Sep 29, 2023

Crypto services provider Matrixport predicts there could be compelling investment opportunities in the bitcoin mining space.

Video transcript

Crypto, the services provider. Matrix Port predicts that there could be a compelling investment opportunity in the Bitcoin mining space. Joining us now to discuss is Matrix Port, head of research and strategy, Marcus and Marcus. Welcome back. Well, thanks for having me and uh Happy Friday. Happy Friday to you. Uh Before we get into uh your discussion on miners, you know, we, we just brought up this uh 27,000 mark that we, we uh just got to in, in Bitcoin. And as I noted that the markets in crypto in general have been quite thin. What, what do you make of this latest? Rally it its causes. Um And just in general because I know I know a rally in Bitcoin plays into your thesis with the miners. So, so let's talk about this sort of very short term move. Obviously, it's not the long term move that that you're talking about. But let, let's first talk about the short term. What, what do you make of it? Well, short term, I think you can draw a trend line from the July high this year. Uh all the way down to, you know, to the current level. And I think you noticed that we are actually breaking out here. So we are breaking out of this triangle formation, you know, we're entering October and historically, a Bitcoin uh really well in October. So over the last 10 years, eight of those times in October, the market was actually up with an average of 22%. So I think the odds are actually in our favor and I think we can probably, you know, play with some, you know, with some macro ideas and so on. But I think it looks quite positive right now. I a aside from the, you know, I was, I always called that astrology in a way because I i it's just looking at the calendar and, and, and saying, OK, well, this is what happens, you know, the moon cycles and farming cycles dating back 7, 8000 years to, to the birth of agriculture and it affects commodity prices. But I, I, I'm wondering in this case with Bitcoin, you know, this was a short term move up and in many ways, um the there's a lot going on on the macro stage in terms of oil, in terms of equity, in terms of interest, trades, in terms of uh of a, a perceived hawkishness in, in, in the FED. And now we, we just got the inflation data. It doesn't e even though it's kind, you know, it's being spun uh the recent inflation data that just came out today, the PC, uh it's being spun almost as well. It's, uh, the inflation is getting a little bit under more under control. It's still above three something percent. It's still close to 4%. We're not anywhere near that 2% target. Why then would all of a sudden we see this little bit of enthusiasm to, to push Bitcoin out of that resistance level? Well, I mean, yes, inflation is three and, and a half percent right now or around 3.3%. But interest rates are actually up five and a quarter. So interest rates are up almost 200 basis points above uh above inflation. And I think inflation is just uh really like an an indicator that kind of gradually trends low. I mean, you know, we have seen the highs last year and we are materially, but of course, the fed is still kind of like over, over hawkish, over hawkish. I would, I would uh you know, claim here and I don't think they need to be so hawkish. I think at, at the first moment when they turn a little bit more Davi, I think Bitcoin is just really gonna break out uh quite aggressively. So II I want to turn to your report because you see incredible uh uh rallies happening in Bitcoin miners in the event that Bitcoin goes up uh to all time highs. And I kind of want to get to the idea. First of all, what do you think would be the catalyst to bring Bitcoin back to those all time highs given, as you said, you know, the fed seems to be quite hawkish. But second of all, how are you, how are you coming up with the valuation numbers on these minor stocks, the these Bitcoin miners? How are you coming up with the valuations? Is it based on cash flow? Is it based or is it based on revenue multiples? What what are you using to, to determine that uh rally that you see? Yeah, yeah, we have of course, looked at uh you know, equipment efficiency. And I think for example, Marathon Digital stands out here, I mean last uh last year, I think Q two and Q three, they had an efficiency really from like just like 30 40% because they moved part of the operation, you know, from Montana, you know, down to Texas. And of course, this is like major negative implication for the share price. Um But of course, the last couple of quarters, they're actually running like, you know, 75 80% efficiency. And I think we are already seeing the numbers that are producing a lot of coins. And I think when you, when you just show historically over the last two years, um what did the Bitcoin price reflect of, you know, 60,000, you know, what was the share price? The share price was up actually almost like 10 times higher? And you know, we really just simply just run the numbers and came up with a analysis and we looked of course, at those minus that are highly correlated with the where the regression coefficient coefficient is very high, right? Of course. So, so this isn't ba so this is based on uh when you're running that, that is that stock price to the price of Bitcoin or is it uh is it based on, on the top line or bottom line? So we we look at the against the price of Bitcoin. But of course, we also do some analysis and you know, can this really be achieved? And as I was saying, in the example, in the example of marathon digital, you know, last year, the efficiency was very low, but this year it's very high. So we would assume that actually this year, it can actually track the Bitcoin price. So if Bitcoin for whatever, you know, various reasons, uh