There are many people out there that refer to Bitcoin as ‘digital gold’ and if it is such a thing, investors may be better off looking for a way to mine it instead of outrighting buying it.
Traditional mining companies are great proxies for their underlying commodity. Oil drilling and lithium mining firms around the world have a simple but effective business strategy which is to deploy the cash to set up a mining infrastructure, hire miners, extract and ship. If the costs of mining fall and the market price of the commodity increases, this will result in the prices expanding.
Experienced investors will tend to pick out the biggest mining firms because these companies will tend to have lower costs or economies of scale. During this time, the investment thesis for any miner is that demand for the commodity is likely to be higher in the near future.
This indicates that one of the best ways to bet on the eventual rise and mainstream adoption of cryptocurrencies like Bitcoin, Ethereum and various others to bet on the firms that digitally create them.
There are companies out there, dubbed as ‘crypto miners’, which have industrial scale server farms which constantly solve complicated mathematical issues. By reaching a solution to all the problems, the computer gets a chance to verify the authenticity of each transaction on the blockchain. In fact, the blockchain will reward the miner by issuing a new coin for it.
There are a lot of big miners out but the biggest one in the world was founded in 2013, Bitmain, headquartered in China. This privately owned company is based in Bejing and designs application-specific integrated circuit chips for the act of Bitcoin mining. In fact, according to an article by TechCrunch, the company was well on its way to generating $10 billion in revenue throughout 2018.
Another big mining firm is Genesis Mining which is based in Iceland. From Genesis, the Canadian firm HIVE Blockchain Technologies was born in order to expand its operation across the world. HIVE is one of just a handful of pure-play cryptocurrency stocks listed in Canada.
The partnership that HIVE has with Genesis provide it with access to cutting-edge intellectual property, back office and the industry’s best network. The firm already operates with big mining facilities in both Iceland and Sweden. This is great for them as it provides them with the best climate and a great environment to work in, not to mention the access to renewable energy required for continuous mining.
The firm did an investor presentation in September last year and apparently, they currently manage 24 megawatts of mining capacity. In addition to this, it has fully funded the expansion to 44 megawatts, has only sold the crypto that it generates five times since 2017 and has stored the rest of it in anticipation of better market prices.
If we take a look at the quarterly reported, published in December 2018, we can see that the firm generated $8.45 million in revenue and lost $0.12 per share. On top of this, it holds around $10 million worth of cryptocurrencies.
As reported by The Motley Fool “it’s fair to say HIVE is a loss-making startup in a nascent industry with the potential for hyper-growth.” If the value of cryptocurrency floods back into the market this year, then the payoff could be massive. Although this would only go-ahead for the firm is they can successfully expand the capacity of its production side.
In such a nascent industry, there will, of course, be risks with such a business model. The mining costs alone are fixed and very high, when it comes to the protocol of major cryptocurrencies such as Ethereum could be changed in the near future and thus making the act of mining a lot more relevant. Take all this out of the equation and you still have the looming threat of rivals from different companies based in different countries across the globe which could have lowered costs and better technology.
In the end, investing in Bitcoin firms such as HIVE are always going to have a sense of risk in them. Then again, at the moment, the whole crypto industry is a risky area.
However, for investors that have got the eagerness to get involved and an optimistic outlook, betting on a regulated firm with an actual address and phone number might be a better option than a decentralised digital currency created by an anonymous creator from an unknown location (Satoshi Nakamoto for those who don’t know who I’m on about).