Bitcoin has consistently outperformed all major asset classes over the past decade, solidifying its role as the benchmark for digital asset investors. For those committed to Bitcoin’s long-term vision, 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 treasury bonds are to the legacy financial system—a foundational benchmark. While no investment is without risk, Bitcoin held in self-custody eliminates counterparty risk, dilution risk, and other systemic risks common in traditional finance.

With BTC outperforming every other asset class in 9 of the past 12 years (by orders of magnitude), it’s no surprise that it has usurped treasury 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 objective of digital asset investors is to acquire more BTC rather than acquire more dollars. All investments or spending are viewed through the lens of BTC being the opportunity cost.

MicroStrategy has demonstrated what this looks like in the corporate world with their new KPI: BTC Yield. To quote from their September 20th, 8-K form: “The Company uses BTC Yield as a KPI to help assess the performance of its strategy of acquiring bitcoin in a manner the Company believes is accretive to shareholders.” MicroStrategy has taken full advantage of the tools available to them as a multi-billion dollar public company: access to low interest rate debt and the ability to issue new shares. This KPI shows that they are acquiring more BTC per outstanding share despite the fact that they are engaging in the traditionally dilutive activity of new share issuance.

Mission accomplished: they are acquiring more bitcoin.

But MicroStrategy has an advantage that the average fund manager or retail investor does not: they are a publicly traded company with the ability to tap into capital markets at little to no relative cost. Individual holders are unable to issue shares into the public market in order to raise capital and acquire BTC. Nor can we issue convertible notes and borrow dollars at a near zero % interest rate.

So that begs the question: how can we accumulate more bitcoin? How can we have a positive ‘BTC Yield’?

Bitcoin miners acquire BTC by contributing computational power to the Bitcoin network, and receiving a greater amount of BTC than what it costs in electricity to operate their machine(s). Now this is easier said than done. The Bitcoin protocol enforces a predetermined supply schedule using “difficulty adjustments” – meaning that more computational power dedicated towards Bitcoin mining results in the finite block rewards getting split up into smaller pieces.

The most effective Bitcoin miners are those that maximize their computational power while minimizing their operational costs. This is accomplished by acquiring the latest, most-efficient Bitcoin mining hardware, and operating with the lowest possible electricity rate.

Under current market conditions (as of 11/21/2024), 1 bitcoin has a price of ~$98,000. However, an Antminer S21 Pro mining with an electricity rate of $0.078/kWh is able to produce 1 BTC for ~$40,000 in electricity. This is an operating margin of nearly 145%. A business is typically considered to have “healthy profit margins” if they are in the 5-10% range – mining beats this easily. This is in spite of the fact that as of the April 2024 Bitcoin halving, they earn half as much BTC per unit of compute.

The price of a financial asset – specifically bitcoin – is set at the margin. This means that the asset’s price 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, in part, is what enables BTC’s notoriously volatile price action. A lack of sellers at price X means buyers must bid the price higher than X in order to find the next marginal seller. Inversely, a lack of buyers at price X means a seller must lower their ask to find the next marginal buyer. BTC can quickly move up or down based on a lack of sellers or buyers in a specific range.

Consequently, the velocity at which the Bitcoin price can move is much higher than that of network mining difficulty. Substantial growth in network mining difficulty is not achieved by marginal bid/ask spreads, it is achieved by the culmination of ASIC manufacturing, energy production, and mining infrastructure development. There is not shortcutting the time and human capital necessary to increase the total computational power on the Bitcoin network.

This dynamic is what creates opportunities for Bitcoin miners to accumulate vast amounts of bitcoin.

The chart here illustrates the explosive growth of Bitcoin mining profitability that takes place during bull markets. “Hashprice” measures the amount of revenue that Bitcoin miners earn per unit of compute on a daily basis. On a year-over-year basis, hashprice has increased by more than 300% at the height of each bitcoin mining cycle. This means that miners have had their profit margins more than triple in a 12-month span.

Over the long-run this metric trends down as more entities begin mining bitcoin, miners upgrade to more powerful & efficient machines, and the block subsidy is cut in half every four years. However, during bull markets, the combination of the forces that are a positive catalyst for mining difficulty (and thus net-negative for mining profitability) pale in comparison to the rapid growth in the price of bitcoin.

In addition to wider profit margins during bull markets, Bitcoin miners have the simultaneous benefit 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 the time) began trading at ~$24/T. By November 2021 – when the BTC price was peaking – they began trading for north of $120/T.

Bitcoin mining hardware retaining resale value is becoming increasingly the case with each new generation of hardware. In the early days of Bitcoin mining, technological advancements were swift and forceful – to the point that new ASICs would make older models obsolete overnight. However, the marginal gains of new ASICs have diminished to the point that older models are able to remain competitive for multiple years after release.

Since the S19 was launched in 2020 and retains a non-zero market price today, it is reasonable to expect that the S21 line of machines will be able to retain value for even longer. This gives miners a significant leg-up when it comes to accumulating bitcoin, because the upfront cost of purchasing machines is no longer “sunk". Their machines have a price, one that is correlated to bitcoin, and there is a resource available to get liquidity.

Blockware developed this platform to enable any investor – institutional or retail – the opportunity to gain direct exposure to Bitcoin mining. Users of the marketplace are able to purchase Bitcoin mining rigs that are hosted at one of Blockware’s tier 1 data centers and have access to industrial power prices. These machines are online already, eliminating lengthy lead times that have historically caused some miners to miss out on those key months in the cycle in which price is outpacing network difficulty.

Moreover, this platform is built by Bitcoiners, for Bitcoiners. Which means that machines are purchased using Bitcoin as the medium of exchange, and mining rewards are never held by Blockware – they are sent directly to the users own wallet.

Lastly, this provides miners with the aforementioned opportunity, but not obligation, to sell their machines at any time and price. This enables miners to capitalize on volatility in ASIC prices, recoup the cost of their machines, and accumulate more BTC faster than they would with a traditional “pure play” approach.

This innovation removes the obstacles that have historically made hosted mining difficult, enabling miners to concentrate on the mission: accumulating more Bitcoin.

For institutional investors looking for bulk pricing on mining hardware, contact the Blockware team directly.

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