Bit Digital: The Blue Chip Crypto Equity
[Bit Digital, Inc.(BTBT)](/symbol/BTBT?source=content_type%3Areact%7Csection%3Amain_content%7Csection_asset%3Ameta%7Cfirst_level_url%3Aarticle%7Csymbol%3ABTBT) (/symbol/BTC-USD?source=content_type%3Areact%7Csection%3Amain_content%7Csection_asset%3Ameta%7Cfirst_level_url%3Aarticle%7Csymbol%3ABTC-USD), (/symbol/ETH-USD?source=content_type%3Areact%7Csection%3Amain_content%7Csection_asset%3Ameta%7Cfirst_level_url%3Aarticle%7Csymbol%3AETH-USD)
Summary
– Bit Digital loses the least amount of money compared to its peers when factoring in gains on currency exchanges.
– The company’s balanced approach to crypto treasury management makes it a play on both BTC mining and ETH staking.
– The core mining business has a long way to go to become profitable, given the company’s $48k BTC break-even price.
When I
last covered Bit Digital (NASDAQ: BTBT) for Seeking Alpha in mid-June, I gave the company a bullish call at $3.36.Beyond the fact that Bit Digital takes a more balanced approach to managing crypto holdings than most of the other public miners, the company also operates a relatively lean business with very little debt:
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.
Since that article, BTBT shares rallied over 50% up to $4.80 per share before falling back down below $2.50 two months later amid crypto’s broad selloff.
Given the retracement in shares from the high earlier this summer and a setup that I view as favorable for both Bitcoin (
BTC-USD) and Ethereum ( ETH-USD), I think BTBT shares offer a solid risk/reward buy opportunity down here as a blue-chip crypto proxy.
Q2 Performance
In 2nd quarter 2023, Bit Digital recorded just over $9 million in total revenue.$8.9 million of which was derived from Bitcoin mining with the remaining revenue coming from Ethereum staking.Revenue was up 32% year over year and 8.4% sequentially.
Cost of revenue increased from $5.2 million to $5.7 million quarter over quarter.Total opex moved up from $8.8 million to $9.1 million as operating income came in at -$5.7 million for the second straight quarter.
Aided by back to back quarters of currency exchange gains over $4 million, Bit Digital kept basic EPS loss at -$0.03 for the second consecutive period.It’s admittedly still negative, but the company’s balance sheet management over the last two quarters puts Bit Digital ahead of its similarly capitalized peers in terms of earnings.
Balance Sheet
As of quarter ended June 2023, the company had $18.5 million in cash and equivalents, $31.6 million in digital assets, and $30 million combined in property, equipment, and deposits.There had been a notable 43% decline in cash and equivalents over the last six months and the company raised $11 million in fresh cash through a private investment from Ionic Ventures in a subsequent event after quarter end.
Given the company’s ETH staking strategy, we’ve seen the share breakout of Bit Digital’s ETH & BTC HODL dramatically change from 85% BTC a year ago to over 53% ETH at the end of the July 2023.I generally view this as smart treasury management because actively staked ETH generates a yield natively on-chain while BTC does not.We can also observe an increase in both BTC and ETH held in treasury since quarter ended June as well.
|BTBT July 2023||Bitcoin||Ethereum|
|Mining/Staking Rewards||133||44|
|Change in HODL||+192||+428|
|Difference||+59||+384|
Source: Bit Digital, figures in whole coins
Given the fact that Bit Digital’s change in both ETH and BTC treasury balances surpassed what the company yielded through blockchain rewards, it appears as though the company has already deployed some of its capital to scale up crypto positions.
Assuming purchases close to the average closing prices in July of $30k for BTC and $1.9K for ETH, the increases in HODL that exceed blockchain rewards imply the company put roughly $2.5 million toward buying spot BTC and ETH in July.
It’s unfortunate that the company could have gotten a better deal on those buys had it waited a few weeks, but balance sheet management otherwise has been strong in my view.In the July update, Bit Digital noted $21.9 million in cash and equivalents as of month end.With just $8.6 million in total liabilities and over $50 million in working capital at the end of June, the company has some runway to be patient with the market and get the best price on its BTC or ETH if it chooses to liquidate to raise capital.
Risks
Like several other BTC miners with low debt loads, Bit Digital does carry dilution risk.While it’s been to a lesser degree over the last month, share issuance has historically been how the company raises capital rather than going to the debt markets:
In July, the Company issued over 3.1 million shares to Ionic Ventures for net proceeds of approximately $11.0 million after broker-dealer commissions.
This strengthens the company’s cash position further, but it does come at the expense of the common equity shareholders.
Furthermore, although it is not the worst in the industry, Bit Digital’s breakeven Bitcoin price is a bit on the high side when adding cost of revenues and opex figures and then dividing by quarterly BTC mined:
|Q3-22||Q4-22||Q1-23||Q2-23||TTM|
|Cost of Revenues||$6,500,000||$6,000,000||$5,200,000||$5,700,000||$23,400,000|
|Total Opex||$15,500,000||$17,400,000||$8,800,000||$9,100,000||$50,800,000|
|BTC Mined||429||427||361||318||1,535|
|Breakeven Price||$51,282||$54,801||$38,781||$46,541||$48,339|
Source: Seeking Alpha, Bit Digital, analyst’s calculations
The last two quarters have been better than the second half of 2022.But at a $48.3k trailing twelve month breakeven BTC price, there are other miners in the space that theoretically get to cash flow positive from the core line of business faster than Bit Digital does if the company’s currency exchange gains don’t continue to offset operational losses in the future.
Finally, at three times book and over 6 times sales, BTBT is price far from growth and is far from “cheap” by traditional valuation metrics.It’s a highly speculative name and these kinds of stocks could do very poorly if the broader equity markets take another leg lower.
Summary
Despite the risks and the obvious dependence on digital asset prices to get to profitability, I continue to be bullish Bit Digital at this point.I believe the company’s openness to both Bitcoin and Ethereum monetization models will ultimately pay off well in the future.
The flywheel model that Bit Digital is currently running gives the company nice optionality.
It has a balanced approach to blue-chip crypto asset management that utilizes ETH for passive yield at minimal cost.
I like this about the company very much.If Bitcoin is “digital gold,” Ethereum is arguably “digital gas.” In my view, BTBT is a clean and easy way to wager on future adoption of both BTC and ETH outside of holding the coins directly or chasing arbitrage through the Grayscale funds.
All this said, there are clearly a lot of risks with Bit Digital as well.If my math and my interpretations from the company’s July update are accurate, Bit Digital is currently underwater on recent BTC and ETH purchases.
I expect those positions to ultimately turn around.But it could be a sign of poor execution on a reasonable strategy.I personally keep positioning relatively small and nimble, but I do still like BTBT from the long side under $3.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of BTBT, BTC-USD, ETH-USD either through stock ownership, options, or other derivatives.I wrote this article myself, and it expresses my own opinions.
I am not receiving compensation for it (other than from Seeking Alpha).I have no business relationship with any company whose stock is mentioned in this article.
I’m not an investment advisor.
Seeking Alpha’s Disclosure: Past performance is no guarantee of future results.
No recommendation or advice is being given as to whether any investment is suitable for a particular investor.Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole.
Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank.Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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