Summary Bit Digital was the top miner in May by BTC per EH/s. It has one of the cleanest balance sheets in the sector, with almost no debt and some cash left to scale. The company is starting to put capital to work in hopes that it can double mining capacity this year. Led by a strong May for Bitcoin ( BTC-USD ) mining transaction fees, some of the public miner equities have been continuing their phenomenal year to date runs through mid-June. Bit Digital ( BTBT ) has been one of the clear standouts from the pack in recent months: Data by YCharts Year to date, BTBT shares are up over 400% while some of the larger players in the industry are up between 100-200% and haven't made fresh highs since April. Having gone long BTBT shares back in late March after calling the company a "hold" in my January article for Seeking Alpha, it's been a marvelous run to say the least. Now in mid-June, we have a fresh earnings report, recent production figures, and growth strategy moves to assess. May Production & Global Exahash All things considered, Bit Digital had one of the better months in the sector, in my opinion. In May, the company produced roughly 113 Bitcoin. That was a 31% increase over April on an active hash rate of 1.2 exahash per second. A large factor in the production increase for Bitcoin miners broadly in the month was the surge in transaction fees as a share of the total block reward. Transactions averaged a 12.7% share in May after averaging just 2.4% from January through April. BTC Transaction Fees (IntoTheBlock) What has helped Bit Digital's stock performance is the company's return on costs has been stronger than peers. From a mining efficiency standpoint, Bit Digital had an outstanding May after producing 94.2 BTC per exahash. This gave the company the top spot in the industry for the month of May and it maintains a top 5 ranking when adjusting that metric to a year to date average: BTC/EHs May 2023 YTD AVG BTBT 94.2 88.8 HIVE 92.4 90.5 IREN 92.4 93.9 BITF 91.8 88.3 CLSK 90.9 90.2 CORZ 88.2 84.6 CIFR 82.2 75.7 MARA 81.9 74.0 ARBK 69.2 64.6 RIOT 64.4 68.0 HUT 56.5 59.1 Source: company filings, author calculations While the transaction fee trend has come down a bit midway through June, at a 5.9% average share of block reward, transactions are still playing a more meaningful role in Bitcoin mining revenue. Of course, the improving economics of Bitcoin mining haven't gone unnoticed and global hash rate recently surpassed 400 EH/s. Data by YCharts This means there is more competition for the block reward and miners generally receive a smaller share of that reward if they aren't able to maintain capacity growth in line with global exahash growth. That said, global exahash has come down off the May high as the price of BTC has struggled since the March spike. Q1 Earnings In the first quarter earnings release, Bit Digital noted $8.3 million in revenue. This was up 6% from the prior quarter and was primarily derived from the company's Bitcoin mining operation. Revenue from Ethereum ( ETH-USD ) staking rewards was less than $100k in the quarter. The company's cost of revenue declined 13% from $6 million to $5.2 million sequentially. Total opex declined from $17.4 million in Q4-22 to $8.8 million in Q1-23 but that did amount to a 9% increase over Q1-22. That said, from a net income standpoint Bit Digital had its best quarter since Q2-21 at $(2.3) million: Data by YCharts The large negative net income figure from Q4-22 is largely due to a $50 million mining rig impairment at the end of the year. From a balance sheet perspective, Bit Digital eliminated more than half of the company's liabilities and saw property and plant assets decline by another $3.5 million due largely to an additional $2.2 million miner rig write down: Quarter Cash and Equivalents Digital Assets Net Property and Plant Total Liabilities Q1-22 $28.1 $43.9 $28.7 $7.7 Q2-22 $44.3 $30.6 $90.0 $7.0 Q3-22 $32.3 $33.0 $80.7 $6.4 Q4-22 $32.7 $27.6 $22.6 $10.5 Q1-23 $27.9 $27.1 $19.0 $5.2 QoQ -14.7% -1.8% -15.9% -50.5% YoY -0.7% -38.3% -33.8% -32.5% Source: Seeking Alpha, Company filings As of March 31st, Bit Digital had just $5.2 million in total liabilities versus nearly $28 million in cash and equivalents though that figure was down to $15.4 million at the end of May. In subsequent events since quarter end, the company has made various rig purchases and hosting agreements to help scale the company's mining capacity. As of the end of May, Bit Digital is holding 453.6 BTC and 10,996 ETH, of which 6,692 are in stake. Scaling Strategy Between late April and early May, Bit Digital agreed to purchase 6,600 mining rigs from various unaffiliated sellers. The machine breakout is 3,600 S19s and 3,000 S19j Pros. In the past, Bit Digital has disclosed its preference to buy machines in the spot market rather than direct from manufacturers. The company appears to be scaling at the right time as ASIC prices are at or near multi-year lows according to data from HashRateIndex: ASIC Prices (HashRateIndex) The company has been actively announcing expansion plans throughout the second quarter. An April, Bit Digital announced 20 MW in hosting services through Coinmint in New York. In early May, Bit Digital agreed to 4 MW of hosting with Blockbreakers out of Canada. On May 18th, Bit Digital announced a two-year agreement for over 8 MW with an Iceland-based Bitcoin mining firm called GreenBlocks. In this agreement, Bit Digital is providing a 39-month interest free loan of up to $5 million to GreenBlocks so that company can build out the operation for Bit Digital: GreenBlocks will exclusively use the advances to buy miners that will be operated for the benefit of the Company at a facility in Iceland, with an overall capacity of 8.25 MW. To secure the prompt payment of advances, the Company has been granted a continuing first priority lien and security interest in all of GreenBlocks' rights, title and interest to the financed miners. According to Bit Digital, so far those loan advances have totaled just under $3.6 million to GreenBlocks. While I'm not enamored with the interest free loan for machines that the company won't ultimately own, Bit Digital's leadership appears motivated to diversify hosting providers and hosting jurisdictions to the best of the company's ability. So far, what we can tell from Q2 is the company has been putting dollars to work in an attempt to scale mining capacity in an environmentally friendly way before the halving next year. Risks One cause of concern for me back in March was that we didn't know how much capital Bit Digital put into the MarsProtocol venture that was announced earlier in the month. The company did provide some clarity on that investment in the Q1 earnings report. As it turns out it was just $89k for 40% of the MarsProtocol business. I stand by my initial feeling that BTBT shareholders won't see a return on that capital but that remains to be seen. Bit Digital says it hasn't been impaired yet. Additionally, we will observe at least some degree of share dilution on the next quarterly report. The company raised $3 million in gross proceeds by selling 1.3 million common shares to Ionic Ventures LLC in May. Share count has remained relatively flat over the last 4 quarters but that's something to keep any eye on going forward as Bit Digital tries to double mining capacity this year. Summary Bit Digital has a compelling model. The overwhelming majority of the company's revenue is from mining BTC. Yet it has what I view as a well balanced approach to managing its digital assets in treasury by converting some of its BTC to ETH for staking rewards. While staking rewards is still a very small driver of the company's overall revenue, it is a far less expensive business to operate since it doesn't require expensive mining rigs to validate transactions. The company has been making moves over the last two months and I think it remains one of the more interesting miners in the public equity markets given its low debt, spot market rig purchases, and focus on blue chip digital assets. I believe this one is going to continue to outperform and I still like it as a high-upside proxy for Bitcoin bulls.
