With a number of analysts predicting Bitcoin’s hashrate to increase to a range of 300-325 EH/s by end of year, it's valuable to see what level of hashrate is required from a large mining firm just to keep its share of the pie.
The selected publicly listed miners above predictably show a positive hashrate growth in line with global hashrate increase. Iris Energy and Marathon lead the way in terms of percentage growth, growing significantly quicker than the global hashrate.
Funding this growth takes capital – often vast sums. Let’s take a look at the three ways miners can access funding: equity raise, debt raise or selling Bitcoin.
Disclaimer: This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any investment or to adopt any investment strategy.
After the China exodus, North America-based miners had an opportunity in front of them: raise capital and become dominant miners on the Bitcoin network.
The two best examples to date are Riot Blockchain (RIOT) and Marathon Digital (MARA) – which were Nasdaq-listed at the time – capitalizing on easy access to Wall Street money with an investment of 42,000 S19j miners for $138.5 million and 30,000 S19j Pro miners for $120.7 million. Both miners are relative hashrate giants.
A company can raise capital by selling shares to investors, known as equity funding. North America-based miners have the ability to raise capital by going public through an initial public offering (IPO) or even secondary offerings if they are required to raise more capital. For example, Riot announced during its 2021 Q3 update that it had successfully completed a $600 million at-the-market (ATM) equity offering.
A few other miners, namely Bitfarms (BITF), Digihost Technology (DGHI) and Marathon, have recently applied to raise capital through ATM offerings. These are usually secondary offerings of stock, which allow companies to raise capital over time. In an ATM offering, companies incrementally sell shares into the secondary trading market through a designated broker-dealer at prevailing market prices. The advantages of this are that orders are usually executed at once without the need to watch and "time" the market. They are also effective for trades that need executing by a certain date. Disadvantages can include the fact that there is no control over executed price, thereby providing a risk of not getting the best price, and that they can be costly if the stock is volatile.
Bitcoin miners like Argo Blockchain (ARBL), which are publicly traded on the London stock exchange, have also recently successfully listed on the Nasdaq (ARBK). This has enabled Argo to raise a further $128 million of capital to help fund the expansion of its flagship mining facility at Helios, Texas.
The obvious advantage to equity raises is that they enable the company to obtain funds with no loan or repayments to make. However, shareholders don’t always view equity raises favorably, as dilution impacts their level of value and ownership. If a listed company is required to go to make additional or secondary offerings, sometimes these come with discounts or warrants attached, to attract new investors. (Argo offered a 20% discount when it diluted its shares in March 2021).
The most common form of raising debt is a loan, where the company borrows money and agrees to repay the loan in full plus interest.
As the Bitcoin market matures, the opportunity to borrow money through secured loans has become more available at competitive interest rates, especially for miners “hodling” their Bitcoin (which provides further liquidity to their balance sheet). Argo and HUT8 (HUT) took advantage of this by agreeing to Bitcoin-backed loans from Galaxy Digital (GLXY) in Q2 2021 of $45 million and $25 million respectively.
Another form of debt financing was the $40 million unsecured loan that Argo utilized via the closing of its SEC-registered public offering at the agreed principal interest rate of 8.75%. Argo Helios, a subsidiary of Argo Blockchain, recently entered into additional loans, totaling $70.6 million at an interest rate of 12% under Argo's equipment financing agreement with New York Digital Investment Group (NYDIG).
Lastly, Marathon was able to raise $650 million in convertible senior notes at 1% in November 2021 in a private offering to qualified institutional buyers. The notes will be due in 2026.
As already highlighted, the majority of North American miners believe the value of Bitcoin will only appreciate over the coming years. HUT has not sold any of its “hodl” and holds an impressive 6,769 Bitcoin.
However, a number of miners have sold their Bitcoin to pay for operational and capital costs. Iris Energy (IREN) actually sells its mined Bitcoin on a daily basis for growth of its operational and capital costs. Iris firmly believes that reinvesting Bitcoin today will generate more Bitcoin tomorrow by using revenue to generate more miners. Iris determined this to be a less dilutive option to raising equity to finance capital expenditure and operational costs.
The past month has also seen more miners sell Bitcoin to cover their operational and capital costs. Cleanspark (CLSK), Riot and Argo all reported sales of their Bitcoin hodl in their monthly updates.
With the price of Bitcoin now falling below $26,000, it will be interesting to see how each of the miners uses the various levers available to them to achieve their growth targets. Mining becomes even more competitive as margins shrink, increasing the difficulty of obtaining capital from the market. If anything is certain, it's that the current macro-environment will yield a different capital raise pattern than the last 24 months have produced.
Disclaimer: This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any investment or to adopt any investment strategy. This information is for educational purposes only and is as of the date of that particular presentation. Compass does not guarantee profits from mining activity. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a mining product, service or strategy. Changes in the rates of exchange of cryptocurrencies, hashrate, difficulty, network transaction fees, hosting and other fees may cause the efficiency and returns of mining to diminish or increase. Individuals are responsible for their own decisions regarding cryptocurrency mining, including all financial and operational risks.