“That’s Our Two Satoshis” - 3 Reasons Why Bitcoin Miners Are Outperforming BTC

Jeff Dorman, CFA
Jun 17, 2024

Thats Our 2 Satoshis Logo

Screenshot 2024-06-17 at 10.56.58 AM
Source: TradingView, CNBC, Bloomberg, Messari
Strength in Equities and Fixed Income Offset By Crypto Weakness
As expected, the Federal Reserve held rates steady last week, though there was a bit of hawkishness in Chair Powell’s speech, coupled with a hawkish dot plot that showed only 1 expected cut this year and an upwardly revised neutral rate.  Equity markets and fixed income markets looked past the Fed’s words, instead focusing on what the data said following one of the softest CPI reports of the year earlier in the week. There have been 689 CPI data points since 1967, and only 31 times that Core CPI (ex-Shelter) printed Negative MoM. Last week was one of those prints. 
Source:  Twitter / X
The Nasdaq and crypto markets reacted completely differently to the FOMC and CPI. The divergence below shows the difference between the Nasdaq (NDX) and the Bitwise 10 (BITW) last week. 
This has been a common theme for most of this year.  Equity and fixed income markets tend to go higher during periods of inactivity and only react negatively when there is a real reason to. Digital assets markets tend to do the opposite, drifting lower when it is quiet and boring and only moving higher when there is a reason.  
Which is why the Bitcoin mining stocks are so interesting right now.  Are they considered tech equities?  Or are they considered crypto?  Historically, the Bitcoin mining stocks have behaved like they were just an extension of the Bitcoin market.  Most likely, they were traded by the same macro funds and family offices that also traded Bitcoin, and the correlation was near 1.0.  But for the first time in their publicly traded history, the Bitcoin Mining stocks are diverging from the price of Bitcoin. Over the past 30 days, the Valkyrie Bitcoin Miners ETF (WGMI) is up +50% while BTC is -8%. 
Source:  TradingView
Why is this happening?  Well, there are 3 reasons to own Bitcoin mining stocks right now, and 2 of them are new, giving Bitcoin miners additional revenue streams and higher valuations:
  1. Bitcoin mining stocks act as “levered BTC”.  This has always been true, as the business model has fixed costs and variable revenues, which leads to high operating leverage.  For instance, if BTC rises roughly +50% to $100,000, we estimate that EPS for CLSK will rise +140%, MARA +330%, IREN +177%. The top-line revenue growth combined with holding BTC on their balance sheet makes these stocks a better way to play BTC's upside than BTC itself. 
  2. For the first time in Bitcoin’s history, there is upside optionality for the miners in terms of transaction fees. This boost beyond emissions has not been modeled by equity analysts. The release of ordinals and L2s on Bitcoin drives incremental fees. Even though these fees have slowed down in recent weeks, that upside optionity still exists.
  3. Bitcoin mining centers are re-rating based on the needs of AI. The mining stocks have a very high valuation floor right now due to possible conversions to AI data centers.  Bitcoin mining centers have everything an AI data center needs: land, buildout completion, low energy costs. BTC mining stocks are valued at $1-4 per watt that they control, but high-performance computing (HPC) data centers are valued at $5-12 per watt (Morgan Stanley report). The business transformation towards these data centers will increase valuation, and it is WAY cheaper to convert a facility than to build new facilities.
While no one can value Bitcoin itself, it is fairly easy and straightforward to value the existing businesses because of its success.
Is Telegram (TON) the new Binance (BNB)?
The digital assets market peaked on March 13th, 2024. Since then, it has been a bloodbath for most tokens.  Bitcoin (BTC) and Ethereum (ETH) are down close to 10% each over this time period, as they have benefited from the new ETF demand (and future demand).  And Solana (SOL) continues to buck the trend as well.  But most other tokens are down 30-60% over this same time period. The smattering of market-leading tokens across various sectors shows the correction's pain. 
Source: TradingView
But if you look closely, you’ll see one major outlier. Telegram Network (TON).  
