On 11 October 2023, analysts Reginald L. Smith and Charles Peace from J.P. Morgan’s North American Equity Research department published a note that provides a thorough examination of the Bitcoin mining industry. The note, titled “Bitcoin Mining: Expanding Coverage (Initiating Coverage on CIFR, CLSK, RIOT, and MARA),” offers valuable insights for investors and industry stakeholders.
J.P. Morgan on the Industry’s Pivotal Phase
According to Smith and Peace, the Bitcoin mining sector is at a critical point. They note that management teams and investors are currently assessing the potential introduction of a Bitcoin ETF, which could instigate another market rally. Concurrently, they are contemplating the challenges posed by increasing hash rates and the upcoming block reward halving, both of which could impact industry revenues and profitability. The analysts stress the importance of discipline and timing and recommend operators that stand out in terms of existing hash rates, operational efficiency, power contracts, growth plans, and liquidity.
New Coverage and Ratings by J.P. Morgan
Smith and Peace are initiating coverage on four significant players in the Bitcoin mining sector:
- CleanSpark (CLSK): J.P. Morgan rates this as Overweight, indicating a positive outlook.
- Marathon Digital (MARA): The analysts rate this as Underweight, signaling less optimism.
- Riot Platforms (RIOT): Also rated as Underweight by J.P. Morgan.
- Cipher Mining (CIFR): Assigned a Neutral rating by the analysts.
Additionally, J.P. Morgan upgraded IREN to Overweight from its previous Neutral rating.
J.P. Morgan’s Take on Sizing the Opportunity
The analysts estimate that the four-year block reward opportunity, in line with the capital expenditure cycle, stands at $20 billion based on current Bitcoin prices. For context, Smith and Peace point out that this figure peaked at around $73 billion in April 2021 and has varied between $14 billion and $35 billion over the past year. They also note that the total market capitalization of the 14 largest U.S.-listed mining companies is 36% of the size of the four-year block reward opportunity, higher than the three-year historical average of about -25%.
Hashrate Risks According to J.P. Morgan
Smith and Peace observe that more hash rate growth has occurred in the past nine months than in Bitcoin’s initial 12 years. They predict that the pace of hash rate growth will likely decelerate to approximately 15 EH per quarter, equating to a $200-$300 million quarterly global hardware investment. The analysts also estimate that as much as 80 EH (or about 20% of the network hash rate) could be taken offline at the next block reward halving event in April 2024.
J.P. Morgan on Miner Differentiation
According to Smith and Peace, Bitcoin miners vary significantly in terms of scale, operational efficiency, access to capital, and growth prospects. They identify CleanSpark as their top pick due to its balanced attributes of scale, growth potential, power costs, and value. Marathon Digital, although the largest operator, is noted for its high energy costs and low margins. Riot Platforms is acknowledged for its low power costs and liquidity but is also identified as the most expensive among the companies covered. Cipher Mining is recognized for its low power costs but is also noted for its growth limitations.
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