Thinking of Valuing a Bitcoin Mining Company?
Understanding the Fundamentals of the Industry
The purpose of this article is to give other experts facing the challenge of completing a valuation of a Bitcoin mining facility some of the fundamental characteristics needed to understand the operations and assign value.
A few months back I received a call from a potential client looking for a valuation of bitcoin mining company for purposes of a prenuptial agreement. I excitedly said “yes” I would love the engagement, very candidly telling the client that I had not valued one in the past but that I was part of an amazing organization, the National Association of Certified Valuators and Analysts (NACVA), that had many experts of varying expertise at my fingertips. As the potential client was reaching out to other experts and doing their research on Anchor, I reached out to a NACVA peer, Nainesh Shah, and discussed with him the high-level particulars to ensure he would be able to assist. Nainesh has invested in Bitcoin and other cryptocurrencies for years and is adept at not only the nomenclature, but also the mechanics of this confusing sector. Since the inception of Bitcoin, I have been intrigued by the concept of cryptocurrency and actively participated in many Bitcoin continuing education programs in hopes of someday obtaining a valuation in the industry. Yet, as we all know, completing a valuation engagement in a “new” industry is not the same as reading textbooks and watching webinars (although this does help). Therefore, once I obtained the engagement, I assembled an experienced team and felt equipped with the proper hands-on support, fundamental sector knowledge and, hence, comfortably ready to begin the valuation. The purpose of this article is to give other experts facing the challenge of completing a valuation of a Bitcoin mining facility some of the fundamental characteristics needed to understand the operations and assign value.
Introduction
As the world becomes increasingly digital, cryptocurrencies such as Bitcoin have gained popularity as an alternative form of currency. While many people invest in Bitcoin and other virtual currencies, others have taken a more active role in the market by mining for these digital assets. However, valuing a Bitcoin mining company can be a daunting task, especially for those new to the industry. That is why I enlisted the help of my colleague, Nainesh Shah, to share some experiences and insights on valuing Bitcoin mining facilities. As experts in the field and members of NACVA, we hope to shed some light on this complex industry and provide a better understanding of the key variables needed to accurately value a Bitcoin mining operation.
Brief Background on Cryptocurrency Mining
Bitcoin (the first cryptocurrency) was created by  Satoshi Nakamoto  in 2008. Nakamoto published a white paper describing a digital currency based on proof-of-work (PoW) procedures that allows secure peer-to-peer transactions without the involvement of a centralized financial oversight authority.[1] PoW verifies Bitcoin  and other virtual currencies. The miners, or computers used to mine the digital currency, seek to solve complex sets of arbitrary mathematical algorithms in hopes of generating fractional interests in cryptocurrency. Miners confirm and secure transactions through the addition of blocks (or transactions) to the blockchain (group of transactions). Basically, the mining computers solve math problems to get rewards.
The more miners operating simultaneously, the higher the likelihood that the problems will be solved. The mining is dictated by the amount of processing power (“hash power”).[2] Therefore, mining operations are often housed in large facilities that require significant upfront buildout and capital expenditure costs, relatively low ongoing costs (besides electricity), and excessive ongoing energy output. Energy is by far the largest expense in Bitcoin mining companies. If the operator does not sell the cryptocurrency at the “right time”, profits can be quickly absorbed through the asset generating costs.
Key Questions/Sector Specific Documents
Some of the documents are rudimentary for the valuation of a Bitcoin mining facility (tax returns, internal financials, depreciation schedule, etc.), but some of the information requested is unique to the industry. Bullet-pointed below are some extraordinary documents and questions we found to be key to the valuation of a crypto-mining company:
- What cryptocurrencies are being mined (i.e., Bitcoin, Ether, Alt Coins, etc.)
- Are there any agreements in place with electric companies
- If yes, copies and/or terms of the contracts (i.e., length, megawatt parameters at the corresponding rates, thresholds that must be met before terms are met, caps, etc.)
- What type (if any) of clean energy sources are used (water, solar, natural gas, nuclear, etc.)
- How many megawatts of power is available at the company location(s)
- Is there any proprietary operational software used to oversee the mining (i.e., remote maintenance/operations)
- Is the mining exclusively for internal profits and/or mining for others
- Terms, contracts in place, fees, etc. when mining for others
- How old is the equipment (switchgears, miners, FPGA’s, etc.)
- Describe the battery backup and cooling systems
- Type of miners used (CPU*, GPU or ASIC) and/or cloud mining
- *CPU chips are predominately outdated and not practical for mining most cryptocurrencies given the large operating costs
- How do you “time the market” (have to sell at a point to capture profits or electric costs will cut into the profits)
- Cryptocurrencies being mined (Bitcoin, Ether, Alt Coins, etc.)
- Power consumption related information:
- Agreements with electric companies, including terms and thresholds
- Available megawatts of power at the facility
- Use of clean energy sources (water, solar, natural gas, nuclear, etc.)
- Description of battery backup and cooling systems
- Hardware related information:
- Type of miners used (CPU, GPU, ASIC, or cloud mining)
- Age of equipment, including switchgears, miners, cooling units, and FPGA’s
- Use of proprietary operational software for mining operations
- Purpose of mining (internal profits or for external clients)
- Review any relevant fees and contracts
- Strategy for timing the market to capture profits and offset electricity costs
Specific Considerations
Market Trends: To assess market trends in the Bitcoin mining industry, it is important to keep an eye on factors such as the price of Bitcoin, the rate of new mining operations entering the market, and any changes in government regulations or policies that could impact the industry. In addition, analyzing the energy consumption and efficiency of mining operations can also provide insights into market trends and the overall health of the industry.
