Riot Blockchain (RIOT.Q) bought 3,000 new Bitmain S17 Pro Antminers for $5 million today so they can prepare to lose even more money after the halving.
We’re being a bit tongue-in-cheek here by saying Riot is preparing to lose even more money, but it’s not without a grain of truth. On the surface of it, the company’s net loss in the three-months ending September 30, 2019 and 2018, respectively, was $1.8 million and $6.2 million, or $0.08 a share and $0.46 a share.
But if you look at other miners, you’ll see similar and worse numbers across the board, especially during those time periods when the crypto-winter was in full swing. Now that confidence in bitcoin is being gradually restored, we should see companies like Riot making a turnaround.
Just in time to get smacked in the face by the halving, but more on that later.
Riot Blockchain at a glance:
- Generated approximately $1.7 million in revenue on the production of 157.2 bitcoin, and 400.2 litecoin for the quarter. This compares to Q3/18 revenues of $2.3 million on the production of 319.3 bitcoin, and 1,182.2 litecoin. The industry faced continuing increases in the bitcoin difficulty index, increasing 61% during the latest quarter, which negatively affected BTC production and reported revenues.
- The average price of bitcoin for the latest quarter was $10,382, compared to $8,297 in Q2/19 and $6,856 in Q3/18.
- Cash and digital currencies as of September 30, 2019 totaled approximately $18.3 million.
- The Company received gross proceeds from the sale of shares of its common stock under its ATM of approximately $23.6 million at a weighted average sales price of $3.10 per share during the nine months ended September 30, 2019.
- Net loss in the three-month periods ended September 30, 2019 and 2018, respectively, totaled approximately $(1.8) million and $(6.2) million, or $(0.08) and $(0.46) /share. Net loss in the nine-month periods ended September 30, 2019 and 2018, respectively, totaled approximately $(16.6) million and $(46.6) million, or $(0.93) and $(3.56) /share.
Buildout
The story behind Riot’s 107,600 square foot Oklahoma City mining facility begins in early 2018. Since then, the company has mined over 1,820 Bitcoin, and lesser quantities of Litecoin and Bitcoin Cash.
The facilities current electric costs are based upon peak demand. The company gets hourly demand billing rates in advance so they can be smart with their operational costs, easing off on mining activities to reduce electricity consumption if the electrical cost and the amount of Bitcoin potentially mined don’t favour Bitcoin. This is how most Bitcoin miners work. What isn’t explicitly suggested is whether or not Riot will switch their power-intensive ASIC-rigs devoted solely to Bitcoin off when it gets to expensive, and shift to one of their other coins, such as Bitcoin Cash or Litecoin, to continue production.
For the billing month of October 2019, direct electricity costs incurred averaged $0.0275 kWh with an approximate range of $0.01 to $0.07.
That’s a good rate—for right now.
The latest generation of Bitmain’s ASIC-rigs include a 50% improvement in hardware power efficiency, compared to the S9’s presently being used by Riot. The new antminers are expected to increase Riot’s block-closing efficiency at their Oklahoma City mining facility by 440% while consuming 220% of an S9’s electricity usage. They allow Riot to mine more while spending less on electricity.
The hashrate (or the ability to solve the equation and close the block) at their Oklahoma City mining facility is 225 petahash per second, if it’s running at full power. That’s 225 opportunities a second to challenge the mathematical equation to close the block and get the Bitcoin block reward. The old S9’s will continue to operate to maximize capacity, depending on fluctuations in power costs and the price of Bitcoin. The new antminers will need approximately 12 megawatts of available electric supply, with the balance of S9s using the remaining power to pick up anything left over.
The new hashrate from the new machines represents a 200% increase over what they’re presently doing, and Riot anticipates that the new miners will represent approximately 70% of the total current mine capacity, and will be deployed early Q1 2020.
The Halving
Satoshi Nakamoto built artificial scarcity into the code of the Bitcoin blockchain. Every four years, the block reward would shrink by half, which means that the amount of bitcoin released for moving Bitcoin’s blockchain is less approximately ever 210,000 blocks. Right now, the coin reward is 12.5 bitcoins. So every time a miner like Riot eats enough energy to have their racks-upon-racks of ASIC rigs hit on a jackpot, they get 12.5 bitcoins. For reference, one Bitcoin is presently worth CAD$9,716.17 and 1,800 bitcoins are generated a day throughout the entire network, so if one of Riot’s machines solve the equation the company’s riches go up by roughly $121K.
At the time of writing the halving is 160 days away. When the timer reaches zero the block reward will reduce to 6.25 bitcoins released, but the price of bitcoin won’t see any immediate change, nor will the hashrate or the electrical cost. Eventually, though, the scarcity will take over. Companies who can’t stand the heat from the reduced cost of mining versus the increased computing and operational cost will bow out, and the difficulty to close the block will reduce with it to accommodate. If the previous halvings are any indication, the price will go back up and up and up, until the strongest and most well-positioned benefit considerably from mining, but in the short term, it’s going to be a massive drain.
“For the community that are living this day to day they know the event is there. They even know the date (within a few days). Large miners that are holding BTC will have to sell to cover operational expenses or use cash as revenue halves. New buyers have to come in to move this market up. So other than a new headline, the halving is being dealt with now by those who are operationally effected by it. Those that don’t will be priced out of the mining business,” said Jason Williams, co-founder of Morgan Creek Digital.
This is where a company like Riot Blockchain is going to lose money. The supply shock is going to cost Riot more money for less yield after the halving until the price of Bitcoin recovers. If it does at all.
And that’s the wild card:
There could have been something inherent to the first two halvings that led to their previous bull runs that may not be duplicated in this halving. Something unseen. The probability is low—because at least in theory—someone would have seen it and reported on it, but that doesn’t mitigate the probability of this happening.
Regardless, the smart money’s on a bull run.
Here’s a statistical model from Digital Asset Research showing the prospective trajectory.
By spending the money on the new more cost efficient antminers, Riot is anticipating the increased electrical cost for the interim period post halving, and that’s smart. They’ll spend money, continue to lose more in the short term, and wait for the bigger payoff after the halving when there are less companies competing for the greater block reward.
Good deal.
—Joseph Morton