rzelich
I believe Bitfarms Ltd. (NASDAQ:BITF) is the best pure-play Bitcoin mining investment with a more than 300% potential upside. They are the most efficient Bitcoin (BTC-USD) miner with a robust safety-first strategy. They have developed a technological, sustainable competitive advantage with an impressive electrical subsidiary that can promptly deal with significant weather events.
Within months, they may also be the world’s lowest-cost Bitcoin producer with a flawless balance sheet enabling them to survive and prosper during next year’s halving.
In May, I wrote an article on Bitfarms describing them as having strategic genius. This article follows that first article and will look at the progress Bitfarms has made against the forecasts and targets I presented to justify my previous Buy recommendation.
In short, Bitfarms is outperforming my projections to such an extent that I am raising my price target to $3.50 and upgrading the company to a strong buy.
Bitcoin Miner Strategies
JPMorgan Chase & Co. (JPM) recently issued a research note discussing how Bitcoin Miners are attempting to offset lower profitability by diversifying into high-performance computing services. In articles on Cipher Mining Inc. (CIFR) and Hut 8 Mining Corp. (HUT), I discussed this approach and liked some of its merits. Bitfarms is not pursuing this route. Bitfarms have been clear: they do not intend to be anything more than a Bitcoin miner; they want to be the best and most profitable miner. In the Q2 earnings call Q and A session, the CEO said
we’re not going to jump willy-nilly into to something where we don’t know much about…..Right now, effectively we have no clients. We, we mine Bitcoin and we sell Bitcoin
Bitfarms Strategy
It is simple and easily understood: they want to mine Bitcoins, sell some to cover their costs, and keep the rest on the balance sheet to develop shareholder value. To be successful, they need to be the most efficient miners; anything less than this will make them suboptimal and eventually lead to failure. I believe that Bitfarms is successful in its strategy and is already the world’s most efficient miner. It will likely become the world’s lowest-cost miner in the coming months.
Reducing Risk
Bitcoin is risky; the asset has enormous volatility and has the potential to run into regulatory concerns.
Bitcoin miners typically use renewable energy as their electricity source, which has led to a concentration of producers in Texas and other areas of significant solar production.
In my first article, I discussed the merits of Bitfarms’ strategy to spread its operations over North and South America. Bitfarms has mines in Canada, The U.S., Argentina, and Paraguay. It adds security and resilience to their operations. Earlier this year, a Bitfarm mine in Magog was hit by lightning during a storm. If they had been more concentrated like many of their competitors, their entire mining operation could have been affected; in Bitfarms’ case, it caused only minor disruption. The geographical strategy meant Bitfarms kept producing regardless of the weather in North America.
Bitfarms owns an electrical subsidiary that was able to repair and restart the damaged site at a very impressive pace. Planning for this type of eventuality is an example of the strategic thought the managers are using.
The geographical spread minimizes some of the regulatory concerns that many have, such as if any individual country moved against Bitcoin mining the way the Chinese authorities did. Bitfarms would be inconvenienced but not destroyed.
Bitfarms, the World’s Most Efficient Miner
Most miners use proprietary software to optimize the performance of their mining machines. Bitfarms is no exception, and the Bitfarms software would appear to be a source of a sustainable competitive advantage. Their proprietary software has made Bitfarms the most efficient miner of 2023. (I am using Bitcoins mined per exahash of capacity as the measure of efficiency.)
This table is from a monthly report written by Anthony John Power of Compass Mining in the UK; I read it each month.
Bitcoin Mining Efficiency (Compass Mining)
Riot Platforms (RIOT) appear at the bottom of this chart, but that position is very misleading. Riot has power agreements that incentivize them to throttle back on production when the network needs electricity. They sell the electricity they bought back to the network and profit significantly by throttling back production. They look like inefficient producers when they stop producing Bitcoin to sell electricity.
With the halving coming, efficiency will be crucially important, and it means that as network difficulty grows, Bitfarms will always be in an advantageous position relative to their competition.
Bitfarms is the Future Low-Cost Producer
Bitcoin miners have one significant cost: electricity. The cost of electricity and the efficiency with which the miners uses electricity are the critical determinators of the cost per Bitcoin produced. Bitfarms is attempting to lead the market in this area. They search out hydroelectric power producers and sign long-term power purchase agreements; they have managed to get their costs down to $0.03 per kw (Q2 earnings), which is very low for the industry. Hydroelectric sites typically need less cooling than sites powered by solar as they are in lower temperature areas than the sun-soaked regions needed for solar electricity generation.
Paraguay is becoming an important country for Bitfarms; in my first article, Paraguay was a 10MW facility and not forecasted to grow. Things changed in the Q2 earnings call.
Two new power contracts were announced for 150MW (slide 7 September update); construction at Pao Pe is due to finish in Q1 2024, allowing 50MW to come online. The remaining 100MW will require construction close to Yguazu, the world’s third-largest Dam producing Hydroelectricity.