maybe the Macro becomes a bit more favorable, um maybe it's a strong kind of late year end rally, maybe a Bitcoin ETF will be approved and so on, you know, we were just kind of highlighting that actually your upside is probably, you know, five times bigger than if your long, long Bitcoin. And therefore it makes more sense, you know, I think if I may, may add one more, one more example here, for example, was just recently launched six months ago. They have a lot of uh mining farms or mining exposure in, in Bhutan and Bhutan, you know, the mines are Bitcoin really? At, at 1/10 or 1/8 of the cost uh as in the US. So they have some uh you know, I guess the competitive advantages here. Do you factor? Sorry. Jet, I just II I do have to ask this though. I mean, are you factoring the, the higher interest rates when, when all those w when you were doing that uh analysis, the, the, the correlation, of course, that was at a time, you know, a lot of that data is gonna show up that's at a time when interest rates are at zero or near zero. And the willingness to take on risk in the equity markets were, were a lot higher. I mean, you know, we had the, the, the games stop and all this stuff world's changed since then, interest rates are now, you know, 500 basis points higher. What does that, does that account for, for this change in risk appetite? Yes, it looks really the last two years. So it has not just necessarily, you know, the best of the times but also the worst of the times. And this is what I was saying, we seem to be, you know, out of the worst of the times because efficiency numbers, you know, have changed, you know, some of those miners were already, you know, able to refinance themselves and of course, I, you know, I admit and this is what we wrote in the report as well. You know, higher energy costs, uh higher refinancing cost as an interest rate is a little bit of a wild card. But we, we are not too, you know, we, we don't think there is enough feed through really. And this is why we would only like, for example, um you know, we structured the basket really of of 10 companies that are trading at a steep discount to the current Bitcoin price. So you're buying actually Bitcoin, you know, for example, uh 30% lower these, these these stocks. So there is a margin of safety there. So there is a buffer where we feel comfortable in. Uh And that's why we, we think that it's kind of like priced in right now, Marcus, have you taken into consideration that the having is coming up in April miners are gonna learn, earn less per block? I believe it's just gonna be just over three Bitcoin per block. Where right now it's around six. This, have you taken this into consideration? Yes, we have and for example, um you know, marathon mining just as well, Martin Digital as an example here, they mine currently at 24,000 per Bitcoin and their costs are going to go up to, to 29,000. Uh That's what we estimate. And it again, it depends on the efficiency and so on. But the efficiency is really high right now. Um So nevertheless, I mean, we need to really well pay about 30 1000. Otherwise, of course, those miners are in trouble as well. But of course, some have uh have a much lower mining cost. Uh Again, for example, BT has a mining cost of only like 18,000 right around like 15,000, you know, marathon 24,000. So we factor this, this in, in some of the um the the operational cost. Uh And, and of course, it will be a big headwind for lot of the miners and we have really split them in two universes. Uh you know, one that has a cost already above 30,000. So we would kind of stay away from them, but some have really like competitive advantages in, you know, in, in their set up and everything and, and the, and the mining equipment that they have and on those ones, we would really kind of like engage and think that, you know, you know, there is a kind of like a good, a good bet going forward on the topic of marathon digital. They recently mined an invalid blog. They said it was due to a bug during an experiment. Can you explain what happened there for us? Yeah, I'm not, so I'm not, not aware of this one. So I don't wanna like step in their, on their feet there. Sorry for that. I thought that um that that was something you were briefed on. So I apologize for that. The last question I will ask you then is about this E futures ETF we saw the price of ether pump above 3% this morning when we were doing our markets check, what's your expectation here? Um Does this tell you anything about the potential for um an ETF catalyst when it comes to the spot, Bitcoin one? Like, I mean, we haven't seen the markets really react to this e futures ETF news. Does that tell you anything about what might happen when we get a Bitcoin? ETF? Yeah, I mean, you know, when you look at, you know, the back test of the, the Bitcoin futures ETF si mean, they're, they're underperforming because of the role cost that they have every month. Um you know, they have some other higher costs. So we are not actually a big fan. We don't think it really matters too much on, on, on the future side. It's more important if there is a spot uh ETF being approved and I think the money will so probably uh primarily to, to the Bitcoin ETF and we are really bullish on, on this one. If it's going to be approved, it looks of course right now that it's going to be pushed out until October. But nevertheless, I think uh once it's approved, there's going to be a lot of money and the money is going to flow into, into, into Bitcoin and as we said previously, it's probably going to be like 20 to $30 billion being, being put into this uh into the, into those Bitcoin ETF S Marcus. Thank you very much for joining the show this morning. Thank you. That was Matrix Port, Head of research and Strategy, Marcus Tien.

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