TMT sector trends: will there be an M&A spree in bitcoin mining?

It is no secret that bitcoin mining is highly CAPEX intensive, with our expert, a divisional head at a North American digital asset miner, estimating that it costs USD 80-90m to build such a business. They added that during a bull market it would typically take 1-1.5 years to repay CAPEX of USD 60-70m, whereas in today’s environment that timeframe has increased to about five years. 

The bitcoin downturn has put many miners in a difficult situation

As of June 2022, some USD 1.9bn of debt was owed by publicly traded miners in North America for ASIC equipment purchases made in 2021, our expert said. “Obviously, it’s a very dynamic market, but… I think there was certainly underappreciation for not just the volatility of bitcoin but the volatility of standing up mining operations.” In their opinion, 70% of publicly traded miners could be over-leveraged and therefore will require a degree of restructuring or financing. Indeed, many miners have already been forced to sell their equipment, have been unable to fulfil orders, or have had to sell some of their bitcoin holdings because of depressed margins and fiat debt obligations. 

There are also concerns with access to power in certain mining hotspots

A leading example of this is Texas, as state regulators grapple with the need to balance demand for energy. Many miners that had plans for large operations in the state – including sizeable orders – have had to take a U-turn on their plans because they cannot secure the power. “Or perhaps even the means, from a financial perspective, to stand up the infrastructure with bitcoin trading where it is right now.”

Against the backdrop of spiralling energy costs and debt, our specialist expects “an interesting couple of quarters” ahead. Ultimately, many miners could be squeezed out, presenting lucrative buying opportunities for those with healthy balance sheets. Aspects that buyers may look at, we were told, include power purchase agreements, power source, number of exahash, revenue multiples of 5-10x, and bitcoin balance sheet total. 

But there are signs the industry will be able to weather the storm 

Despite some reticence today to invest in miners with high debt loads, institutional investment participation is increasing, with BlackRock’s move in August to join its Aladdin platform to Coinbase an example of this.¹https://www.ft.com/content/0948f1a9-ad0b-4126-9ae8-5ce4e212c07e “It’s certainly a concern for investors as to how well people are going to keep their lights on with margins so low and rates going higher,” our specialist said. However, the adoption curve, broadly speaking, “is only going up”. They are of the view that bitcoin could eventually capture 2-3% of gold’s place in institutional portfolios. 

Could we see other regions targeted for mining?

Our expert is closely following developments in Canada, particularly Labradorm which they remarked is resource-rich but low on infrastructure investment. They are also bullish on infrastructure and the hash rate gaining momentum in the Middle East, where there is an abundance of sun, and oil and gas. “I think I saw a graph once that said that, if you tried to mine out of Kuwait, if you had the infrastructure… you could mine a bitcoin for USD 1,200, just because the power is so, so cheap there.”

What does the future hold for bitcoin miners?

There are still several sticking points when considering the future of bitcoin mining and the overall bitcoin network. One is that with the hard limit of bitcoin’s supply set at 21 million coins, and the pool of available bitcoin constantly shrinking, there will come a time when no reward is paid. “There are still transaction fees that miners earn, so you still get paid as a miner to effectively secure their payment rail,” our expert said. An area of increasing focus among miners is how to grow the ecosystem beyond mining coins. In our Interview, the specialist discussed the importance of ancillary lines of fiat-based or uncorrelated revenue. For example, some miners are able to service other customers in the traditional high-performance compute space; others who own power sources sell power back to the grids.

As a business decision that “every miner needs to make”, hosting vs self-mine could be viewed as an important factor in the ability to diversify. Although the former is low margin, particularly if bitcoin is trading in a bull market, “it does give you consistent revenue”, our specialist said. However, there are also high servicing costs. If bitcoin re-enters bull territory, our expert anticipates a further shift to self-mining, potentially increasing from the current level of 70% to 90%. As we heard, owning power can have a “very meaningful impact” on margins.

What about the future of bitcoin itself?

Having lost about two-thirds of its value since November 2022, there are of course concerns about the unpredictability and therefore stability of bitcoin. However, our specialist said they believe that what is “exciting” is that bitcoin is currently trading in line with other risk assets, rather than losing value due to a loss of faith in the technology. The fact that miners can participate in futures markets is also noteworthy, according to our expert, as this enables investors to diversify into mining more easily while giving miners the opportunity to secure profits regardless of falling hash rates. “I do think that we’re going to see a maturation of instruments and development of tools to play [in] different dynamics of this industry.” 

However, without a crystal ball, it is impossible to predict how bitcoin’s place in financial markets and society could evolve. Regulatory developments and the wider adoption of cryptocurrency payments will no doubt be important factors to observe. For now at least, the competitive landscape among the mining players could be about to change quite significantly.