Hashrate Growth on Track to ~400 EH/s by YE; Stocks Largely Outperforming But May Still Prove Attractive

Bitcoin stocks have largely  been outperforming Bitcoin, even as BTC is now up 79% YTD.  With this strong price performance, Hashrate has continued to grow strongly, up 100 EH/s since the beginning of the year, or 43%.

As a group, Bitcoin miners are now trading at an adjusted Enterprise Value per PH/s (based on YE 2023 company guidance) of

~$56,000. Our adjusted enterprise value is computed by adding equity market cap and debt, and subtracting out cash / equivalents as well as the current market value of publicly disclosed BTC / digital asset holdings.

Industry   conversations   and   various hardware brokerage transactions suggest new S19XP class rigs are trading in the mid- high $30s range, while S19 class rigs are trading in the high teens / low $20s per TH/s. Used rigs are at a significant discount to this number. As a result, the miners are trading at approximately 1.8-2.5x the replacement cost (new) of their hardware fleet, which does not account for the significant electrical and physical infrastructure investment on their books.

Hashrate growth is somewhat inelastic to price. If price continued to appreciate, there could be some upside to our Hashrate estimates of 400 EH/s by YE 2023; however, this  would  be  limited  by  available infrastructure, power availability and the availability of rigs – although no doubt some older  generation  rigs  would  likely  get switched back on. On the other hand, a decline in price could result in some older equipment and higher-priced power locations shutting down, but less than the magnitude of  price  decline.  Over  longer  periods, Hashrate would likely catch up, adjusting for reduced miner revenue in BTC terms around the next halving in April 2024, but the availability of power and rig production and deployment timelines would cause any runup in BTC price to outpace lagging Hashrate growth, relative to our current model.

Our study of the Bitcoin power price curve suggests that there is adequate available power in the $50-60 per MWh and under range to accommodate most of the planned Hashrate, while at current prices, an S19XP would be earning ~$120 / MWh at our year- end 400 EH/s network Hashrate estimate. Even an S19 class rig would be making about

$85 / MWh, which is sufficient to keep most such rigs operational.

From this perspective, then, the miners are trading at a reasonable multiple to their underlying tangible book value. This can change quickly if BTC price were to reverse, of course. However, an investor with a constructive view on BTC price might view the mining space as a leveraged exposure to the price of Bitcoin, and view the underlying Hashrate  deployment  by  the  miners  as affording some downside protection, IF the deployment is fully funded. On the upside, an accelerating  price  would  likely  outpace Hashrate  growth,  leading  to  expanding revenue per MWh  and improving gross margins for the miners.

Miners are trading at a rich median 10x AdjEV / 2023E consensus EBITDA, but a sustained BTC price recovery could drive upside to the EBITDA estimates, benefiting equity investors. However, we would caution investors  to  seek  downside  protection, preferably through more liquid BTC derivative instruments including Puts. We do not have a view on price, but rather focus on possible outcomes  IF  price  moved  in  a  certain direction.

Miner Performance Leveraged to Bitcoin

• Bitcoin is up 79% Year to Date
• Most miners are outperforming Bitcoin and have gained close to 170% YTD on average

Miner Valuation On Consensus Estimates

• Based on consensus estimates, the miners trade at a median multiple of 10.2x Adj. EV / 2023E EBITDA
• The median Adj. EV / EBITDA multiple is 5.1x 2024 estimated EBITDA
• We adjust EV by subtracting out mark-to-market value of publicly disclosed BTC holdings (in most cases as of 3/31/23)
• The miners trade at a median adjusted EV of $55,900 per PH/s of targeted YE 2023 Hashrate

All Time High Hashrate Largely Tracking Price

• Target Hashrate has generally been climbing from the post-China ban trough of 98 EH/s
• It achieved all time highs of 349 EH/s with the reset on 4/20/23, averaging +4.7% per difficulty epoch so far in 2023, adding about 100 EH/s or 43% so far this year

All Time High Hashrate Despite Price Stalling

• Target Hashrate has generally been climbing from the post-China ban trough of 98 EH/s
• It achieved all time highs of 349 EH/s with the reset on 4/20/23, averaging +2.0% per difficulty epoch since the beginning of 2022
• Hashrate growth further accelerated so far this year

Consistent Hashrate Growth Even as Price Was More Volatile

• Since the beginning of 2022, Hashrate growth has been more consistent than price growth
• Year to date, price is up 79% while Hashrate is up 43%
• As a result, while price is down 25% from the beginning of 2022, Hashrate actually doubled over the same period

Bitcoin / ETH Performance Both Peaked Together, But ETH Bottomed First

• Both ETH and BTC peaked together on 11/9/2021, as shown on the rebased trailing 24-month charts below
• However, ETH bottomed much earlier, at 40.69 on 6/18/2022. In other words, $100 on 4/27/21 would have bottomed at $40.69 on 6/18 before recovering to $82.42 now
• BTC bottomed at 32.48 on 11/21/22 before recovering only modestly to 56.99

ETH / BTC Relative Performance

• Taking the ratio of the ETH to BTC rebased time series (prior slide), we see that ETH has generally outperformed BTC
• However, there were two major periods of outperformance, with the rest being more of an oscillator
• The first was the three months into May 2021, and the second was from July 2022 into the Merge, as investors anticipated the successful completion of the Merge
• Subsequently, there was a mean reversion post-Merge, followed by a somewhat sedate period of relative performance
• We anticipate volatility to increase over the next several months

Bitcoin Power Cost Curve Based on BitOoda Estimates

• We have spoken with a number of miners and developers in the Bitcoin ecosystem, both public and private
• The below curve is our best-guess estimate about the global power cost curve currently, as well as at the end of 2023 and 2024
• Many players do have variable power pricing, including a fixed base price plus a variable fuel cost adjustment rider
• The variable FCA component has reduced dramatically vs the summer
• If the price of natural gas were to spike again as it did in 2022, the below curves would shift to the right – but for now, we estimate the shift from late 2022 to 2024 is actually up and left

Cumulative Power Cost Curve Currently 9GW < $60/MWh

• We estimate that about 9GW of capacity is currently under $60 / MWh
• However, this does reflect recent fuel cost adjustment items
• Between planned capacity additions and current benign gas prices, the curve could shift up and to the left in 2023

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