Why are $RIOT and other bitcoin mining stocks overpriced?

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by pennyether

I’ve spent the last week and a half researching bitcoin mining, looking at financials, purchase orders, equipment, making spreadsheets, etc.

I don’t see any possible world where owning 10,000 mining units (and an order for another 25,000 to arrive by October) imputes a $1b+ valuation, especially when there will be close to 1,000,000 of these units manufactured by that time.

There is nothing proprietary about what $RIOT does — what they do is done 1000x over across the world: Buy mining hardware and plug it in. Is the total market cap for bitcoin mining somehow in the trillions? If owning these units is so amazing valuable, why are the manufacturers selling them rather than using them to mine?

I’m wondering if I’m missing something here…

Happy to expand on this more if there’s any interest.


About Mining

Bitcoin Mining is the process of buying specialized hardware (which has a hashrate), hooking it up to electricity, and getting back some amount of BTC. The amount of BTC you get is: your hashrate divided by network hashrate times reward.

Currently the reward is 1000 BTC per day. This halves every four years, so if you’re a miner, get wrecked. But anyway, just assume it doesn’t half.

Now the amount of $ rewards you get is the above equation times the price of BTC, or $USD.

So to recap: You spend $2400 to get hardware that gives you 100 TH/s… the network hashrate is 150,000,000 TH/s, so you get 1/1,500,000 of 1,000 BTC per day (.0067 BTC), times $30,000, that’s $20/day. Pretty sweet, right? You’ll break-even in 120 days, and from then on out, it’s all profit, right?


Race to the bottom

Except, here’s the golden rule of bitcoin mining: The more profitable it is to mine, the more the network hashrate grows. It’s that simple. Miners collectively see it is profitable to mine, so they buy a ton of that hardware, and now the network hashrate will, for example, double… so you’re netting $10/day instead of $20/day.

This is how it works — miners are all competing, adding hardware when it’s profitable, and driving the profit margin down to the lowest point they can tolerate, given the volatility of $BTC.

There is nothing proprietary about mining, and there are no economies of scale. There’s nothing special about any miner’s hardware — they all buy it from one of a few manufacturers (Bitmain, MicroBT, Canaan, eBang, etc). There’s nothing special about electricity — low cost electricity is available all around the planet.

During the bull run of 2017, BTC went from $1,000 to $14,000 — but during that same period hashrate went from 2 EH/s to 16 EH/s — so even though $BTC exploding in value, the actual mining profit margins only increased a little bit. By the end of 2017, the same hardware you had in Jan would now mine 1/8th the amount of BTC. (The story got WAY worse in 2018)

From my analysis I’ve concluded that on average miners can hope for 1-2x return on their hardware investment across 2 years — by that time, the hardware has negative profit margin. Not bad.. but not worthy of $1b+ valuation.

Of this 1-2x, the vast majority of return comes from when the newest hardware is just released, and/or when there are spikes in $BTC that happen faster than miners can provision new hardware.


The arms race

All things being equal ($BTC, network hashrate), there is another factor that guarantees network hashrate will go up — and that is availability of new hardware. For $2400 you could get 20 TH/s… then a year later, 50 TH/s.

Per the golden rule of mining — if it’s more profitable to mine, network hashrate goes up. About every year the next generation of mining hardware is released and is much more profitable, so miners must upgrade to it or they’ll be left in the dust as the network hashrate explodes. When the dust settles, they are still getting the same amount of BTC, but have had to shell out $ for the new hardware. Nobody wins, except the hardware manufacturers.


About RIOT

$RIOT is a publicly traded company at above $1b valuation. They’ve done essentially nothing but hook up a few thousand hardware units and operated at a loss.

They sell shares constantly to raise cash to pay for their losses and ridiculous salaries. There is nothing special about their operations — what they do happens on a scale 1,000x over across the world: buy mining hardware, hook it up to electricity.

Throughout 2020 they ordered $83m in equipment which will trickle in throughout 2021… (which they’ll have to do more share offerings to finance as their purchase orders require payment in various months).

Meanwhile, the rest of the mining world has done exactly the same, probably to the total tune of a few $billion in orders. The miners in china will get their equipment in greater quantities, and earlier, and at better prices (no tariffs, cheaper shipping, etc).

*If $83m purchase order for late-arriving, overpriced mining hardware (which will only amount to a tiny fraction of global hashrate) is worth $1b+ market cap… doesn’t this impute a ridiculous valuation on the BTC mining industry as a whole?


Litmus test

Do you think that purchasing $50m in hardware (which will not arrive until later this year) somehow imputes a $1b valuation, when literally $billions of the same mining hardware were purchased by all other miners?

Do you think the manufacturers are too stupid to realize that they could be multi trillion dollar companies if they just announced they are going to mine with their hardware rather than sell it?

Do you think 1% of the network hashrate a year from now is worth $1b? (Btw, they will not even come close to 1%… network hashrate will have gone up 2-4x by then.)

Do you think $RIOT can compete against Chinese miners that get preferred deals with manufacturers, get first dibs at newest hardware, get better deals, don’t have to pay tariffs, don’t have to wait for shipping, and use their precious Guanxi?

Do you think that when $BTC doubles, somehow all miners will forever make double the returns from their hardware?


Am I missing something? How are $RIOT, $MARA, etc, seeing such insane valuations right now? Would it make sense to short them?

Thanks.

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.

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