Last week, Roth Capital Partners hosted several executives on its Crypto/Blockchain panel including: Clark Swanson-CEO and Vice Chairman of Blockcap, Darrin Feinstein-Executive Chairman and Co-Founder of Blockcap, Merrick Okamoto-Executive Chairman and CEO of Marathon Digital Holdings (NASDAQ: MARA), and Sheldon Bennett-Chief Operating Officer and Board Member of DMG Blockchain Solutions (TSX.V: DMGI) (OTCQB: DMGGF).
A summary of Roth’s takeaways from the panel conversation are detailed below.
What makes Bitcoin economically valuable? Given the debate as to whether BTC can be categorized as a currency, commodity, technology or something else, Roth asked its panelist to explain how they think about the value of Bitcoin. The main takeaways included that it is viewed as: 1) a store of value and 2) a portable/robust network for non-traditional banking (BlockFi). Part of the store of value appears to come from the limited supply of 21M BTC to ever be in existence (~18.6M already mined), which if we back out those “lost coins” (users without passwords) and some of the prominent creators and long term holders, makes the float of BTC even smaller. Additionally, as an argument as a store of value, it could help offset some potential inflationary pressures from monetary and fiscal policy measures.
What Roth views as more interesting is the latter point, where blockchain and crypto can be augmented to provide an alternative banking system in parts of the world with a less developed banking/financial presence. Additionally, as the coins exist in a network, the value is also in the network, which can be accessed almost anywhere and becomes more valuable, robust and secure as more users participate in the network.
What it takes to be a miner. There are numerous factors to consider when it comes to entering the crypto mining space that span well beyond just the price of a coin (BTC in this example). Miners need to have a physical location to store and operate the mining machines, a reliable source of power and cooling, a pipeline of miners to add to the network, top-tier coders to mine the coins and other compliance (especially if publicly traded) and operational measures. Roth believes a key call out is the operational cycle of mining equipment.
Roth thinks of this as traditional CapEx, as new machines are being developed regularly which often make old mining rigs obsolete (or of less relative value). However, the rise in BTC price and interest in mining operations has caused shortages in mining rig inventory (also exacerbated by supply chain issues), making it increasingly more difficult to obtain the top-tier mining rigs. Therefore, companies have to be strategic in ordering their miners ahead of time (which can correlate with price drops and halvings). However, if miners are unable to get the latest equipment, there are instances where old machines can be “overclocked” to increase capabilities. Miners with access to ample rig inventory and long-term power agreements for inexpensive power, Roth believes, stand to benefit the most, as this industry only gets more competitive, and the process of mining for BTC more difficult.
Energy costs, sustainability backlash and the future of power. Another concern that has made it into the limelight has been the vast power consumption of crypto mining operations and the emissions as a byproduct. Outside of fixed mining rig costs, the biggest variable cost (for miners) is energy consumption, so it is vital miners can lock in energy agreements ahead of time, if possible, at the cheapest rate (in order to maximize margins and profitability). This however is sometimes easier said than done due to regulation on a state-by-state basis or even in various countries. The power usage has also faced backlash from the ESG community, which Roth’s panelist shared their thoughts on.
For instance, many of Roth’s panelists have looked into or are using alternative sources of energy. DMG for instance operates ~100% hydro power and has plans to add wind and solar energy sources in the future. DMG utilizes these alternative energy sources to take some traditional energy sources off the grid during certain parts of the day. However, alternative energy is not foolproof, as energy is still needed to run things like solar and wind, which do not work in certain weather conditions and being close to a hydro facility is not always feasible.
In the meantime, for this growing market it seems most companies are after the cheapest source of power as an input costs. That said, companies like Marathon are adding carbon credits to help offset its carbon footprint. Overall, Roth believes there would need to be industry-wide adoption of more environmentally friendly energy resources for alternative energy to be feasible given the “race to the bottom” in input costs (energy and mining machines). However, many panelists like management from Blockcap believe the industry could be on the forefront of pushing towards alternative energy sources as they are cheaper overall, as long as it remains profitable to do so. Roth looks forward to how this could evolve if per se BTC prices fall or input prices rise enough to cause a lull in mining, as a shift to renewables could potentially break down a barrier to gain more interest from ESG investors.
For more information on this year’s event, visit https://ccw.fm/dSw4J
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