New Generation Mining Rigs Are Safe Haven “Bitcoin Dividend” Assets
Abstract
As the macro landscape weighs on markets all over the world, many investors are flocking to traditional safe-haven assets. The Russian invasion of Ukraine, record-high inflation in the US, and a hawkish federal reserve have led to the price of Bitcoin falling from $69,000 to $38,000. While unconventional, new-generation mining rigs provide a unique opportunity for investors. Because of the algorithmic supply dynamics in the Bitcoin network (difficulty adjustment), these new rigs enable miners to earn a consistent positive cash flow even in the face of extreme volatility. Last, your machine dollar-cost averages into Bitcoin at a discount, which enables you to still capture massive future potential upside.
Bitcoin’s historic Sharpe ratio outpaces all other asset classes.
Price is highly volatile, but that is the price investors pay for massive returns.
The S19XP has a very high operating margin (80%+) even after accounting for the recent price drop and increase in mining difficulty.
After a theoretical stress test on the price of Bitcoin, new generation machines would still be earning positive returns as old generation machines turn off first.
More Bitcoin would be mined by the new machines as old generation machines turn off.
At $19,000 BTC, an S19XP would still have an operating margin > 50%.
As ASICs commoditize, the new generation machines today have the potential to last significantly longer than older generation ASICs.
The time to deploy capital is now. By the early 2030s, 97% of all Bitcoin will be mined (currently at 90%). Demand inevitably will far exceed supply for the world's most valuable asset.
Bitcoin’s high returns come at the expense of short term volatility
Many investors are confident that Bitcoin will outperform most asset classes on a 4+ year time horizon, but the high potential returns come at the expense of short-term volatility.
There is a metric in finance called the Sharpe Ratio that can be used to calculate Bitcoin’s historical risk-adjusted returns. Meaning, after accounting for volatility and short-term risk, is the return justified?
Looking at a 4-year holding period, Bitcoin’s Sharpe ratio is historically almost always higher than all other major asset classes including gold, US stocks, US real estate, bonds, and emerging currencies. This chart was created by Willy Woo (@woonomic).
Data: https://charts.woobull.com/bitcoin-risk-adjusted-return/
While the 4-year holding period Sharpe ratio validates that the short-term volatility can be justified by the large returns, that doesn’t mean investors want to stomach that short-term volatility.
What if it was possible to still capture a large amount of the future upside and reduce short-term volatility risk, all while earning a positive daily BTC “dividend”?
Earn a “Bitcoin dividend” during high volatility
Mining Bitcoin using the proper strategy enables a unique asymmetric position in the market. Purchasing new generation mining rigs during the initial phase of a hardware upgrade cycle allows market participants to reduce short-term volatility exposure while still capturing Bitcoin’s future long-term upside potential.
At the current price and network mining difficulty, an S19XP would have an operating margin north of 80%.
This was calculated using a BTC price of $44,500 and a hash price of $0.20.
This is with the market price down almost 50% from its all-time high and mining difficulty climbing steadily. An operating margin this high means the miner will be spitting off positive cash flows for a significant amount of time. This is because of two main reasons.
First, difficulty cannot climb too fast, as millions of miners would need to be deployed. That is a lot of infrastructure and manufacturing that needs to be built out over time. While this is currently occurring, it is not occurring overnight.
Second, the price could possibly fall further, but if it does, older machines (S9s, M20s, S17s, etc.) will turn off before new generation rigs. This would lower network difficulty and likely retain your positive cash flows.
Network breakdown and volatility stress test on miners
In order to evaluate how a new generation machine would perform under extreme price volatility, it’s important to estimate the current breakdown and distribution of the global mining network. While it is impossible to know exactly what machines are currently hashing and how much they are paying for electricity, we can compile research from CoinShares and Blockware Solutions clients and partners.
Below is CoinShares Research’s estimate for the total network hash rate by hardware unit.
This hash rate distribution analysis from January 2022 can be broken down into three large buckets.
S9 - 22.8%
S17 (includes Whastminer M20s and Avalon 11s) - 11.4%
S19 (includes Whatsminer M30s and Avalon 12s) - 65.8%
Since the global hash rate has now grown to ~ 200 EH, we can assume that all additional network hash rate can be allocated to the S19 (and related models) bucket.