The Open Network (TON) is a decentralized, layer-1 blockchain initially developed by the team behind Telegram's popular messaging app. After Telegram ceased its direct involvement due to regulatory challenges around its $1.7 billion ICO, the global developer community took over and continued the project under the same name. ​Although Toncoin is independent from Telegram, with Telegram’s founder and CEO Pavel Durov directly saying that Telegram has no remaining links, it has incorporated the Ton wallet into the messaging app and added Ton Network apps in its app store. Because the wallet was incorporated into the messaging App, The Open Network can access Telegram’s 900 million users worldwide. With that in mind, TON is a bet on how well this community of developers can onboard Telegram's existing user base into Web3.
Over 360 million users engage monthly with what Telegram refers to as "Mini Apps", which include chatbots and mini-games. Currently, 300 of these Mini Apps are projects on TON, and are accessible via the Telegram app center. These apps have predominantly been gaming apps like Pixels, Fanzee Battles, and Catizen, which have all had ~1 million users try the game. The largest app to date is Notcoin, an app built on TON where users click a coin on the screen to mine a future airdrop of Notcoin. The app has rapidly onboarded over 30 million users. The recently launched NOT coin currently has a market cap of $1.7B for a click-farming app.  
TON is used to pay transaction fees, staking to validate the network, and protocol governance. On average, 6000 TON is burnt daily, with a high of 28K TON in April.  Additionally, ~500M TON is staked, validating the network.  
Telegram is unique in that it does not fit a pre-defined sector.  We often hear about DeFi, NFTs, Gaming, Layer- 1s and 2s, DePin, RWAs and more.  However, there is no category to describe a layer-1 blockchain that exists solely to integrate with a messaging app. Perhaps Telegram is analogous to BNB. In 2018, there were very few defined sectors within digital assets. Most assets were Bitcoin forks or smart contract platforms. Binance Coin (BNB) entered the picture. Most digital asset investors didn’t know what to do with BNB – it didn’t fit into an existing theme, narrative, or sector, but it was a real business with real cash flows.  If you were using traditional cash flow analysis, the BNB token made all of the sense in the world due to Binance’s profitable exchange model. Still, if you were a venture capital investor, it was harder to figure out the long-term value of BNB.  It was just a token that derived cash flows from the exchange’s revenue.  Whereas most investors at the time were thinking about TAM and technology. Fast forward 6 years, and it is now obvious why BNB was such a success. It wasn’t just an exchange token.  Binance was an ecosystem, and the token became multi-purpose – it was a collateral token, a gas token (for Binance smart chain), and a loyalty program and a cash-flow generating pass-thru revenue token.  It morphed over time as the Binance customer list and product suite grew.
Telegram Network (TON) looks similar. Given its massive user base and product market fit, it has so many levers to pull.  Forget about the valuation of the token for a second, just think about successful crypto businesses.  You’d be hard pressed to find 10 other businesses as successful and widely used within crypto markets as Telegram.
In no particular order, here are 9 projects, protocols or businesses that are on par with Telegram’s usage:
  • Bitcoin:  $1.3 trillion market cap
  • Ethereum:  $425 billion market cap
  • Solana: $70 billion market cap
  • Coinbase: $60 billion equity market cap
  • Binance: $93 billion token market cap and an estimated $200 billion equity market cap
  • Metamask:  ???  – but parent company Consensus has an equity value worth $10 billion+
  • Uniswap:  $6 billion market cap 
  • Circle: ??? -  but looking to an IPO soon and last valued around $9 billion in 2022
  • Tether: Easily a $100 billion+ equity market cap on $5-10 billion of annual revenues
Based on that, TON's $20B valuation doesn't seem crazy. 


And That’s Our Two Satoshis!
Thanks for reading everyone! Questions or comments, just let us know.

The Arca Portfolio Management Team
Jeff Dorman, CFA - Chief Investment Officer
Katie Talati - Director of Research
Sasha Fleyshman - Portfolio Manager
David Nage - Portfolio Manager
Wes Hansen - Director of Trading and Operations
Michal Benedykcinski - Senior Vice President, Research
Nick Hotz, CFA - Vice President, Research
Kyle Doane - Vice President, Trading
Alex Woodard - Associate, Research
Christopher Macpherson - Research Analyst
Andrew Masotti - Associate, Trading and Operations
To learn more or talk to us about investing in digital assets and cryptocurrency
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