16 BARRON’S November 22, 2021
R
ockdale, Texas, wasn’t
attracting much business
before Bitcoin came to
town.
A modest town of
5,600, an hour outside
of Austin, Rockdale lost
a major employer after Alcoa shut
down its aluminum smelter in 2008.
But the electrical infrastructure that
Alcoa left behind is being put to new
use: mining Bitcoins.
More than 11,000 computers hum
24 hours a day at the old Alcoa site,
making trillions of calculations a sec-
ond to help operate the Bitcoin net-
work. Run byRiot Blockchain(ticker:
RIOT), the machines contributed to
“mining” 1,292 Bitcoins in the third
quarter, worth $54 million in revenue
to Riot. Rockdale is now one of the
largest Bitcoin production sites in
North America. Riot aims to add
63,000 computers, more than doubling
its mining capacity, by the end of 2022.
“We plan to make it one of the larg-
est Bitcoin mining assets in the world,”
says Riot CEO Jason Les. The Alcoa
site included a large electrical switch-
ing yard—ideal for a miner aiming to
expand to 700 megawatts of capacity,
enough to power 650,000 homes.
That kind of electricity use has
elicited criticism that crypto mining
is contributing to carbon emissions.
But if you believe in the promise of
Bitcoin, the miners offer an alternative
to owning the coin—betting on the
network’s high-tech plumbing and
potential for tangible profits.
Riot looks appealing for its growing
share of the market and efficiency
gains as it expands. Another stock
to consider is Core Scientific, a miner
that plans to go public through
a merger with a special purpose
acquisition company, or SPAC, called
Power & Digital Infrastructure
Acquisition(XPDI).
Marathon Digital Holdings
(MARA) could also be a winner. The
stock sold off this week after disclos-
ing an investigation by the Securities
and Exchange Commission related to
the prior issuance of restricted shares.
“There’s no accusation we’ve done
anything wrong,” Marathon CEO Fred
Thiel tellsBarron’s. Marathon, he adds,
is flying in mining “rigs” from Malaysia
and expecting to more than triple its
Bitcoin capacity over the next year.
Mining stocks have gained an
average of 291% this year as Bitcoin
has doubled, far ahead of the Nasdaq
Composite’s 25% return. But they are
highly sensitive to movements in Bit-
coin prices and investor sentiment.
Marathon, for instance, was ahead
628% this year before giving up more
than a third of those gains on news of
the SEC investigation, as well as an
increased convertible bond offering.
Despite the volatility, large-scale
miners are generating operating prof-
its, based on adjusted earnings before
interest, taxes, depreciation, and
amortization, or Ebitda. Riot’s reve-
nue should jump to $464 million
nextyearfrom$2 20 millionthisyear,
according to consensus estimates.
Ebitda is expected to increase to
$324 million from $125 million.
Core, based in Bellevue, Wash., is
also turning into an industry leader.
The company operates in Kentucky,
Georgia, and North Carolina, and is
developing plants in North Dakota
and Texas, scaling up to 1,000 mega-
watts of total capacity by the end of
2022—topping every other North
American miner. Core aims to host
infrastructure for other miners and
produce its own coins, generating
more-stable cash flows than if it were
just a stand-alone miner.
Core also seeks to be net carbon
neutral, using renewables and carbon
credits. “They have good long-term
contracts with energy providers,”
says an investor with more than 5%
of XPDI’s shares. He expects the stock
to hit $20, up from $13.75 recently. As
with any SPAC, investors can cash out
at $10 when the merger comes up for
a vote, expected in January.
D.A. Davidson analyst Christopher
Brendler calls Core a “best in class”
operator that should ramp up profits
as it expands. He sees the company
more than doubling revenue over the
next year to $1 billion, generating $
million in adjusted Ebitda.
Marathon, for its part, is banking on
an asset-light model—contracting with
hostingfacilitiesforenergyandplow-
ing nearly every penny of capital into
mining machines. The company has
just 10 employees, outsourcing much
of its operations. Thiel says the com-
pany is buying machines in bulk at
30% of the industry average, produc-
ing Bitcoins at a cost of roughly
$6,200, well below the industry aver-
age of $10,000. Wall Street expects
Marathon’s sales to more than triple
from 2021 to 2022, reaching $750 mil-
lion, resulting in Ebitda of $581 million.
Bitcoin mining isn’t anything like
digging gold out of the ground. Rather,
it involves producing Bitcoins as a by-
product, or reward, for validating
transactions on the blockchain net-
work. Miners do this by running com-
puters continuously to try to guess a
string of alphanumeric characters for
each block of transactions. Guessing
correctly validates the block, adding it
to a chain of previous blocks (hence the
term blockchain). The main prize for
being first is payment in Bitcoin itself,
which the network’s code allocates at
a rate of 6.25 Bitcoins per block.
