Well it is one of those Fridays. Grey, glum, a little cold. Time to muse.

I’ve been thinking about crytpo miner valuations. What point do they become predicated on, or more related to their fundamentals. They seem to have been trading as a proxy for their underlying currency price and as a purely speculative lottery ticket in the crypto sector. There are some signs that this is starting to change. Or maybe it already has.

Its difficult to come up with a share price target or current valuation when the underlying asset (bitcoin or Ether) are radically volatile; The equipment required for these miners to progress is increasing in both cost and efficiency, and the delivery of such is subject to serious supply chain issues; and the energy inputs required to operate are burdensome and growing. How to predict or cost this out – Tough indeed. I’m still waiting to get my hands on a piece of quality institutional research on these puppies. If anyone can point me in the right direction, let me know please 🙂

All that being said, a little more investigation might provide an explanation of why the valuation of HIVE and Hut 8 are different. Aside from the fact that HIVE is predominantly an ETH Miner and HUT is BTC.

Check this out:

As of Dec 31st	Shareholders Equity (Millions)	Market Cap (Current)	Price / Book Ratio	Mining GM
HIVE	55	1,529,320,000.00	27.8	67.4%
HUT	115	716,100,000.00	6.2	-2.1%

Hive has about half the balance sheet value (shareholders equity) of Hut 8, yet it trades at more than twice the valuation (Market Cap) and hence a price to book ratio of 27.8 vs. 6.2 for Hut. Whats up with that?

I think a key driver of the difference is gross margin. Simply put, after mining coin, and taking away the costs of operation (equipment and technology – And ignoring depreciation), HIVE is a very profitable company, creating a very healthy gross margin (67%) which is the revenue to pay expenses and make an operating profit. Hut comes in at -2.1%. Which means Hut’s mining operations, as of Dec 31, did not generate any margin to pay expenses.

Clearly, HIVE has been an excellent, cost effective operator. Hut 8 isn’t in that position (yet).

Hence, the difference in valuation.

This isn’t meant to take anything away from Hut 8 – Its valuation reflects these facts and it is far less expensive to purchase based on Market Cap. There is also the opportunity for it to turn profitable based on improving mining margins OR through rapid appreciation of BTC value which can help create profitability.

A few months makes a big difference in Cryptoworld and I am pretty confident that both these companies will be profitable on an operating basis in Q1 2021. However, I would also predict that HIVE will continue to enjoy significantly higher margins and is better positioned to remain profitable should Crypto prices decline.

One thing I do note is that companies keep boasting about how many coins they are HODLing. I think that is less relevant than it seems (and the differing valuations of HIVE and HUT 8 bear this out). What matters is how those coins end up on the balance sheet. Are they being created via profitable mining operations (at no additional cost to shareholders) or from share issuance and dilutive events? Something to think about.

GLTA!