A risky buy of bitcoin in a larger bullish market than cryptocurrency

All commodity markets have their investment bets leveraged. Crude has wild cat exploration and production companies; gold and precious metals cause mining to do the dirty work on the ground. A commodity of the future, bitcoin, is no exception to the rule that when there is a scarce resource to exploit in the world, and investors place increasing value on it, miners will rush to claim the wealth.

The recent gains in what could be the highest bitcoin bet of all led Leeor Shimron, vice president of digital asset strategy at Fundstrat Global Advisors, to take a look at the “digital gold rush” in the bitcoin mining trade.

These mining companies are fairly new and young, have no background, and some hit the market outright, and some of the larger ones, like Riot Blockchain, attracted regulatory scrutiny in its early days. They have also been operating at a loss, but Shimon noted that they have raised more than $ 1 billion in market capitalization after investing heavily during the bitcoin recession in the hardware and facilities that have helped them “make money. a lot ”in the current cycle of the bitcoin market.

Shimron described the miners in a note last week to customers who expressed interest in growing stocks as a “high beta game” on Bitcoin. According to his analysis, during the recent uptrend of the cryptocurrency, during which bitcoin increased by 900%, the average return among the largest listed traders was 5,000%.

Bitcoin miners, in Shimron’s words, form the main backbone of the Bitcoin blockchain, as they “burn electricity to guess computer generations with the goal of solving cryptographic puzzles” and generating revenue in the form of extracted bitcoins. As bitcoin is mined, miners sell the assets to cover their expenses. Many choose to keep a portion of their bitcoin mined in their corporate balance sheet, a trend that is beginning to gain strength with the more disruptive and digitized-oriented CEO class in a wider market, such as Jack Dorsey in Square and Elon Musk in Tesla. Musk just added “Technoking” to his executive title and Tesla CFO recently added “Master of Coin” to his. The US mining company, Marathon Digital Holdings, recently announced that it had bought an additional $ 150 million worth of bitcoin to keep on its balance sheet.

The major listed mining companies the Fundstrat analyst reviewed include the two Nasdaq-listed companies, Riot Blockchain and Marathon Digital Holdings, and two over-the-counter market shares, Hive Blockchain and Hut 8.

Shimron’s analysis shows that the beta presented by these bitcoin mining companies generates a return of 2.5% for every 1% movement in the cryptocurrency. While there is not enough historical data to draw firm conclusions, the performance of miners is clearly tied to the price of bitcoin, and its trading profile amplifies the downside and downside, he said.

It is a “notoriously competitive industry,” in Shimron’s words, where the ability to be profitable can be reduced to cheap electricity and access to specialized mining hardware. As the price of Bitcoin rises, “miners spin new platforms or upgrade their hardware with more powerful and efficient machines.”

Marathon has recently made a $ 170 million deal for Bitmain’s 70,000 S-19 ASIC miners, which, when fully deployed later this year, will increase its mining power to 103,000 machines.

This high cost of doing business in bitcoin mining results in low or negative free cash flow and off profits, Shimron writes. But for now, mining companies have captured the growth of the current bitcoin bowling cycle as a result of their spending. (They also saw a wild trade in the 2017 Bitcoin boom).

Now they have also caught the attention of some of the newest forces in the market, as a recent Bloomberg play noted that bitcoin miners were discussed on the WallStreetBets message board on Reddit, which fueled the mania in GameStop actions.

“For investors who want to expose themselves to miners, this beta makes it a great opportunity amid a roaring bullish market. … There are adjustments and starts and setbacks, but we still have a lot of room to grow here,” he said. said Shimron said in an interview with CNBC.

It is the broader bullish market in cryptocurrencies that has fueled miners and Shimon believes it can continue in 2021, driven by macroeconomic and demographic factors. Fears of inflation will support bitcoin prices and even amid recent 10-year Treasury yield pressure that may act on cryptocurrencies as it does on technology stocks, the Fed said. it is clear that the central bank wants to keep its policies impoverished. in place until 2023.

Another driving force is the continued adoption of new digital technology and digital assets by younger investors. “It seems that the youngest are engaged in bitcoin and other digital currencies instead of gold and commodities, and this speaks of a demographic change … For them it is not crazy to interact with the money of a purely digital way, “he told CNBC.

Last week, Morgan Stanley became the first major Wall Street bank to offer its wealthy customers access to bitcoin. It limited access to customers by at least $ 2 million, given the risks involved.

There are already other ways to enter the crypto market other than the underlying currencies, such as currency-trading exchanges that will soon be available to more investors. Coinbase was recently valued at $ 68 billion in the private market and is planning a direct listing on the Nasdaq.

There are three Bitcoin ETFs in Canada and at some point there may be one Bitcoin ETF available in the United States. The Securities and Exchange Commission’s latest attempt was unveiled in mid-March by VanEck ETFs, but investors didn’t have much hope the SEC will soon approve a bitcoin fund, looking elsewhere for cryptocurrency investment ideas that go further. of buying bitcoins.

Shimon, who managed an early-stage cryptocurrency and a blockchain investment fund before joining Fundstrat, said he believes miners are a foundation for the cryptocurrency space. “The major companies will be here to stay,” he said, noting the economies of scale they invest in equipment against which the toughest new users will be able to compete.

Having made the “smart move” during the bearish bitcoin market to build operations, the current supply chain shortage in the technology sector caused by Covid may further help position these miners after capital which have already been earmarked for specialized machines for space.

However, as many traders and hedge funds do with gold miners and small-cap oil explorers, he is inclined to trade bitcoin miners in a bullish market, rather than seeing them as investments in maintain long term.

Shimron continues to prefer bitcoin as a long-term investment, as well as any ETF finally approved by the SEC for US investors. “It’s only a matter of time before the SEC approves a bitcoin ETF,” he said. “When a BTC ETF arrives, rates will be low and it will be the safest and easiest way to use traditional rails to expose yourself to bitcoin,” he said.

Miners have faced criticism over the huge amounts of electricity needed for bitcoin operations, but Shimron’s view boils down to the financial situation and market performance. (He says there is also much to criticize about the impact of the fiduciary monetary system on the world).

“It is quite clear that the US dollar, as a global reserve currency is in its final stages, will not disappear soon, but we are in the last stages of the US dollar as a reserve currency and the decentralized is the next stage “.

Even if bitcoin mining stocks pose too high a risk for most investors, trust me to say that the world of cryptocurrency should be on everyone’s radar. “This is where it all goes. Finance has been the last vestige the Internet has not touched,” Shimron said.