Bitcoin has consistently outperformed all major asset classes over the past decade, cementing its role as a benchmark for digital asset investors. For those committed to the long-term vision of Bitcoin, the ultimate financial goal often shifts from acquiring more dollars to maximizing their Bitcoin holdings.
Bitcoin is the Hurdle Rate
Bitcoin is to digital assets what government bonds are to the legacy financial system: a fundamental benchmark. While no investment is without risk, Bitcoin self-managed eliminates counterparty risk, dilution risk, and other systemic risks common in traditional finance.
Where BTC has outperformed every other asset class in 9 of the past 12 years (in orders of magnitude)it is no surprise that it has usurped government bonds as the “risk-free rate” in the minds of many investors – especially those knowledgeable about monetary history and thus the appeal of Bitcoin’s verifiable scarcity.
Another way to phrase this would be that the financial goal of digital asset investors is to acquire more BTC instead of acquiring more dollars. All investments or expenses are viewed through the lens of BTC as an opportunity cost.
MicroStrategy has shown what this looks like in the business world with their new KPI: BTC Yield. To quote from their September 20 post: 8-K form: “The company uses BTC Yield as a KPI to assess the performance of its strategy to acquire bitcoin in a manner that the company believes is beneficial to shareholders.” MicroStrategy has taken full advantage of the tools at its disposal as a multi-billion dollar publicly traded company: access to low-interest debt and the ability to issue new equity. This KPI shows that they are acquiring more BTC per share outstanding, despite engaging in the traditionally dilutive activity of issuing new shares.
Mission accomplished: they acquire more bitcoin.
But MicroStrategy has an advantage that the average fund manager or private investor doesn’t: It’s a publicly traded company with the ability to tap capital markets at little to no relative cost. Individual holders are unable to issue shares on the public market to raise capital and acquire BTC. Nor can we issue convertible bonds and borrow dollars at near-zero percent interest rates.
So that begs the question: how can we accumulate more bitcoin? How can we have a positive ‘BTC Yield’?
Bitcoin mining
Bitcoin miners acquire BTC by contributing computing power to the Bitcoin network and receive a larger amount of BTC than what it costs in electricity to run their machine(s). Now this is easier said than done. The Bitcoin protocol enforces a predetermined delivery schedule using ‘difficulty adjustments’ – meaning that more computing power for Bitcoin mining results in the finite block rewards being broken down into smaller pieces.
The most effective Bitcoin miners are those who maximize their computing power while minimizing their operating costs. This is achieved by purchasing the latest, most efficient Bitcoin mining hardware and operating at the lowest possible electricity rate.
Under current market conditions (from 21-11-2024), 1 bitcoin has a price of ~$98,000. However, an Antminer S21 Pro mining with an electricity rate of $0.078/kWh can produce 1 BTC for ~$40,000 worth of electricity. This is an operating margin of almost 145%. A company is generally considered to have ‘healthy profit margins’ if they are between 5 and 10% – mining easily beats this. This is despite the fact that from the Bitcoin halving in April 2024, they will earn half as much BTC per unit of account.
Price growth exceeds difficulty growth
The price of a financial asset – especially bitcoin – is set at the margin. This means that the price of the asset is determined by the most recent transactions between buyers and sellers. In other words, the price reflects what the last buyer is willing to pay and what the last seller is willing to accept.
This is partly what makes BTC’s notoriously volatile price action possible. A lack of sellers at price X means that buyers must bid the price higher than X to find the next marginal seller. Conversely, a lack of buyers at price X means that a seller must reduce demand to find the next marginal buyer. BTC can rise or fall quickly based on a lack of sellers or buyers in a specific range.
Consequently, the speed at which the Bitcoin price can move is much faster than that of network mining problems. Substantial growth in network mining problems will not be achieved through marginal bid/ask spreads, but will be achieved through the culmination of ASIC production, energy production and mining infrastructure development. There will be no reduction in the time and human capital required to increase the total computing power on the Bitcoin network.
This dynamic creates opportunities for Bitcoin miners to accumulate massive amounts of Bitcoin.
The chart here illustrates the explosive growth in Bitcoin mining profitability that occurs during bull markets. “Hashprice” measures the amount of revenue Bitcoin miners earn per unit of account on a daily basis. On a year-over-year basis, the hash price has increased by more than 300% at the peak of each Bitcoin mining cycle. This means that miners more than tripled their profit margins in a twelve-month period.
In the long term, this statistic drops as more entities start mining bitcoin, miners upgrade to more powerful and efficient machines, and the block grant is halved every four years. During bull markets, the combination of forces that are a positive catalyst for mining problems (and therefore a net negative for mining profitability) pales in comparison to the rapid growth of bitcoin’s price.
Price Volatility in Bitcoin Mining Hardware
In addition to wider profit margins during bull markets, Bitcoin miners have the simultaneous advantage of the fact that ASIC prices tend to move in tandem with the Bitcoin price. During the 2020 – 2024 cycle, the Antminer S19 (most efficient ASIC at that time) started trading at ~$24/T. In November 2021 – when the BTC price peaked – they started trading above $120/ton.
Bitcoin mining hardware that retains resale value is becoming more and more the case with each new generation of hardware. In the early days of Bitcoin mining, technological developments were rapid and vigorous – to the point that new ASICs would make older models obsolete overnight. However, the marginal gains of new ASICs have declined to the point that older models can remain competitive for several years after introduction.
Considering the S19 was launched in 2020 and has a non-zero market price today, it’s reasonable to expect the S21 machine line to hold value for even longer. This gives miners a significant advantage when it comes to accumulating bitcoin, as the initial cost of purchasing machines is no longer ‘sunk in’. Their machines have a price, a price that is correlated with bitcoin, and there is a source available to obtain it. liquidity.
Blockware Marketplace
Blockware developed this platform to provide any investor – institutional or private – with the opportunity to gain direct exposure to Bitcoin mining. Users of the marketplace can purchase Bitcoin mining rigs hosted in one of Blockware’s Tier 1 data centers and access industrial energy prices. These machines are already online, eliminating long lead times that have historically caused some miners to miss those key months in the cycle when price exceeds network issues.
Moreover, this platform was built by Bitcoiners, for Bitcoiners. That means machines are purchased using Bitcoin as the medium of exchange, and mining rewards are never owned by Blockware; they are sent directly to the user’s own wallet.
Finally, this gives miners the aforementioned opportunity, but not the obligation, to sell their machines at any time and at any price. This allows miners to take advantage of the volatility in ASIC prices, recoup the costs of their machines, and accumulate more BTC faster than they would with a traditional ‘pure play’ approach.
This innovation removes the obstacles that have made hosted mining difficult in the past, allowing miners to focus on the mission: collecting more Bitcoin.
For institutional investors looking for bulk mining hardware prices, Please contact the Blockware team directly.
