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Introduction
Riot Blockchain, Inc.NASDAQ:RIOT) is considered among the biggest companies in the Mining Industry.
We must consider many aspects when we speak about a particular industry, such as Bitcoin mining.
Despite the fact that there is a significant priceThe company has since improved certain aspects of its business after it collapsed from the March 2021 highs of more 70%.
Let’s now examine the features and key players within this industry, before we dive into the company.
Sector Overview
The Bitcoin mining industry is capital-intensive so there are few big players.
Capital intensive requires substantial and ongoing investment. Those who don’t invest enough are likely to lose market share quickly.
In this business, a company’s market weight can be expressed as the ratio of its hashrate to that of the network’s total. The higher a company’s hashrate, then the company’s ability to mine Bitcoin (BTC/USD).
As transactions become more complex and hashy, it is necessary to continue investing in new infrastructure.
Bitcoin Impact on Miner’s Businesses
The business of Bitcoin mining companies is closely linked to Bitcoin price trends in the same way that oil companies are connected to their business.
It is obvious that mining companies keep bitcoins they have mined on their balance sheets. They only sell bitcoins when they need it. This explains why an increase of bitcoin’s price can lead to an increase of the company’s assets. The company’s assets will also decrease if the bitcoin price drops.
The following chart shows a similar price trend between major mining companies (Riot Blockchain, Inc. (RIOT), Marathon Digital Holding, Inc., Hut 8 Mining Corp., (HUT), and CleanSpark, (CLSK), as well as the price of bitcoin.
It is evident that price changes are positively correlated.
This correlation makes mining companies attractive to people who do not want direct exposure but still want the price rises.
The phenomenon of Bitcoin halving is another important insight. Bitcoin halving refers to the halving of the bitcoins that miners are paid as a reward. It occurs every four year, and the next time it will be is in 2024.
How will halving impact the mining industry?
It can have two effects. On the one side, the price trend for BTC after the halving shows that it has always seen an upward trend. This is evident in the graph below.
BTC price after halving (Investopedia)
But, there are other options. One thing to remember is that the price rise of BTC was not due to halving.It would have increased at the same rate as the rise in BTC’s popularity.
Despite the past increases, there’s no guarantee that the 2024 halving (and subsequent halves) will result in a rise. However, a rise in BTC prices will have a positive impact on corporate assets.
The other side of the coin is halving, which means that mining’s profitability is divided by 2. This is, according to our opinion, the most dangerous aspect of mining companies in the near term. It is important to plan carefully when making investments and purchasing new businesses in order to reduce the profitability of your business. Even if the halving is fully absorbed, another halving (i.e., six more years) will occur in 2028. This means that in 2028, mining activity will be only 25% of what it is today. This is an important factor in the analysis for Riot as well as other mining companies.
Riot Business Model
We’ve now established the foundation and defined the industry’s characteristics. Let’s move on to Riot.
Riot’s business model can be broken down into three areas.
The first area is mining activity. This is the main business area and accounted for approximately 86% of the total revenue of the company in 2021.
The company currently holds approximately 6,062 BTC as of March 2022. All of these are derived from its mining operations.
In addition, the company anticipated that it would have 53,379 workers by the March 2022 data release conference. This will increase the company’s mining capacity to about 5.4 EH/s as of April 2022 (compared to about 3.9 EH/s now).
Mining capacity is the ability of the mining device perform calculations faster. It also indicates the miner’s ability to confirm transactions and to receive BTC as a reward.
In this industry, the hash rate of a company’s mining devices is a good indicator for its competitiveness.
The chart below shows that Riot’s hashrate is always rising, which means more investment and a rise in the company’s competition.
The company anticipates having a hashrate of around 12.8 EH/s by 2023. This is a 315 percent increase over the 2022 hash rate.
After The last halvingJuly 2016, the observed global hash rate CAGR was around +135% every year for almost six years. Comparing it to the projections by RIOT, we can see that the company anticipates gaining market share in the upcoming months.
Riot Hashrate (Riot Investor Presentation).
Riot ranks second in hash rates for other companies in the industry after Core Scientific (CORZ).
We can conclude that the company is competitive and well-positioned in the industry. However, a rise in hash rate does not mean that the company will be competitive. There is no doubt that other companies will increase theirs. It is possible that Riot’s hash rate growth could be outperformed by some other companies, and that overall industry growth will be faster than the historical growth in hashrate.
Comparison of hash rates from competitors (Riot Investor Presentation).
Data Center Hosting is the second business area. This business segment provides co-location services to institutional-scale Bitcoin mining businesses. The Whinstone Facility was purchased by the company to operate this business. This business accounts for approximately 12 percent of the company’s total revenues.
Engineering is the third area of business. Ferrie Franzmann Industries, LLC (“ESS Metron”) was acquired by them as a strategic partner. Riot now has access to essential electrical components and engineering services that will allow them to improve and develop their infrastructure.
This business contributes only 2% to total revenues.
Expected Riot Growth vs Other Miners
Riot is investing heavily into new technologies that will enable them to grow in Hash Rate quicker than the global network. One example is their ongoing development of immersion-cooled miners. Riot will be able to achieve a performance increase of approximately 50% over air-cooled miners, which would mean a 25% increase in Hash rate.
Riot anticipates that the growth will reach 12.8 EH/s by Jan 2023. But let’s take a look at some of our competitors to see how the industry will change over the next few years. For the entire of 2022, we can calculate a growth starting at 3,1 EH/s (Hashrate capacity at the start of the year) and we expect a growth of 316%.
Riot is not the only company that is affected by the growth in Hash Rate and mined BTC, but all companies in this industry.
Marathon (MARA), which is expanding its fleet, expects to be carbon neutral in 2023 with an estimated Hash Rate capacity around 23 EH/s. (Marathon Digital Holdings Announces Bitcoin Production Updates for March 2022). If we consider that MARA had 3,9 EH/s in January 2018, to reach 23 EH/s by March 22, the company’s total capacity is expected to increase 497% during 2022.
CleanSpark (CLSK), another example, expects to grow from its current 2.9 EH/s growth to more than 10 EH/s by spring 2023. (CleanSpark Announces March 20,22 Bitcoin Production). This means that 2022 will see a 244% increase in growth.
Core Scientific (CORZ), currently the leader in Hash Rate capacity had at the start of this year a capacity capacity of 13,5 EH/s. It expects to increase that number. 40 EH/s between 2022 and 2023. This means that the EH/s capacity has increased by 196%
Conclusion
In terms of forward multipliers, we see that the EV/Sales ratio for RIOT is between MARA and CLSK.
RIOT, despite being a leading company, expects to grow its capacity at one the highest rates in industry. This may allow it to maintain good revenue growth should there be no major Bitcoin price shocks. However, this is not without cost. RIOT spent $274.8M last year as deposits for equipment, primarily to support miners. Additionally, the company pursued several acquisitions that collectively further diluted shareholders.
In order to keep the company’s current policy firm, additional investment will be necessary over the next few decades. It is very unlikely that RIOT will achieve a profitable level in free cash flow.
Overall, the high capital intensity required to grow the company, and every other company within the crypto-mining sector, renders it unattractive.
However, the bottom line depends heavily on Bitcoin. We believe that an investment in BTC will be more conservative and less risky than other investments. Crypto-miners could see a rise in BTC in the short-term, but it is necessary to invest a lot in order to sustain industry growth. This will reduce the company’s bottom lines in the short-term.