Computer, Bank, Blockchain, Coin, Currency
Are all bitcoins created equal? Not necessarily according to Galaxy Digital. Revealed exclusively to Forbes, today the company is releasing a report, How Much Does It Cost To Mine A Bitcoin?, from its research team.
The answer to this question matters greatly.
First, as the price of bitcoin grows along with interest in the space, many people are starting to worry about the growing carbon footprint of the industry. Although the precise figure is disputed due to difficulty in discerning the exact energy mix between fossil fuels and renewable sources, it is still correlated to the amount of electricity needed to unlock new coins as well as the number of expensive bitcoin miners operating on the network.
Second, investing in bitcoin mining companies has become an extremely popular and lucrative trend for investors looking to get exposure to the industry without purchasing the asset directly. Many have outperformed bitcoin so far this year, sometimes significantly. In fact, large numbers of investors already own shares in these companies, perhaps unknowingly, because of their inclusion in mutual funds offered by asset managers such as BlackRock, Vanguard, and Fidelity.
The performance of these stocks has diverged from bitcoin and even popular crypto stocks such as Coinbase and MicroStrategy recently due to a number of factors, such as the premium that they receive from being easily accessible at mainstream bourses to the earnings expectations that come from having the foresight and financial backing to purchase the always-in-short-supply mining equipment, much of which gets manufactured with multi-month lead times.
It also helps that most of these companies are based in North America, which has benefited greatly from China exiling virtually all its mining capacity. In fact, the U.S. is now the world’s largest mining center, something that would have been inconceivable in January.
But these reasons just explain macro factors. What about other data points such as the cost of production? As more bitcoin miners go public and research houses increasingly cover the space, analysts are trying to determine a way to measure how expensive bitcoins are to produce for for each of these firms. There is no universally accepted approach according to Amanda Fabiano, head of mining at Galaxy Digital.
“We realized that when you look at mining public mining companies, there’s really a few metrics that they all report. It’s the current hash rate, future expected capacity and then their cost to mine a coin. So we dug in a little bit and saw that everyone differs on how they calculate their cost per coin; it’s not very transparent.”
Note Galaxy mining operates mining hosting facilities and conducts proprietary bitcoin mining activities.
As a result, Amanda and her team decided to build their own model for calculating the cost of a coin, relying on data reported by companies in regulatory filings. They use three levels of analysis to break down the costs between direct and indirect expenditures, while also accounting for depreciation.
Cost of Bitcoin Production Calculator
Along with the research report, the company is also open-sourcing their model for experimentation within the wider community via an Excel spreadsheet. Brandon Bailey, mining associate at Galaxy notes, “With the open-source spreadsheet, we really wanted to create it in a way that resembled one of those filings so people knew exactly what to look for, go to any company they wanted, pull up their filing and plug it directly into our spreadsheet and have it automatically calculate those different levels of the cost of production. We really tried to make it as user friendly as possible so that anyone can pick it up and do it.”
So, what can this model tell us? And what is missing? After all, like any worthwhile model it makes certain key assumptions and excludes certain variables to focus on the most pressing data points. For instance, Galaxy’s model does not incorporate items such as future mining capacity, revenue generated from price appreciation or making balance sheet loans, the relative efficiencies of renewal vs. fossil fuel energy sources. Those can be added in by other analysts using the models.
However, it still provides some key takeaways. For instance, miners are starting to utilize different strategies to grow their business. For instance, Marathon hosts most of its miners at third parties and focuses on leveraging its balance sheet to procure as much hashrate as possible. Other firms such as Riot are much more vertically integrated because they control access to power supplies and own the buildings used to house the mining equipment.
One approach may not be better than another, but Fabiano says “My expectation is that vertically integrated companies’ cost to mine a coin will stay consistent or decrease over time. If we’re able to start tracking these metrics now, we’ll be able to see the impact of owning your own infrastructure on electricity costs.”