Bitfarms: Higher Risk, Higher Reward (BITF)

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Bitfarms (NASDAQ: BITF) now has an 80% discount on its all-time high, so should you buy the decline or were the shares purely overvalued and now in line with reality?

The key answer using standard capital valuation methods is that Bitfarms it is undervalued. But, as you probably know, the underlying Bitcoin asset (BTC-USD) has a mind of its own, and short-term fluctuations can make and break individuals or businesses overnight. How according to my last articleBitfarms is still a long-term buy if it is able to withstand the volatile nature of the underlying asset class.

Increased tax risk, strong operations

Bitfarms surprisingly made a profit of $ 5 million or $ 0.02 EPS, despite the collapse in cryptocurrency prices. But, the net income from standard accounting is not the largest for the analysis of the underlying operations of Bitfarms (or cryptographic miners in general). A more significant metric is EBITDA or adjusted EBITDA to assess operating performance.

Bitfarms EBITDA Bitcoin

Bitfarms EBITDA (Bitfarms)

The tight EBITDA gives a clearer view of the underlying transaction. It eliminates the impact of depreciation and standard accounting interest, eliminates the effects of stock compensation and financing expenses, and, most importantly, incorporates unrealized gains and losses.

We will still analyze the impact of funding below as it is generally vital but not necessary when analyzing the underlying transactions.

Since keeping Bitcoin is a basic principle of Bitfarms, incorporating unrealized gains and losses, which are not included in the accounting EPS, is very important.

Thus, year-on-year adjusted EBITDA grew by 64% despite market conditions to the contrary.

Energy Pressure

The decline in Bitcoin prices was mainly responsible for reducing the gross margin to 76% from 84% in the fourth quarter of 2021. During the first quarter, prices ranged from $ 33,000 to $ 46,000, so if the current price of approximately $ 30,000 remains for the remainder of the second quarter. , expect more compressed gross margin. At a $ 30,000 Bitcoin price and keeping the same variable costs at $ 8,700, next quarter’s margin would be 71%.

Along with a suppressed Bitcoin price, another external effect was energy prices.

Some analysts are concerned about rising mining costs. Of course, rising energy costs will affect some miners, but not all miners, including Bitfarms, will be devastated. Variable costs for mine are now up to $ 8700 / Bitcoin from $ 8400 in the fourth quarter. In fact, Bitfarms saw a higher variable cost per Bitcoin of $ 9000 in the second quarter of 2021.

Bitfarms has some of its energy prices guaranteed by contracts. Guaranteed energy prices eliminate the risk of short-term energy fluctuations.

The main facility at risk is in Argentina, as it uses natural gas instead of hydroelectric. Bitfarms has a rate of $ 0.02 per KW hour for the next four years before switching to market rates. Therefore, if natural gas prices continue to rise after the fixed rate of the contract is exceeded, Bitfarms will feel the effects of rising costs at this facility.

However, most Bitfarms operations use hydroelectric power. As hydropower does not have the same mobility as natural gas or other fossil fuels, it does not see the same price increase even though long-term energy prices rise. As for Bitcoin miners, Bitfarms is relatively well isolated.

The importance of a solid balance sheet

Now that we are actively seeing the risk of disadvantage in both the broad market and the cryptocurrency market, it is crucial to see how companies react to their financing and cash management.

One of my main criticisms of a larger competitor, Marathon Digital (MARA), is that it took on $ 600 million in debt in December 2021. This is not to say that debt has no place but that it can be exploited in an already volatile market. increases the risk substantially.

Since the last time I wrote on Bitfarms, I’ve been in debt.

As of the first quarter of 2022, Bitfarms has a $ 100 million line of credit backed by Bitcoin, which charges an interest rate of approximately 10.75%. The immediate risk here is the need to commit additional Bitcoin if the price continues to fall.

For collateral, you have to pledge 133% of the value of the credit, so $ 133 million for Bitcoin. At the end of April, 5,646 Bitcoin are retained, which means that if the price falls below ~ 23,500 the disposal of Bitcoin may occur. If the value of the credit remains the same as Bitcoin is extracted, the disposal price will fall. The guarantee is the short-term imperative risk to be observed.

The advantage of using a line of credit is that it is cheaper compared to financing equipment.

Now, let’s move on to the capital side of financing.

Bitfarms’ equity-based financing strategy has its ups and downs. Changing the interest rate and default risk to dilutive risk, let’s see how dilutive it was.

Since the program was launched on the market in August 2021, 30.7 million shares have been issued at an average of $ 5.77 per share, significantly higher than the current price. The last quarter had 6.8 million shares issued at an average of $ 3.99 per share.