The Paraguay growth is significant, increasing the longer-term target production availability by 36% to just over 600MW for the entire operation. Paraguay will also have the lowest energy prices in the fleet (Q2 earnings Q and A); the growth in Paraguay will reduce the average cost per Bitcoin, increase capacity, and spread the operation over more counties, improving its robustness.
The first article’s two targets for increasing facilities were to increase the Argentina site from 18MW to 50MW (completed in September) and the Baie Comeau site from 0 to 18MW (completed this month). Bitfarms is developing a reputation for excellent execution of their plans.
New Miners
Mining machines are energy-hungry; their electrical performance is measured in watts per TH. It measures the electricity needed to produce 1 unit of computing power.
Bitfarms has a fleet management strategy covering all of its operations, which aims to optimize the production of Bitcoins at the lowest cost. They are preparing for the recently announced sub 20w/TH miners(available in 2024). Currently, the fleet consists of 23% sub 30w/TH, 58% in the range 30-40w/TH the remaining 19% is 40-45w/TH.
Bitfarms is currently buying MicroBT Hydro cooled miners; they will be installed at the Paso Pe mine in Paraguay and will be sub 30w/TH. Paso Pe will have highly efficient miners running on the lowest cost of electricity; the production cost per bitcoin will be meager as a result.
Financial Strategy and Fair Value
Bitfarm’s strategy of preparing for the halving runs through the entire business. Another important example is the balance sheet. All of Bitfarms’ debt will mature before the halving, and they will approach this disruptive time with a flawless debt-free balance sheet.
Currently, Bitfarms has $46 million in cash and $9.9 million in debt (Sep 30th 2023)
Balance sheet summary (Author Database)
Bitfarms is the only miner audited by a big 4 accountancy firm and has been for five years, adding to the sense that they are planning to be a quality, highly respected operation here for the longer term.
Bitfarms Fair Value
In my earlier article, I presented a fair value for Bitfarms of $581 million (current Market Cap $275 million). That valuation assumed a long-term Bitcoin price of $254,000 (calculated using ARK investments Big ideas and applying some probability work) and Bitfarms being able to Hoddle 30 Bitcoins per month in 2023, 15 from 2024, and 7.5 from 2028. The reducing figure represents each halving.
The September production update provided by Bitfarms says they managed to HODL 49 Bitcoins in September, following the 60 Bitcoins added to the treasury in August and 45 in July. In the last three months, they have saved 154 Bitcoins, which is 70% higher than my initial forecast. Suppose they can continue at the current run rate; the fair value calculation changes to $993 million, suggesting an upside of 360%. The new value is higher than the best-case Scenario I presented in my earlier article. The increased capacity now forecast in Paraguay may add further additional upside but we will have to wait and see how network difficulty develops after the halving to assess its impact.
The Downside
If Bitcoin goes to zero, then Bitfarms has no value. Bitfarms mines Bitcoins with a cost of $12K-$15K, and as long as the price stays above this, they can operate with a positive gross margin. The halving may reduce the number of competitors they have and consequently reduce the network difficulty, increasing Bitfarms’ share of the rewards handed out to miners.
Their low-cost operation, highly efficient mining operation, and robust geographical spread suggest the downside is limited compared to some competitors.
When To Buy
The price of all Bitcoin Miners is driven to a large extent by the price of Bitcoin; Bitfarms is attempting to build value by amassing Bitcoin on the balance sheet, and as a result, their value will move with the highly volatile price of the coin.
Technicals suggest that now may be a good time to buy Bitfarms
I use Elliot Wave theory to help me time entry and exit points. My long-term chart shows a down move from the high above $9 in 2021. The long-term corrective wave [A]-[B]-[C] in purple may be complete; the latest leg from [B]? Counts complete in five waves, and the fifth wave of that move is in about the right area for a turnaround. It has been a long multi-year correction, a true crypto winter, and has lasted about the same amount of time as previous crypto winters.
Technical Chart (Author)
Conclusion
Bitfarms is a pure-play Bitcoin miner; they have a geographically diverse strategy to mine Bitcoins with the lowest cost and have proven their ability to be the most efficient miner.
The Bitcoin Mining industry is approaching the next halving; it will likely be highly disruptive and put some miners under financial stress. I expect some of them to go bankrupt.
Bitfarms has designed its business to meet the stresses ahead, and it will enter the halving without any debt, with some of the lowest energy costs available and a focused management team determined to make a success of the bitcoin mining industry undistracted.
The technical chart suggests that the current share price may be in the right area for a turn higher, and with a potential upside of 300% this might be a good time to buy.
The big caveat is Bitcoin; this company’s value is in its Bitcoins. If they become worthless, then shares in Bitfarms become worthless.
