A risky bitcoin purchase in a bigger bull market than the cryptocurrency

All commodity markets have their leveraged investment stakes. Crude oil has wild exploration and production companies; gold and precious metals make the mining operations do the dirty work in the ground. A commodity of the future, bitcoin is no exception to the rule that when there is a scarce resource to exploit in the world and investors increasingly value it, miners will run in to stake their claim on the wealth .

Recent gains in what is arguably the riskiest bitcoin bet of all have led Leeor Shimron, vice president of digital assets strategy at Fundstrat Global Advisors, to take a look at the “digital gold rush” in bitcoin miners’ trading.

These mining companies are fairly new and young, they don’t have a track record, and some came on the “roundabout” market – and some of the biggest, like Riot Blockchain, were supervised by regulators in their early days. They also operate with losses, but Shimon noted that they have reached more than $ 1 billion in market cap after investing heavily during the downturn of bitcoin in the hardware and facilities that helped them “get great” in today’s bitcoin. bull market cycle.

Shimron described the miners last week in a note to customers expressing interest in the rising stocks as a “high beta” on bitcoin. During the cryptocurrency’s recent bull run, in which bitcoin is up 900%, the average return among the largest publicly traded miners was 5,000%, according to his analysis.

Bitcoin miners are, in Shimron’s words, at the heart of bitcoin’s blockchain, as they “burn electricity to generate guesses to solve cryptographic puzzles” and generate revenue in the form of mined bitcoin. While the bitcoin is being mined, the miners are selling the assets to cover their expenses. Many are choosing to keep some of their mined bitcoin on their corporate balance sheet as well, a trend that is starting to gain traction with the more digitally-oriented, disruptive CEO class in the broader market, such as Jack Dorsey in Square and Elon Musk on Tesla. Musk has just added “Technoking” to his executive title and Tesla’s CFO recently added “Master of Coin”. The North American mining company, Marathon Digital Holdings, recently announced that it had purchased an additional $ 150 million worth of bitcoin to hold on its balance sheet.

The largest publicly traded mining companies that Fundstrat’s analyst reviewed include the two Nasdaq-listed companies, Riot Blockchain and Marathon Digital Holdings, and two over-the-counter market shares, Hive Blockchain and Hut 8.

Shimron’s analysis shows that the beta these bitcoin mining companies exhibit generates a 2.5% return for every 1% move in the cryptocurrency. While there isn’t enough historical data to draw any firm conclusions, the miners’ performance is clearly tied to bitcoin’s price, and their trading profile reinforces the upside and downsides, he said.

It is a “notoriously competitive industry,” in Shimron’s words, where the ability to be profitable equates to cheap electricity and access to specialized mining hardware. As the price of bitcoin rises, “miners are running new platforms or upgrading their hardware with more powerful and efficient machines.”

Marathon recently struck a $ 170 million deal for Bitmain’s 70,000 S-19 ASIC miners, which, when fully deployed later this year, will increase its mining power to 103,000 machines.

This high cost of doing business in bitcoin mining results in low or negative free cash flow and dampened earnings, Shimron writes. But the mining companies have for now captured the growth of the current bitcoin bull cycle as a result of their spending. (They also saw wild trading in the 2017 bitcoin boom.)

Now they’ve also caught the attention of some of the newest forces in the market, as a recent Bloomberg piece noted that the bitcoin miners were discussed on the WallStreetBets message board on Reddit, fueling the GameStop stock mania.

“For investors looking to gain exposure to miners, that beta makes it a great opportunity in the midst of a bustling bull market. … There are fits and starts and setbacks, but we still have a lot of room to grow here,” Shimron said in a statement. interview with CNBC.

It is the broader cryptocurrency bull market that has fueled the miners and Shimon thinks it could continue into 2021, driven by macroeconomic and demographic factors. Fears of inflation will support bitcoin prices, and even under recent interest pressures from the 10-year Treasury that can respond to cryptocurrency as well as technology stocks, he said it is clear from the signals from the Fed that the central bank wants its moderate policy. preserve. in place until 2023.

Another driving force is the continued adoption of new digital technology and digital assets from younger investors. “You see that younger people are attracted to bitcoin and other digital currencies as opposed to gold and commodities, and it speaks of a demographic shift … For them it is not crazy to handle money in a purely digital way”, he told CNBC.

Last week, Morgan Stanley became the first major Wall Street bank to offer its wealthy customers access to bitcoin. It limited access to customers by at least $ 2 million, given the risks.

There are already ways to enter the crypto market other than the underlying currencies, such as the exchanges that trade in coins and will soon be available to more investors. Coinbase was recently valued at $ 68 billion in the retail market and is planning a direct listing on the Nasdaq.

There are three bitcoin ETFs in Canada, and at some point, a bitcoin ETF may be available in the U.S. The latest attempt with the Securities and Exchange Commission was filed in mid-March by VanEck ETFs, but with investors not having high expectations SEC will soon approve a bitcoin fund, they are looking elsewhere for cryptocurrency investment ideas that go beyond buying bitcoin itself.

Shimon, who ran an early-stage cryptocurrency and blockchain venture fund before joining Fundstrat, said he sees the miners as a foundation for the crypto space. “The top companies will be there to stay,” he said, noting the economies of scale of equipment investments that new entrants will have a harder time competing against.

After making the “smart move” during the bitcoin bear market to build out operations, the current shortages in the tech sector supply chain caused by Covid could further help the positioning of these miners beyond the capital they already put in. have stopped specialized machines for space.

Still, as many traders and hedge funds with gold miners and small cap oil explorers do, he is inclined to trade the bitcoin miners in a bull market run, rather than seeing them as long-term investments.

Shimron continues to prefer bitcoin as a long-term investment, as well as any ETF ultimately approved by the SEC for US investors. “It’s only a matter of time before the SEC approves a bitcoin ETF,” he said. “When there is a BTC ETF, the costs will be low and it will be the safest and easiest way to use traditional rails to gain exposure to bitcoin,” he said.

The miners have been criticized for the massive amounts of electricity required in bitcoin operations, but Shimron’s view boils down to finances and market performance. (He says there is also plenty to criticize about the impact of the fiat currency system on the world.)

“It is quite clear that the US dollar as a global reserve currency is on its last legs and will not disappear anytime soon, but we are in the later stages of the US dollar as a reserve currency, and decentralized is the next phase.”

Even if bitcoin mining stocks pose too high a risk for most investors, he is confident that the world of cryptocurrency should be on everyone’s radar. “This is where everything is going. Finance is the last remnant that has not been touched by the Internet,” said Shimron.