustain the growth of the industry and the company’s profits in the short term. You will lose.