Financial Performance: Financial performance is a crucial factor to consider when valuing a Bitcoin mining company. It is important to analyze key financial metrics such as revenue, operating expenses, and profitability over time. Additionally, monitoring trends in the cryptocurrency market and understanding the impact on the company’s financial performance is essential to accurately assess its value.
Operational Costs: In the context of valuing a Bitcoin mining company, operational costs are a critical component to consider. The largest cost associated with Bitcoin mining is energy consumption, which can vary depending on the location and agreements in place with electric companies. Other operational costs to consider include the cost of equipment, maintenance, and labor. A thorough understanding of these costs is necessary to accurately value a mining company and assess its profitability.
Financial Forecasts: The price of Bitcoin changes every second, is very volatile, and moves in big swings. Every four years, the block reward is cut in half (“halving” as it cuts in half the rate at which new Bitcoins are generated). Halving has historically kicked off a bull run, which can enable strategic exit planning and financial forecasting.
Tax Implications: Virtual currency does not have legal tender status in any jurisdiction, but in general, the sale or exchange of virtual currency to pay for goods or services has tax consequences. Under Notice 2014-21, miners recognize gross income equal to the fair market value of the cryptocurrency at the time of receipt. Receipt of cryptocurrency as an employee or as a result of trading as an independent contractor is subject to self-employment taxes.
Framework for Assessing Risk: Assessing risk is an important aspect of any valuation engagement. In the case of a Bitcoin mining company, risk factors can include regulatory changes, fluctuations in cryptocurrency prices, operational issues, and more. It is important to establish a framework for assessing these risks and assigning probabilities and impacts to them. This framework should take into account both internal and external factors that could impact the company’s operations and financial performance. A thorough risk assessment can help inform the valuation process and provide a more accurate picture of the company’s value.
Miscellaneous Considerations
Regulatory Environment: The regulatory environment for cryptocurrencies and Bitcoin mining is constantly evolving, and it can have a significant impact on the valuation of a mining company. Changes in regulations, such as restrictions on mining activities or taxation, can affect the profitability of the mining operation and, ultimately, the value of the company.
Opportunity Zones: It is largely irrelevant where a cryptocurrency mining company is located (assuming there is access to the necessary power and an ample footprint to house the equipment). Opportunity Zones (OZ) provide a solution for the crypto miner who is looking for land with tax saving perks. Additionally, establishing a company in an OZ often creates jobs in areas where jobs are needed.
Competition: Bitcoin mining is a competitive industry, and the success of a mining company depends on its ability to outperform its competitors. When valuing a mining company, it is important to consider the competitive landscape and assess the company’s position relative to its peers.
Barriers to Entry: The largest barrier to entry (assuming that start-up costs are not an issue) is accessibility to sufficient energy. The graphic cards on the mining rigs operate 24 hours a day. The more rigs, the hotter it gets and, therefore, the more cooling must take place or melting will occur. Many articles that I read noted that the energy sourced in the United States for Bitcoin mining could sustain the needs of a small country.[3]
Cybersecurity Risks: Bitcoin mining companies are vulnerable to cyber-attacks, which can result in loss of equipment, funds, and data. The security of the mining facility and the computer systems used for mining must be considered when valuing the company.
Beyond these considerations, we know that Bitcoin mining is a unique industry that requires specialized hardware and software to solve complex mathematical problems and validate transactions on the blockchain. While it is distinct, several industries share similarities with Bitcoin mining, such as data centers, renewable energy, semiconductor manufacturing, finance and investing, and technology startups. These industries face comparable challenges such as high capital expenditure costs, ongoing research and development, and the need to keep up with changing technology and market trends.
Conclusion
Valuing a Bitcoin mining company requires a deep understanding of the industry and unique sector-specific documents. As the largest expense for mining companies is energy, agreements with electric companies, use of clean energy sources, and the amount of power available at the location are key considerations. Additionally, understanding the type of cryptocurrencies being mined, proprietary software used, equipment age and type, and mining contracts and fees are important factors to consider. Tax implications, Opportunity Zones, financial forecasting, and barriers to entry are also noteworthy. Overall, a comprehensive understanding of the Bitcoin mining industry is critical in accurately valuing a mining company.
[1] https://bitcoin.org/bitcoin.pdf
[2] Miners strive to create a 64-digit hexadecimal number (or “hash”) in order to win Bitcoin. The hash goes into a public ledger that is accessible to anyone and creates security for the miners that the transactions are being recorded.
[3] https://www.cnet.com/personal-finance/crypto/bitcoin-mining-how-much-electricity-it-takes-and-why-people-are-worried/
Tricia Garthoeffner, ABV, CVA, MAFF, EA, MAcc, is the founder and managing member of Anchor Business Valuations & Financial Services, LLC (ABVFS). She has over 15 years of experience in providing business valuation and consulting services. As a previous holder of the series 7, 62, 63, and 72 licenses, and current Florida licensed Sales Associate, she also has the financial services and merger and acquisition background (~10 years on Wall Street in investment banking and private equity/hedge fund) needed to maintain an active presence in M&A consulting.
Ms. Garthoeffner was recently nominated (2022) as the Chair for NACVA’s Standards Board, after serving as the Vice-Chair (2021). She is a past Florida state chapter president for NACVA and a current teacher of the NACVA CVA exam (credentialing program for expert candidates nationwide), a past treasurer of the Florida Academy of Collaborative Professionals and a past Vice-President, and current member, of the Southwest Florida Chapter of Collaborative Professionals. Most recently, she was appointed to the social media task force team of Pocket Experts Solutions.
Ms. Garthoeffner can be contacted at (239) 919-3092 or by e-mail to info@AnchorBVFS.com.