One big variable, along with
the price of Bitcoin itself, is mining
difficulty—how many guesses per
second the network makes to validate,
or “hash,” the next block. That hash
rate is measured in exahash, or 10 to
the 18th power hashes a second. It’s
now nearly 170 exahash and could
more than double over the next year,
says Thiel, assuming miners lock in
power agreements and get their ma-
chines operating.
Why does this matter? Because a
higher hash rate reduces the potential
rewards for each miner. The rate plum-
meted this summer after China banned
Bitcoin mining, but it has been climb-
ing back. Analysts expect it to rise,
potentially making it harder for miners
to earn Bitcoin rewards and requiring
more electricity for each coin.
Higher Bitcoin prices attract more
miners, which raises the network’s
hash rate. Miners are thus in a perpet-
ual arms race—continually expanding
Bitcoin Mining Stocks
Let Investors Get Under
Crypto Economy’s Surface
The miners offer profit growth and
an alternative to owning the coins
“We’re very
focused on
playing this
arms race.
But it will
get harder
going
forward.”
Fred Thiel, CEO of
Marathon DigitalBy DAREN FONDA
Illustration by Daniel HertzbergNovember 22, 2021 BARRON’S 17
and upgrading equipment to hit pro-
duction targets. They also tend to raise
capital serially for more infrastructure
and machines, potentially diluting eq-
uity owners or straining their balance
sheets. Riot, for instance, spent $
million to acquire mining assets in
Rockdale and plans to spend $160 mil-
lion on the infrastructure buildout.
Marathon recently raised $650 million.
Rising hash rates have another
consequence: a steeper carbon toll.
Miners are consuming 0.5% of the
world’s electricity, according to the
Cambridge Bitcoin Electricity Energy
Consumption Index. As it gets
tougher to mine, companies might
consume more electricity, potentially
increasing carbon emissions even as
many countries try to cut back.
Industry groups say that 58% of
global Bitcoin production is now car-
bon neutral, based on renewable fu-
els. El Salvador, where Bitcoin has
become an official currency, is har-
nessing geothermal energy from a
volcano for mining. But plenty of Bit-
coin is still produced with coal in
places like Kazakhstan.
North America is also turning into a
mining hub, with more than 40% of
the global hash rate. A third of U.S.
production is now based on renewable
power, according to the industry, po-
tentially reducing the carbon toll. One
creative approach:Stronghold Digital
Mining(SDIG) wants to turn toxic coal
waste in Pennsylvania into Bitcoins.
“Miners don’t contribute to carbon
emissions in energy markets that are
properly designed,” says Peter Cram-
ton, an economist and former energy
regulator in Texas. Miners in certain
markets soak up renewables that
would otherwise be wasted as surplus
power, he points out. That can provide
demand for wind- and solar-power
generators, giving them incentives to
develop renewables with long-term
customers. “Power companies with
excess power look at Bitcoin mining as
a way to create baseload consumption
for renewables,” Thiel says.
Riot plans to ramp up capacity in
Texas and install an “immersion cool-
ing” system to keep circuits running
at lower temperatures. Riot says the
cooling baths should boost the comput-
ers’ hash rate by 25% and reduce
downtime, lifting overall performance
by up to 50%.
“It will result in fewer machines
generating the same hash rate,” says
H.C. Wainwright analyst Kevin Dede,
who rates the stock a Buy with a $
price target.
Wall Street likes the mining stocks
for their capacity expansion plans and
high gross margins. Multiples for the
stocks are well below those in other
areas of crypto; exchanges likeCoin-
base Global(COIN) and mining chip
companyNvidia(NVDA) both trade
at far higher valuations.
The miners’ discounts reflect con-
cerns about their capital intensity as
companies vie for production—betting
on higher prices for a risky and con-
troversial asset. Investors have seen
this story turn to tears in other cycli-
cal industries, notably in Texas’s
century-old oil patch.
Bitcoin mining will get tougher as
the hash rate rises. The Bitcoins doled
out for validating blocks will halve in
2024, to 3.125 per block—forcing min-
ers to add capacity and make up for
lost revenue. Costs are still low enough
that efficient, large operators can be
highly profitable. But scale will matter
more than ever as the margins dwin-
dle. “We’re very focused on playing this
arms race,” Thiel says. “But it will get
harder going forward.”B
Digging for Digital Gold
Here are three Bitcoin mining stocks to consider.
Company / Ticker Recent Price Market Value (bil) YTD Change 2022E Revenue (mil) 2022E EPS 2022E P/E
Power & Digital Infrastructure Acquistion / XPDI(1) $13.83 $6.8 38%(2) $958 $0.96 14.Marathon Digital Holdings / MARA 51.46 5.3 393 750 4.36 11.Riot Blockchain / RIOT 33.63 3.4 98 464 1.58 21.(1) XPDI is expected to merge with Core Scientific next year. Data for Core Scientific postmerger (2) Price change from IPO earlier this year. E=estimate Sources: FactSet; company reportsForsomeoflife’squestions,you’renotalone.
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