Analysis

A Tale of Two Bitcoin Mining Companies

I have bought put options on RIOT Blockchain (RIOT-Nasdaq) which I hope will expire out of the money.

A put is a contract to SELL shares in a company at a certain price. I have bought contracts for the right to SELL RIOT at five dollars. That means the contract is worth money if I can BUY shares in RIOT at less than five dollars.

The put options are a bet that RIOT drops in price, or insurance in case bitcoin goes down the drain in the next two months.

Why did I do that?

I own a lot of stock in DMG Blockchain (DMGI-TSXv) which won’t come free-trading until the summer.

And with the way the market Is treating public bitcoin mining companies, it is going to take quite a rally in bitcoin for DMGI to trade above $1.00 anytime soon.

I am LONG in DMG and short in RIOT so no matter which way the price of bitcoin goes, I should end up in the money on at least one of those investments.

I picked these two company as a paired trade because at first glance, the companies are very similar, as both are in the bitcoin mining business.  But the differences in the two are what makes think I could win both trades.

AT time of writing (March 26th) RIOT has a share price of $7.36 USD with a market cap of $71 million USD ($92 million CAD).

DMIG has a share price of 78 cents CAD with a market cap of $45 million CAD.

As you can see, the market cap of RIOT is twice that of DMG. But what are you getting for your investment in these companies? And this is where it gets interesting.

The only tangible assets that this companies have that have a chance of producing revenue anytime soon are the mining assets.

According to shareholder update posted on company’s website on February 16th, RIOT now owns 7,500 Antminer S9 and 500 L3+ mining rigs. The S9 is used for mining Bitcoin and the L3+ is used for mining Litecoin.

To get these miners up and running, you will need find facilities that can house all these rigs and meet their energy requirements.

The S9 consumes 1400 watts and the L3+ consumes 800 watts.

You need to cool the mining rigs while in use and the industry standard is an additional 25% of energy is needed.

Therefore, RiOT needs to find facilities with 13.5 megawatts. The calculations are as follows:  (7500 times 1400 watts) + (500 times 800 watts) multiply by 1.25 and you get: 13.6 MW.

RIOT filed an 8-k on Edgar on Feburary 20th saying they are planning to install the equipment in a facility and they are “in negotiations with the landlord.”

I don’t know when all those rigs will be fully deployed.

Also if you check out the management team, they don’t seem to have anybody who has operational experience building out large-scale cryptocurrency mining operations, so they have brought in outside help.

In the very same 8K, the company declares it has entered into an agreement with Ingenium International LLC, for twelve months, to assist in the installation and deployment of the 8000+ ASIC miners. For this service. Ingenium will get paid $4 million US.

To summarize, in an undetermined amount of time, (months, not weeks), RIOT will have a 13.6 MW of crypto-mining capacity which at today’s prices, should generate about $20 million worth of bitcoin and litecoin.

It’s not a compelling story.  Investors have been dumping RIOT steadily for three months. The share was nearly $30 three months ago and now it’s under $8.

Finally, there has been a LOT of negative press about RIOT, from Seeking Alpha to CNBC. There is also not one, not two, but three class-action lawsuits against the company.

 

It’s a Different Story with DMG Blockchain

 

Many investors don’t even know DMG exists. It just went public on February 13th, less than six weeks ago, on the TSX venture exchanges.

It does trade over the counter under the symbol DMGGF.

Obviously, timing is everything. By mid-February the market was already starting to turn bearish.

It’s too bad because DMG is a SERIOUS bitcoin miner.

DMG has 85 MW of bitcoin mining capacity under construction, according to this press release posted on their website.

By mid-2018, 40 MW of capacity is expected to be in place. At present, DMG has at least 2650 mining rigs deployed. Probably more as they are installing rigs every day.

Spearheading the mining operations for DMG is  Chief Operations Officer Sheldon Bennett. ,

Mr. Bennett used to be work for Bitfury, a private company that has building bitcoin miners and running cryptocurrency mining faciliities for years.

During his tenure at Bitfury, Mr. Bennett built out what was the largest bitcoin mining facility in the world: 44 MW capacity. And that was done with bitcoin trading well under $3000.

DMG is at least partially financing construction of the mining facility by selling mining contracts to Japanese customers. They have already sold out their first four megawatts that they put on the market.

What that means is they can finance the purchase of new rigs by charging customers up front. Therefore, DMG doesn’t have to continually raise fresh capital from the marketplace (which isn’t in the mood to give money to bitcoin miners anyways).

By the end of 2018, DMG will be one of the biggest, if not the biggest, public bitcoin miner in North America. And economies of scale mean a LOT in this business.

Conclusion

 

To summarize, by the time RIOT has 13.6 MW of capacity up and running, DMG will have three times the capacity at 40 megawatts. DMG also has a management team in place which “has done it before.”

On the other hand, RIOT just hired the team that is going to do the buildout. That doesn’t look good in comparison to DMG.

RIOT has twice the market cap of DMG. In my opinion, I think  that’s just wrong and I am putting my money where my mouth.

I am long DMG and the shares are locked-up, so I am short on RIOT.

Long-term (six months to a year), the market will wake up the fact that DMG has a bitcoin mining capability and will reward shareholders then.

In the short term, I think RIOT will continue to struggle.

Win-win.

Ross

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