Summary Consolidation attempts in the Bitcoin mining space have begun after recently reported buyout offers for both Bitfarms and Core Scientific. Bit Digital's mix of fleet efficiency, balance sheet position, and HPC service revenue makes it one of the better targets in my view. Based on Riot Platforms' rejected offer for Bitfarms, I can make the case BTBT should be trading closer to $3.50 per share. A 25% premium to 6/4 close. We're still less than two months removed from the long-anticipated Bitcoin ( BTC-USD ) halving in late-April, and we've already seen attempts at consolidation in the public mining equities. Just days after the markets found out about a takeover bid of Bitfarms ( BITF ) by Riot Platforms ( RIOT ), HPC client-turned potential buyout suitor CoreWeave reportedly put in an offer on Core Scientific ( CORZ ). Some companies are well positioned to be buyers in a market like this, others are interesting takeover targets. I believe Bit Digital ( BTBT ) is the latter. Still Buying This Small Cap Crypto Play The Blue Chip Crypto Equity Operational Shift Taking Place? I've covered Bit Digital for Seeking Alpha several times in the last two years. It's arguably the only Bitcoin mining stock that I've been consistently long over the last 18 months. This is what I said last August: If Bitcoin is "digital gold," Ethereum is arguably "digital gas." In my view, BTBT is a clean and easy way to wager on future adoption of both BTC and ETH outside of holding the coins directly or chasing arbitrage through the Grayscale funds. Given Bit Digital's Ethereum ( ETH-USD ) staking strategy, HPC service development, and willingness to scale without taking on a large debt burden, I've viewed BTBT as one of the better long term speculative buys in the mining industry. In this article, we'll get into why the mining industry consolidation is happening, what I think makes Bit Digital an attractive buyout candidate, and perhaps most importantly, what I think shareholders should look for in a potential offer price. The Case for Consolidation The Bitcoin halving has come and gone. While generally viewed as a bullish catalyst that greatly impacts the supply/demand dynamics from new coin issuance, the halving is not necessarily a great thing for Bitcoin miners. Unlike precious metals or base metals, mining Bitcoin has a clear calculable end. There will only ever be 21 million BTC. Between now and roughly the year 2140, the issuance of new coins will be cut in half every four years until all of the coins have been mined, and a different incentive structure will be required to secure the ledger. Data by YCharts To this point, ever diminishing rewards from mining denominated in BTC have been counteracted by the dollar-denominated price of BTC. Meaning, as the price of BTC in dollars (or any fiat for that matter) grows, the pain felt by the miners from declining coin issuance is typically mitigated. We've seen global hash power securing Bitcoin exponentially increase since the network's genesis. Miner Revenue, 7d avg (The Block) But even as Bitcoin once again challenges all-time high prices, the economics of mining BTC have dramatically changed in Q2-24. Unprofitable operations have two choices; turn off, or sell out. In my view, the bigger these unprofitable operations are, the more likely they are to attempt to merge with smaller, efficient fleet operators to grow share of network hash and trim overhead. Why Bit Digital? Bit Digital has the right combination of factors that make the company a really interesting buyout candidate in my opinion. First, the company's mining fleet is usually among the most efficient in the market. BTC per EH/s April (Author's Chart, Company filings) Even though Bit Digital's 2.8 EH/s in April was far smaller than every other company in this chart, the company's 119 BTC in the month put Bit Digital at 42.5 BTC per EH/s in April; by my calculations, this was third only behind TeraWulf ( WULF ) and Iris Energey ( IREN ). Q1-24 Revenue (Bit Digital, Form 6-k) Another reason Bit Digital is so interesting as a buyout candidate is because it's been able to meaningfully grow an HPC services business. At a little under $8.1 million in Q1-24, HPC service revenue already accounts for more than 26% of the company's total revenue so far this year. On the company's last conference call, management signaled that HPC services are going to be the company's primary driver going forward. Bit Digital's approach to scaling EH/s will be more opportunistic than "growth at any cost," to paraphrase CEO