When Bitcoin surpassed the $19,000 mark in December 2017, it sparked a media frenzy that continues to this day. Its sudden rise set ignited the cryptocurrency market and created a space for a wide array of tokens and support services. As a result, many people and organizations soon began investing in computer systems capable of producing Bitcoin, which is now known widely as mining. Bit Digital (NASDAQ:BTBT) is one of these companies, but there are a few distinctions between them and most of their peers. Today, we will look at this up-and-coming Bitcoin mining company and discuss what investors can expect over the short to medium term.
Before we get started, if you'd like definitions of a few key terms concerning cryptocurrency, please see the Crypto Cheatsheet in my previous article. But of course, crypto veterans feel free to skip this section.
What is Bitcoin Mining
Bit Digital is a Bitcoin mining firm that has operations in the United States and Canada. In February 2020, they began their bitcoin mining operation. Bitcoin miners use specialized hardware, known as miners, to generate bitcoins, a cryptocurrency. The mining units operate using computational power to provide transaction verification services (known as "solving a block") which helps to maintain the bitcoin blockchain. For each block added to the bitcoin blockchain, a bitcoin prize is paid out in accordance with a set amount of bitcoins per block. The aim of most bitcoin miners has been to mine bitcoin as quickly and as many as feasible, given the fixed quantity of bitcoins. A miner's hashrate relative to the overall network determines how likely it is to solve a block and earn a bitcoin reward, which is what causes the hashrate arms race we've been seeing in this space.
Second Quarter 2021 Highlights
On August 20, the firm published its financial results for the second quarter ended June 30, 2021.
By the end of the quarter, approximately 70.8 percent of the miner fleet has been deployed, en route to or awaiting installation in North America.
- The firm had 32,500 miners in its fleet, with a total hashrate of 1.92 EH/s.
- The firm's second-quarter reduction of 0.34 EH/s was due to fleet repositioning, in which it sold or discarded older models in the hopes of acquiring newer, more efficient ones.
- The Firm made a modest profit on miner sales, and it expects to reinvest $5.4 million in new-era miners purchases.
- The company purchased 3,515 miners on the spot market during the quarter and plans to make further miner purchases after quarter-end.
- The Company acquired 562.9 bitcoins during the quarter. Again, the miner sales and accelerated migration plan played a role.
- The value of the firm's bitcoin holdings increased to $20.6 million totaling 588.4 coins at the end of the quarter (now worth $29,420,000 with bitcoin's current price of $ 47229.07 USD).
Production Snag
Following the Chinese government's decision to prohibit bitcoin mining, Bit Digital immediately halted its remaining mainland China mining activities on June 21, 2021.
As a result, they sped up their migration plan to North America, which had been in progress since October 2020. The company saw a bitcoin production decline which was attributable to the fact that more miners were in transit to or waiting for installation in North America, a greater proportion of the Company's fleet was offline in the last quarter which negatively impacted the hashrate.
A breakdown of the geographical distribution of the company's mining fleet was provided in their most recent earnings report.
Location Number of miners Percentage of TotalMiners In transit to or awaiting installation in U.S. 14,500 44.6 % United States 7,090 21.8 % China 9,484 29.2 % Canada 1,426 4.4 % Total 32,500 100.00 %
During the quarter, 14,500 miners were sent to the United States. The company expects to complete the migration of its remaining China-based miners to North America during the third quarter of 2021.
Source: Bit Digital
Company Outlook
The company has been committed to increasing its overall hashrate and has had some notable success prior to the disruption in China.
In general, miners with greater hashing power compared to other miners attempting to solve a block have a better chance of solving the block and receiving a bitcoin reward. We've also noticed that as the Bitcoin market price has increased, the proportion of miners and overall hashing power applied to the Bitcoin blockchain has grown. Bit Digital has done a reasonable job at growth but other companies like Marathon Digital (MARA) have taken it to another level.
Source: Bit Digital
The company plans to increase the amount of hashing power capacity relative to the overall hashing power devoted to the Bitcoin blockchain by acquiring and deploying ever-increasing quantities of the most recent generation of more powerful and energy-efficient miners. The company does its purchases on the spot market to avoid the long lead time we've seen with companies like Marathon Digital and Riot Blockchain (RIOT). There are cost savings but it remains to be seen if the relative inefficiency versus the latest Bitmain ant miners will play a role. For miners, time is money and Bit Digital's move is probably prudent. We can also see that the company started the year off well. Between Dec 2020 and Feb 2021, the company averaged a respectable 350 tokens per month.
Source: Bit Digital
Analysis and Forward-Looking Commentary
Bitcoin is Bit Digital's only real product, which simplifies the analysis. The company produced an average of 350 BTC per month from Dec. 2020 to Feb 2021. If we take that average production, we get roughly 4200 bitcoin for the year, which we can take as the base case for our estimates. The company is currently redeploying its fleet in China and it is unclear how significantly the company's average hashrate will be disrupted. As our guide for the worst case, we will take 2800 BTC for 2021. For the best case (most unlikely), we will take 5000 BTC. I expect the actual number to come in somewhere between the base and worst case, but the company will likely continue to grow its fleet despite the recent sales. For BTC's prices, we will take $30k as the worst case, the current price, and $65k as the best case. Below are the rough revenue estimates for the different cases.
Cases Bitcoin Price Bitcoin Production Low Base (current) Best $ 30,000.00 $ 47,229.07 $ 65,000.00 2800 $ 84,000,000.00 $ 132,241,396.00 $ 182,000,000.00 4200 $ 126,000,000.00 $ 198,362,094.00 $ 273,000,000.00 5000 $ 150,000,000.00 $ 236,145,350.00 $ 325,000,000.00
Source: Author's Estimates
Now here's where Bit Digital gets interesting. The company trades at an extremely low PS ratio compared to some of the more sophisticated mining companies. The companies are all heavily investing in their overall hashrates, so it is more prudent to pay attention to forward PS figures.
Using the company's current PS ratio of 6.489, we get the following estimates for the stock based on the different BTC prices and production levels.
PS 6.5 Forecasted Price Cases Bitcoin Price Bitcoin Production Low Base (current) Best $ 30,000.00 $ 47,229.07 $ 65,000.00 2800 $ 10.94 $ 17.23 $ 23.71 4200 $ 16.41 $ 25.84 $ 35.57 5000 $ 19.54 $ 30.76 $ 42.34
Source: Author's Estimates
I do believe that the company has been punished harshly for the Chinese exposure in the crackdown and that if Bitcoin's price remains elevated, the multiple used could be quite conservative.
Takeaway
Bit Digital is in a tough period and there are many uncertainties for investors right now. If the company botches the redeployment of its fleet, we could see an underperformance beyond my forecasts. As long as Bitcoin's price remains stable, Bit Digital is a Buy. I have a $20 price target on the stock as long as Bitcoin's price remains over $45,000. Check out another of my favorite picks in Marathon Digital here.
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I provide easy-to-digest insights on stocks and bonds. I am obsessed with growth stocks and cyclical plays, but I also provide analysis on Value opportunities where appropriate. I employ industry and fundamental analysis to give a clear picture of the opportunity over a reasonable timeframe. - MBA and over a decade as an investor and investment author. - My content is not geared to anyone's specific investment goals, time horizons, or risk tolerance. Content is for illustrative purposes only and is not intended to displace advice from a fee-based financial adviser. It is not to be taken as investment advice, or influence investor decision making. Accuracy of data is not guaranteed.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of MARA, BTBT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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