Bitfarms had 201.6 million shares outstanding at the date of the report, so the market offering is responsible for 15% of the total shares issued. As the share price has fallen below the average issue price by a significant amount, this is fundamentally beneficial for the shareholders who have maintained the program.

The benefit of this can be seen in the book value, which is $ 2.28 per share. When combined with the price of equity, the carrying price is 0.83, which means that the carrying amount of the underlying exceeds the valuation of the equity. Adjusting for a $ 30,000 Bitcoin, the book value per share drops to $ 1.93, and in fact will probably be higher as more Bitcoin is extracted from March 30th.

Once a company’s market value falls below its book value, it is often considered a value opportunity.

Production still increases

The first quarter of 2022 was the antithesis of the bullfight of the first quarter of 2021, as both the broad market and the cryptocurrency markets fell sharply from their equally timed highs in the fourth quarter of 2021. Unfortunately, Bitfarms (and other stocks cryptographic) suffered a double blow, taking downward pressure. of both relevant markets. But looking beyond the fall in stock prices and rising risk, Bitfarms has been operating in its operations.

Since the May 16 earnings release, the Bitfarms hash rate has increased to 3.4 Exahash / s, about 1.5% of the 220 exahash / s for the network’s total hash rate.

Looking to the future, the electricity capacity and delivery of miners will allow a 6.0Exahash / sa by the end of 2022, below the previous target of 8.0. The decrease in expectations is due to a delay in Argentine facilities. The original capacity is expected to be reached in the first quarter of 2023.

Bitcoin Hashrate Bitfarms

Author created using data from Glassnode, Bitfarms

Both Bitfarms and the network hash rate have steadily increased since the Chinese exodus in Q2-T3 2021. Bitfarms has outpaced network growth; at the end of May 2021, Bitfarms was responsible for only 0.88% of the network and is now at 1.5%. This overcoming of the network results in more Bitcoins being extracted.

Bitcoin Bitfarms Bitcoin

Author created using data from Glassnode, Bitfarms

There is a clear long-term upward trend in network share once you eliminate short-term noise. Short-term fluctuations are mainly caused by variation in the total network, which typically ranges from + -10% in a day. The other factor is the staggered function of receiving and installing new miners, which contributes to some of the choppiness of this metric.

A high hash rate doesn’t matter unless it results in a higher Bitcoin extraction, so let’s see that.

Bitfarms Bitcoin

Author created using Bitfarms data

Bitfarms surpassed its temporary increase last summer. Last summer’s increase was due to China’s ban on cryptocurrency mining, which caused most miners to disconnect and relocate, which took time. Since then, most former Chinese miners have relocated to Kazakhstan or other countries with easy-to-access cheap energy or sold their physical Bitcoin miners and rejoined the network elsewhere. However, Bitfarms still increased its production. The fact that the network in general is recovering and Bitfarms is increasing production is a sign of good things to come.

However, it should be remembered that we are halfway through the next halving of Bitcoin, which will more or less halve the Bitcoin extracted as the subsidy is halved. To maintain the same dollar value extracted, or the price of Bitcoin must be doubled, the percentage of the network must be doubled or, of course, a combination of both.

Operational comparison

Let’s compare Bitfarms with Marathon Digital and Riot Blockchain (RIOT), two of the most prominent players in space.

Compared to larger companies, BITF is not surprisingly lagging behind in absolute terms.


Author created using data from Bitfarms, Digital Marathon, Riot Blockchain

However, a different story comes up once you count the market capitalization or what you get for your money.


Author created using data from Bitfarms, Digital Marathon, Riot Blockchain

Bitfarms is clearly in the lead when comparing operations relatively. This metric is why I am more optimistic compared to other Bitcoin miners in the short term. That’s not to say that other companies now have room for price appreciation, as the price per hash rate is significantly cheaper even when total network growth is included.

BITF is in the middle of projected hash rates, as both competitors predict higher hash rate growth. All companies are currently planning for “early” 2023.

Bitcoin Hashrate BITF RIOT MARA

Author created using data from Bitfarms, Digital Marathon, Riot Blockchain

Remember that these are management forecasts, and as for the BITF it has already moved albeit slightly.


With the long-term emphasis, BITF is still undervalued. That’s not to say the risks haven’t increased, yes it has. Including debt in the broader capital structure increases leverage and therefore risk. But, the underlying operating performance is still strong. If Bitcoin recovers in the coming years, as I think it will, the stock is considerably undervalued.

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