Sam Tabar. Data by YCharts Finally, the balance sheet is in great shape. Bit Digital could satisfy all liabilities with the cash on the balance sheet and still have nearly $122 million in digital asset liquidity left over, per the company's April performance update: BTBT Digital Holdings (Author's Chart, Bit Digital filings) This significant stash of coins for a company valued at just $310 million could theoretically be deployed for either HPC infrastructure expansion or alternative DeFi strategies like lending or providing liquidity to DEX protocols for in-kind yield. Management indicated a preference for HODLing the Bitcoin on the balance sheet to benefit from potential price appreciation in the coin post-halving. Roughly 50% of the company's coin treasury is allocated to BTC, with most of the remaining going toward its Ethereum staking strategy. What's BTBT Worth? On the conference call, company leadership mentioned the need for raising capital to fund HPC expansion. However, it was noted that terms for AI compute are far more favorable than terms for Bitcoin mining infrastructure growth. Bit Digital is still guiding for $100 million in annualized HPC revenue. We don't yet have the company's May numbers as of article submission. But by my calculations, Bit Digital is likely in the ballpark of 21 BTC per EH/s post-halving at current efficiency numbers, which indicates somewhere between 50-60 BTC per month going forward depending on global hash and transaction fee revenue. BTC Price Mining Revenue per month Annualized $70,000 $3,500,000 $42,000,000 $80,000 $4,000,000 $48,000,000 $90,000 $4,500,000 $54,000,000 $100,000 $5,000,000 $60,000,000 Source: Author's estimates, assuming 21 BTC per EH/s and 2.8 exahash In the table above, I'm assuming the low end of that range, no mining expansion, and have plugged in 50 BTC mined per month. At the current $70k BTC price, Bit Digital is doing $42 million in annualized revenue from mining. Assuming the company hits on its $100 million HPC revenue forecast, we're looking at worst case $142 million in annual revenue. At a $100k BTC price, Bit Digital is doing $160 million in total annualized revenue and has a market capitalization under $310 million. Data by YCharts At $5.75 per share, Core Scientific's recent buyout offer from CoreWeave assigned a roughly $1 billion valuation to the company and the market reaction has indicated that price is too low. By my estimates, CORZ closed June 4th at 1.5x forward sales assuming a $100k BTC price. The Riot Platforms' offer to buyout Bitfarms valued BITF shares at $2.30. If we annualize Bitfarms' May production data of 20.8 BTC per EH/s and assume the company scales to the 21 EH/s that it's guiding for this year, BITF's $926 million market cap values the company at 1.8x forward sales at that same $100k BTC price projection. At current capacity levels, BTBT is trading at 1.9x forward sales based on my lower end estimate of 50 BTC per month and a $100k BTC price. But if we offer Bit Digital the same liberties that the market appears to be taking with BITF and price the company based on future sales figures and capacity that isn't yet operational, we get a much lower multiple. Bit Digital plans to scale to 6.0 EH/s. At 21 BTC per EH/s post halving, 6 EH/s in mining capacity, and a $100k BTC price, Bit Digital can achieve $126 million in annualized mining revenue on top of the $100 million in HPC services revenue that management is guiding for. Based on these assumptions, BTBT is trading at 1.4x forward sales at a $310 million market cap. And I'll reiterate that Bit Digital isn't servicing debt to the degree that both CORZ and BITF are at this time. In my view, the company should be trading at a forward P/S premium to each of these stocks rather than a discount. But I'd settle for even the same multiple at this point. Closing Thoughts In my opinion, BTBT should be trading closer to $3.50 per share. At the June 4th close of $2.80, I see additional upside of 25%. And some may even call this estimate conservative based on some of the higher price forecasts we've seen for BTC prices over the next 12 months. The fundamentals of Bitcoin mining changed in late-April. Many companies in this space want to pivot to high-performance compute services for secondary revenue streams. Bit Digital is already there and is an interesting speculative buy on that alone. However, given the company's mining fleet efficiency and liquidity position, I don't think it should be overlooked by larger mining peers as the industry consolidates.
