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Bitcoin miner valuation and the comparison to gold


Bitcoin mining has many fundamental similarities to gold mining; however, there are key differences to explore in the complex task of valuing Bitcoin miners’ operations. We will focus on Riot Blockchain as an example, which is a U.S. Bitcoin miner headquartered in Colorado. 


Riot began mining in 2017 and has recently released plans for increasing their hash rate with a delivery of mining hardware expected this spring of 2021. Currently, Riot has a hash rate of 1.5 exahashes per second, which accounts for approximately 1.11% of the Bitcoin network’s total current hash rate of 135 EH/s. 


The company mined 224 BTC, according to their Q3 earnings released on Nov. 9, which is in the ballpark of $4.1 million in revenue at $18,500 per BTC.


Considering the figures above, investors will wonder: How can a company justify a market cap of $670 million with just $8 million in revenue and massive operating (electricity) costs? 


Even with over 1,000 BTC listed on its balance sheet, which is $18.5 million at the current BTC price, the valuation is very stretched, to say the least. 


Here’s where two considerations come into play that could justify a much larger Riot market cap along with other crypto miners, assuming the network moves further into a bull market.


The expectation for future price appreciation 


One does not have to dig deep before finding a wide range of optimistic targets for Bitcoin’s price one year from now. The range extends from Mike Novogratz’s $65,000 estimate to PlanB’s $288,000 based on the popular stock-to-flow model. 


Meanwhile, CitiBank has recently called for $318,000; the Winklevoss twins have suggested $500,000, and Ark Investment CEO Catherine Wood appears to agree with the latter. 


These price targets are the reason why miners have stuck around through the bear cycle of 2018 and operated at a loss at times. They expect the network to be around for the foreseeable future. Miners also know that there is power in serving as the validators of network transactions, and the continued rise in the network hash rate shows that Bitcoin is becoming more secure and competitive every day. 


Those paltry 224 BTC that Riot mined in Q3 would expand its revenue stream to a larger, more ambiguous number if the upper limit of Bitcoin’s price is undefined. This means that Riot’s profit estimation would be unbound if BTC undergoes another parabolic rally, even if the present-day valuation does not make sense for the “lifting cost” to mine one Bitcoin and the quantity of mined BTC.


Lack of mining hardware 


Worrisome aspects about getting behind a Bitcoin miner are the low barrier to entry and the massively efficient and competitive proof-of-work network which Michael Saylor described as a nest of “cyber hornets”.


Anyone can dedicate their computing power to mining Bitcoin, albeit with a very low probability of successfully mining a block and being the first to solve the hashing algorithm. 


As the hash rate increases, miners band together in pools, using increasingly powerful hardware to have the best chance of successfully mining a block. While anyone could theoretically start mining, you won’t get far unless you have the latest Antminer S19 from Bitmain, which won’t be available in stock until April 2021. 


The last time Bitcoin went parabolic, which was in 2017, there was a shortage of ASIC chips and other mining hardware, and suppliers, such as AMD, Nvidia and Bitmain, couldn't keep up with the demand. 


If this situation occurs again with Bitmain and MicroBT, then any miners who currently own the next-gen equipment will have an advantage until more hardware enters the fight.


Conversely, gold miners have a proven source of the metal beneath the ground. Gold miners need both the proper drilling and excavating equipment and rights to the land, which serve as barriers to entry for mining gold. 


Should the price of gold double to $4,000 per ounce, prospecting would increase, and the rate at which gold is extracted from the earth would increase. This would, in turn, break down the activation energy for entry and bring the supply and demand into equilibrium, consequently lowering the price if supply overshoots demand. 


However, no matter how much the mining hardware arms race continues, Bitcoin cannot be mined faster than 6.25 BTC every 10 minutes thanks to the supply schedule and difficulty adjustment that Satoshi Nakamoto built into the protocol. This heavily impacts the supply-and-demand dynamics of Bitcoin, something which I’ll touch on a bit later.


Reference by: cointelegraph.com

Dec 14, 2020

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