Summary Cipher Mining is a Bitcoin mining company with four production sites in Texas. The company aims to be the largest bitcoin miner and expects its mining capacity to reach 745 MW by 2025. Cipher Mining's hash rate has increased significantly since its launch, leading to a higher mining difficulty. Investment Thesis Company Overview Cipher Mining ( CIFR ), incorporated in 2001 through the merger of a wholly-owned direct subsidiary of Good Wooks Acquisition ("GWAC") with and Cipher Mining Technologies Inc. ("CMTI") and headquarters in New York, NY, is a bitcoin mining company that develops and operatings industrial scale bitcoin mining data center with four production sites in Texas. These sites are "Odessa" in Odessa, Texas, "Alborz Facility" in Happy, Texas, "Bear Facility" and "Chief Facility" near Andrews, Texas. The last three are all partially-owned sites with 49% membership through joint venture with WindHQ LLC. Strengths and Weaknesses When Cipher was initially created in 2021, it started with a minimum of 200 MW and up to 210 MW of mining capacity in Texas through a power purchase agreement. The company also at the time offered a road map of its growth to investors. It strives to be the largest bitcoin miner around and expected its mining capacity to grow to 745 MW ("Mega Watts") by 2025. Cipher: Roadmap (Cipher Initial Presentation in 2021) Cipher reported, by October 2023, it had 267 MW of capacity. Per its 10K of 2023 , the company is going to "energize" another 150 MW in 2025. Additionally, it is developing more mining sites to be in production, including a data center in Winkler County, TX called Black Pearl for up to 300 MW. It seems to be on track with reaching the initial target. Currently, as of March 9th, Bitcoin's hashrate is 659.91 EH/s, or 659.91 quintillion hashes computed every second. Comparing with when Cipher was launched in 2021, this rate has gone up by more than 5x. In particular, this growth rate has accelerated most in 2023 to recently, more than doubling of where it was in Jan 2023. On one hand, the higher the hashrate for the bitcoin network, the more its security is strengthened from malicious attacks. Cipher: Bitcoin Hashrate History (Coinwarz.com) On the other hand, with the bitcoin network's hashrate increased, it also prompted the difficulty to be adjusted higher to keep the discovery rate steady. The bitcoin mining difficulty has gone up by 3x for the period since Cipher was set up. Cipher: Bitcoin Mining Difficulty (Coinwarz.com) According to its latest operational report for February this year, Cipher's current aggregate hash rate is 7.4 EH/s. This capacity has steadily increased from 4.2 EH/s in January to 7.2 EH/s in July last year. But it has since been stagnant at the same rate until February this year. Depending on how cleverly Cipher's algorithms are designed, increased difficulty can result in lower bitcoin being mined even if the capacity is increased. That is what we have seen here that the number has actually gone down for the company, partially could be due to higher difficulty, back to the number of bitcoins mined in early last year. Cipher: Operating Hash Rate vs BTC Mined (Calculated and Charted by Waterside Insight with data from company) In fact, as of December, of '23, Cipher Mining's cash-cost per bitcoin was ranked as in the middle of all the major miners, post halving. This another indication that scale may not necessarily result in better cost saving when it comes to bitcoin mining. Bitcoin Mining Cash-Cost per Bitcoin among Major Miners (CoinShares Mining Report as of December 2023) Definitely, one of the key factor that impacts Cipher Mining's revenue and earnings is Bitcoin's price. When the price goes up, the amount of bitcoin it needs to sell for the power cost went down. It used to have to spend about 11-12% of the BTC it mined that month to pay for the power cost. It only had to pay around 2% in Feb this year. Cipher: Power Sales in BTC and Power Cost Ratio (Calculated and Charted by Waterside Insight with data from company) But most significantly, the amount of bitcoin the company needs to sell to maintain its operating cash flow versus how many it gets to keep has also significantly revised down. On a monthly basis, it at one point last year in May, it actually needed to sell more bitcoin than what it got to hold that month when the BTC's price went down to around $20k. And the ratio of sold versus held was over 100% (see the chart below). To be clear, the BTC held was already the net holding after the BTC sold. Certainly, BTC price has gone up by almost 4x from its low more than a year ago. But due to the relatively stable cost structure and the accumulation over the past three months since it got to keep more BTC per month, this Sold/Held ratio has gone down to just about 2.3% in Feb, a low that it has never achieved before as far as we can aggregate. In this past month, it held 1433 BTC and only had to sell 33. To note that this ratio was usually at about 70% before this year, and the number of BTC, it has to sell was around 300-400 per month in order to realize its revenue and earnings. The speed of its asset value expansion is faster than the exponential rate of growth in the past three months. Cipher: Bitcoin Held vs Sold (Calculated and Charted by Waterside Insight with data from company) It is important to note that the M&A activities in the bitcoin mining space has actually slowed down compared to two years ago. So when the larger miners stay large, their advantage will become more evident as consolidation pace moderates. Bitcoin Mining Precedent Transactions (Coinshare Mining Report) Financial Overview Cipher: Financial Overview (Calculated and Charted by Waterside Insight with data from company) Cipher Mining hasn't achieved at all positive free cash flow or positive net profit margin. But with the Bitcoin price going up, Cipher Mining's Bitcoin holding's value naturally going up. Its month end BTC held value in USD is reaching almost $100 million by the end of last month, thanks to the reasons we outlined earlier, both larger number of BTC held and higher BTC price. This value was as low as just about $13 million a year ago. With the latest rate, it can accumulate BTC assets much faster than it has ever been before, which could lead to fast asset value growth. Perhaps the path to profitability one day is getting closer. Cipher: Monthly USD Value of BTC Held (Calculated and Charted by Waterside Insight with data from company) The company's tangible book value also see a large revised upward by about 38% since the end of last year. Since its stock price has largely stayed within a range of $2.20 to $5 since mid last year, now its price to book value has dropped to only 2.152x, about its average since IPO. Data by YCharts There are two factors that are certain in shaping up Cipher Mining's valuation when it looks forward to its future. One is, by design, the increasing difficulty of BTC mining and the subsequent few BTC available to mine. Another is the volatility of BTC's price. The first one increases the scarcity of BTC and the cost to mine it. But we think the company has passed the threshold to be sustainably profitable when BTC price is at or around the current level. Depending on an investor's view about future BTC's price, we think the chance for it to fall back down to as low as where it was in 2022 is less likely than staying at or higher than where it is. We think it is no longer overvalued and has the potential to be a substantial speculative asset with BTC exposure. Conclusion With a realistic point of view about Bitcoin price and its mining practice, we see Cipher Mining progressing steadily in terms of capacity and its mining algorithm's sophistication. With the recent fast appreciation of BTC's price, the company has passed the threshold to be sustainably profitable on a monthly basis. But such condition is highly depending on, again, BTC's spot price. Its price still has a high speculative component related to BTC's price, but the trajectory has largely revised upward. We will initiate our coverage with a hold rating.
