2024 has had its ups and downs for the world’s bitcoin miners.
For anyone even partially up to date on the bitcoin news cycle, the ups won’t come as a surprise. Bitcoin emerged from the darkness that was 2023 to clock a brand new all-time high in March.
For the first time in its short, disruptive, unorthodox 15-year history, the world’s preeminent cryptocurrency soared above $70,000 apiece.
It has wobbled since, but remains some 63% higher year to date at the time of writing this article.
For an industry built upon a) cheap electricity and b) buoyant bitcoin prices, this was undoubtedly a massive boon to bitcoin miners.
But April threw a spanner in the works.
The once-in-every-four-years bitcoin halving, when the rate of daily bitcoin distribution gets slashed in half, concurrently halved the daily revenues generated for those very same bitcoin miners that were basking in bitcoin’s soaring prices.
Halving is a cornerstone of the anti-inflationary currency that is bitcoin, both technically and philosophically, but there is no denying that it presents a conundrum for the miners.
It preserves the value of the digital currency while simultaneously halving how much a miner can earn from dedicating processing power to the global decentralised network.
There is something decidedly Darwinian about the whole ordeal; only the strongest bitcoin miners survive.
It is in this complex macro environment that attention turns to Nasdaq-listed bitcoin miner Bit Digital Inc (NASDAQ:BTBT).
The effects of bitcoin’s rallying spot prices were writ large in Bit Digital’s quarterly earnings to 31 March, when the company booked $21.9 million in revenues from bitcoin mining operations, marking a 166% increase compared to the same period in the previous year.
Smelling post-Halving opportunity, Bit Digital used the quarterly statement to flex its diversifying revenue streams outside of bitcoin mining.
“We were well prepared for the Halving which occurred in April 2024. Our balance sheet remains a core strength with over $160 million of total liquidity as of March 31, 2024, zero debt, and a growing revenue stream that is not correlated to the economics of bitcoin mining,” read Bit Digital’s quarterly statement.
The Halving “was not our first rodeo”, as Bit Digital’s marketing manager Nick Graves put it to Proactive.
But what are these non-bitcoin revenues that Bit Digital is embracing?
Going large on AI
Talking to Proactive, Graves turned attention to the opportunities presented by the artificial intelligence boom.
True, Bit Digital is not the first bitcoin miner to latch onto the trend, but it goes far deeper than simply tacking a buzzword onto the marketing materials.
As of today, Bit Digital provides AI compute power to generative AI models. The company has over 2,000 Nvidia H100 GPUs running for its clients. These are among the most cutting edge of AI-focused processors.
In October 2023, Bit Digital announced a client contract worth $35 million annually for three years, which was quickly upgraded to $50 million a year. Now Bit Digital is aiming to double this contract to $100 million by the end of the year.
“Our AI business ensures that we have a revenue stream not correlated to bitcoin, which is important given the volatility of cryptocurrency markets,” said Graves.
While there is virtue in the ‘build it and they will come’ philosophy, Bit Digital is more concerned with developing business relationships first, then building out data center offerings to suit its clients’ needs.
As an infrastructure-light business, Bit Digital does not outright own these data center assets. Rather, it operates via host contracts with existing data center providers.
Admittedly, this comes with some margin sacrifices, but there are considerable benefits to this business model too.
China’s total ban on bitcoin mining a few years back, which caused Bit Digital’s swift exit from the country, highlighted the jurisdictional risks inherent in the bitcoin mining and data center businesses.
“Had we not been an infrastructure-light company, had we owned that infrastructure, we would have been crushed,” said Graves.
The Microstrategy of Ethereum?
Spearheaded by bitcoin maximalist Michael Saylor, US technology group Microstrategy has morphed into something of a proxy bitcoin play on the traditional stock market.
This is all down to Saylor’s unrepentant policy of converting Microstrategy’s free cash flow into bitcoin.
“Take it for what it’s worth, but there’s a number of people online comparing us to the Microstrategy of Ethereum,” stated Graves.
Care to explain?
“We take a portion of our bitcoin mining rewards and purchase Ethereum. We stake that Ethereum and then we take these Ethereum rewards and we pour that back into our bitcoin mining operations which enables us to buy more bitcoin miners and so forth.”
To give a highly abridged explanation of what Ethereum staking is, the world’s second-largest cryptocurrency is not ‘mined’ like bitcoin is, but rather ‘staked’.
In other words, Ethereum is secured by economic incentives, as validators lose their stake if they act maliciously. Bitcoin, on the other hand, is secured by the computational difficulty of mining.
Ethereum staking forms part of Bit Digital’s flywheel where, in essence, “one plus one equals three”. It also, in effect, positions the group as a proxy for Ethereum staking services, which are currently outside the realm of the traditional retail and institutional investors.
Bit Digital said it yields an estimated 4-5% from its Ethereum staking services.
It is important to note that Bit Digital does not offer Ethereum staking services to the public. Rather, “we use it as a business line for revenue generation”, said Graves.
Revenue lines
Bitcoin mining is undeniably Bit Digital’s bread and butter.
In a first-quarter trading update published on 15 May, the revenue split was $21.9 million from bitcoin mining, $8.1 million from AI data centers and $300,000 from Ethereum staking.
As of March 31, 2024, Bit Digital held 956.4 bitcoins with a fair market value of approximately $68.2 million.
The company had 48,898 miners owned or operating in Iceland for bitcoin mining with a total maximum hash rate of 4.2 exahashes per second with a goal of reaching 6.0 EH/s by the end of the year.
Are the cryptocurrency markets highly unpredictable, sometimes irrational? Undoubtedly. Is Bit Digital etching out an equity story that is diverse, thus well-hedged against this volatility? You can be the judge on that one.
What is undeniable is that Bit Digital’s infrastructure-light, Ethereum-exposed business model is unique among the pantheon of bitcoin-adjacent stock picks.