Crypto mining stocks 101 — Greenidge Generation and Cypher Mining to go public
A crypto mining company merging with a company completely unrelated to crypto and another with near-zero revenue going public at a $2b valuation — here’s the crazy world of crypto…
- On Mar. 22, Bitcoin mining company, Greenidge Generation announced a merger with Support.com ($SPRT), a customer support software company (unrelated to crypto).
- On Mar. 5, Cypher Mining (near-zero revenue) announced its going public via SPAC, Good Works Acquisition Corp ($GWAC).
Crypto mining companies are printing Bitcoin out of thin air and here’s how they’re doing it…
Crypto mining 101 (simplified)
What do Bitcoin mining companies do all day? (see here for technical definition)
- Verify Bitcoin transactions on the blockchain which require heavy computational power — the process of “mining”.
- Receive Bitcoin for verifying transactions AND being the first to solve a computational problem.
Mining companies make big investments in computer equipment to mine Bitcoin — which needs to be replaced every few years.
After mining, they can hold or sell the Bitcoin — which exposes them to the volatile prices of crypto. In 2020, miners benefited from:
- Rising Bitcoin prices — which impacts how much miners can sell their mined Bitcoins for
- Falling energy prices — which is a big expense in the mining process
Investing in miners vs. Bitcoin
While mining stocks are often correlated to Bitcoin, mining stocks have moved further up compared to Bitcoin in the past year.
Investing in miners isn’t as simple as investing in Bitcoin. If the price of Bitcoin rises, the value of your Bitcoin goes up. Miners have additional operational complexities to worry about (ie. energy costs, labor costs, equipment investments and general expenses) and will only breakeven if Bitcoin prices remain above certain levels.
Bitcoin performance vs. two of the largest miners in the past year:
- Bitcoin ($BTC) — up 807%
- Riot Blockchain ($RIOT) — up 8,008%
- Marathon Digital Holdings ($MARA) — up 7,849%
For investors… Bubble-esque valuations
Many of these companies have risen to extreme valuations — largely pumped up by the surge in Bitcoin prices.
Having made only $8m in sales in the past 12 months, Riot has a market cap of over $4b — an astounding 500x price-to-sales. Comparatively, the tech-focused NASDAQ index has an average 4.3x price-to-sales.
Breaking even (as long as bitcoin prices stay up): With the Bitcoin prices near $60k, many of these miners should be breaking even on the variable cost that goes into mining Bitcoin (i.e. electricity
According to Tradeblock, the breakeven cost to mine a single Bitcoin has risen from $4.45 in 2012 to over $15,000 in 2020. But many of these miners are still highly unprofitable — due to high salary expenses, legal fees and other sales & general expenses.
These miners also suffer from rising costs over time:
- The amount of Bitcoins rewarded for mining is cut by half every 4 years.
- Mining a Bitcoin becomes more difficult ~every 2 weeks — which require more computing power and energy
Bitcoin prices would need to continue rising to cover rising costs of mining.
What to watch out for: Any correction in the price of Bitcoin could send mining stocks crashing.
But as long as Bitcoin prices keep going up, miners keep on mining, and investors will likely keep on pumping mining stocks.