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Bit Digital and the road ahead


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Digital Bit (NASDAQ: BTBT), like all Bitcoin (BTC-USD) miners, has come under heavy downward pressure on its share price as economic conditions drive investors toward more risk-averse holdings.

As I write, Bitcoin price continues to decline, dropping below $19,600 as investors look for a bottom.

Barring a surprise drop in Bitcoin price into a $10,000-$12,000 price range for an extended period, BTBT is well positioned for the inevitable Bitcoin price rebound.

In this article, we’ll look at the steps the company has taken to mitigate risk, as well as the numbers from its latest earnings report.

Latest Revenue Report

Mining revenue during the reporting period was $6.8 million, with Bitcoin accounting for $6.5 million and the remaining $0.3 million attributed to Ethereum.

Non-GAAP operating loss was $0.8 million, while non-GAAP net income ended the quarter at $0.1 million, or $0.00 profit per stock. Operating losses did not include stock-based compensation or amortization of equipment and property.

For the quarter, the company gained 197.28 bitcoins and 104.29 ETH, bringing Treasury holdings of BTC to 860.57 and ETH to 313.56. The market value of BTC at the end of June 30 was $15.3 million and that of ETH was $0.3 million.

As of June 30, the company had 38,135 Bitcoin miners and 731 Ethereum miners. Approximate hash rates at the time were 2.7 EH/s for Bitcoin and 0.3 TH/s for Ethereum.

The balance sheet included cash, cash equivalents, and restricted cash of $45.6 million, and aggregate cash of $72.6 million, including cash and digital assets. The company has no debt.

With this earnings report being something of a wash, the company is fairly well positioned to sustain low Bitcoin prices for some time, assuming prices fall to the previously mentioned levels without a quick rebound.

Risk mitigation

By far the most important aspect of risk reduction is that the business does not hold any debt; which removes the risk of the cost of capital increasing when interest rates are expected to rise. It also allows the company to deploy capital to acquire miners, as many of its peers are looking for ways to raise capital by selling some of their mining equipment at bargain prices. At the end of the quarter, the company had “no outstanding miner purchase obligations”.

Towards the end of the reporting period, BTBT announced that it had entered into a new hosting agreement with a Canadian provider of 5 MW. Even though it was a small deal, management pointed it out to emphasize the fact that they “diversify hosting to minimize site and counterparty risk.” This should also reduce the weighted average cost of electricity.

The company also signed a 20 MW hosting deal with Coinmint, LLC. As of this writing, all capacity has been delivered to BTBT.

Fed Watch

It’s no secret that Federal Reserve policy is the catalyst for the price crash of Bitcoin, cryptos in general, and other asset classes. With respect to BTBT, it is important to include Fed decisions in relation to the company’s financial outlook.

My thinking at the moment is that there don’t seem to be any imminent surprises in the near future that should further interfere with the market, ie everything seems to be priced in at the moment.

That said, there’s a lot of politics at play with the US midterm elections, and we can’t be sure about the Fed’s reaction to behind-the-scenes pressure from the White House in particular.

With that in mind, the likeliest scenario would be for the Fed to be moderate in its actions in the final quarter of 2022, as any major move would hurt Democrats if the result was more economic suffering for Americans.

It is possible that deteriorating economic conditions will force the hand of the Fed, in which case it may ignore political pressure and take whatever action it deems necessary to fight inflation.

Assuming there are no major surprises from the Fed, I think the price of Bitcoin has a good chance of starting to recover in the latter part of 2022, as there will be a lot more clarity about its intentions in 2023. This would be a positive catalyst for Bitcoin prices and miners like BTBT.

Conclusion

For what it can control, Bit Digital, Inc. has done a good job of mitigating risk and positioning itself to grab low-cost mining assets at bargain prices.

It’s not the biggest of Bitcoin miners, but it has the potential to deliver strong returns, especially with its share price now below $1.50 per share.

For the sector, this is a relatively low risk play at these prices, and if it drops further, it would be even more interesting to start or add to a position. The only thing to consider if prices come under further pressure is that if they fall below $1.00 per share, it would trigger a Nasdaq response.

But overall, I like BTBT, and aside from the aforementioned risk of an extended bitcoin price drop, the company is poised to take advantage of the bitcoin price rebound when it happens.

Lastly, I’m not too concerned about another huge drop in Bitcoin price because based on past declines, it’s bouncing back nicely. Once this correction passes, I have no doubts in my mind that over time Bitcoin will break new highs. BTBT shareholders will enjoy the trip.

In the meantime, the short-term difficulties will continue until the economic outlook and the real actions of the Federal Reserve become clearer.

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