S9 - 20.0%
S17 (includes Whastminer M20s and Avalon 11s) - 10.0%
S19 (includes Whatsminer M30s and Avalon 12s) - 70.0%
In addition to hardware distribution breakdown, we can estimate miner electricity rate distributions using old Blockware research which was based on data obtained from client and mining pool relationships. For simplicity, this breakdown remained the same from the prior analysis completed in 2020.
From the 2022 CoinShares Research and the 2020 Blockware Research, we can estimate which hardware gets allocated to which electricity rate layer. In general, it is logical to assume that older generation machines inevitably move to the cheaper layers and new generation machines trend toward the more expensive layers.
Old generation machines move toward the cheaper electricity layers because that is where they are most profitable and the ROI is most attractive after accounting for both OpEx and CapEx. New generation machines typically get plugged into the more expensive electricity layers as that is where new hosting capacity is available, and it is the most attractive after accounting for both OpEx and CapEx at scale.
Expanding this breakdown further we can determine the breakeven price of each hardware unit group and each electricity layer.
This is calculated using a Bitcoin price of $44,500 and a hash price of $0.20.
Last, we can perform a stress test to see what machines would shut off before your machine. Since the S19XP is more efficient than older generation machines, ~ 89.2% of the network would have higher Bitcoin breakeven prices than an S19XP on layer 8 (paying ~ $0.07 per kWh).
Stress Test - Scenario: Bitcoin price falls to $19,000
At $19,000, ~ 11.5% of the network would have a breakeven price above the current Bitcoin price, meaning that those ASICs are now unprofitable.
If the price sustained this low level for an extended period of time, we could expect the network difficulty to drop by -11.5% as a result. Interestingly, as network difficulty drops, the BTC breakeven price for the remaining machines decreases.
An S19XP on layer 8 watched its breakeven price drop from $8,036 to $7,207. This is because the machine now will earn more BTC as a result of the drop in difficulty.
This means even at $19,000, an S19XP would have > 50% operating margins, and if the price fell further, then the breakeven price would continue to drop as the inefficient miners continued to drop off the network.
This is how new generation mining rigs protect your portfolio against short-term volatility. As weak inefficient miners can’t continue running profitably, you get rewarded with more Bitcoin.
Still Capture Bitcoin’s Upside Potential
As mentioned at the beginning of the report, an S19XP currently has an operating margin north of 80%. Effectively, this means you’re able to mine Bitcoin at a cost significantly below the current market price. This is a highly effective way to dollar cost average into Bitcoin.
Over the long run, more efficient machines (like XPs and others) will continue to get plugged in. As long as this is happening faster than the old inefficient hash rate is coming off the network, then network difficulty will be increasing.
However, there is little risk of network difficulty exploding quickly enough to make your S19XP obsolete overnight. Over the past 8 years, ASICs have effectively commoditized, meaning new generation machines aren’t multiples more efficient than the previous generation machines. This ultimately foreshadows that the next generation (after the XP) likely won’t be significantly more efficient. This means hash rate and difficulty won’t grow nearly as fast as they once did, and new generation machines today may be operating profitably for an underestimated amount of time.
Data Source: Bitcoin Mining Council
On top of your machine earning a positive cash flow, buying ASICs on dips may lead to appreciation in the asset itself.
Below is the historical price of an Antminer S19. This machine went from $2,000 to $12,000 as it roughly followed the price of Bitcoin, all while earning a consistent daily “Bitcoin dividend”.
Data Source: HashRateIndex.com
Why Now?
Last, Bitcoin is the world’s only perfectly scarce asset. It has unique monetary properties (scarcity, divisibility, portability, durability, and immutability) that make it a global Schelling point.
Mine the last 2,000,000 coins or someone else will.
Bitcoin Mining in Practice
While the Bitcoin mining case is compelling, it is difficult to procure ASICs, build large mining facilities, and source cheap scalable electricity all on your own. As an institution, hedge fund, or high net worth individual, it makes sense to purchase and host ASICs with a trusted partner like Blockware Solutions.
With Bitcoin mining experience dating back to 2013, Blockware Solutions has sold over 250,000 ASICs, hosted 200+ MW of clients, and mined thousands of BTC from the Blockware Mining Pool.
If you are looking for a trusted partner to assist you in deploying capital to the Bitcoin mining space, Request a Quote from Blockware Solutions.