Summary Cryptocurrencies surged in 2024, with Bitcoin gaining 121% due to favorable regulations and Trump's election, driving smart money into Bitcoin-related stocks like Riot Platforms. Riot Platforms significantly expanded its mining capacity, achieving a 155% YoY increase in hash rate, making it the fastest-growing Bitcoin miner globally. Riot's strategy includes acquiring ready-to-run mining sites and diversifying energy sources, reducing reliance on Texas and benefiting from Kentucky's energy-saving programs. Riot's valuation benefits from its substantial Bitcoin holdings and innovative "HODL strategy," positioning it for significant upside as Bitcoin prices rise. Authored by Dionysis Partsinevelos Investment Thesis Cryptocurrencies had a very strong run in 2024 due to a favorable regulatory environment and of course Donald Trump’s victory in November’s presidential election. Bitcoin specifically cruised through major catalysts, beginning with the approval of its first spot ETF in January, ending the year with a 121% gain. Likewise, smart money flowed into the markets to capture this upside, with a lot of them rushing to buy any public company related to Bitcoin. Exchanges like Coinbase, de-facto treasuries like MicroStrategy, but also, Bitcoin miners like Riot Platforms ( RIOT ) all saw increased attention from investors. While others choose to abstain from investing in what they don’t understand, we choose to deep-dive into it to understand the reason why such companies attract interest. We believe there is a big change underway in the bitcoin mining industry, and we want to make sure we are on time to capture as much of this untapped potential as possible. Riot’s operations and energy strategy The bitcoin mining game is a game of electricity and computational power. Success in this industry is defined by how efficiently a company can turn energy into mined bitcoin. Operational efficiency for bitcoin miners is measured in “exa hash” (EH/s), or simply, its hash rate. Back in July 2024, Riot was struggling with elevated fixed costs and not operating at its full capacity, with just 15.5 EH/s out of the maximum 23.3 EH/s possible . This inflated its fixed costs per Bitcoin mined, like staff salaries, equipment depreciation and stock-based compensation. According to a CoinShares report as of Q3 2024, Riot had the highest weighted-average cost per milliwatt ((MW)) among peers. MW helps us measure a company’s electricity capacity. CoinShares During the autumn of 2024, however, Riot made significant steps in expanding its mining operations. According to its December press release , the company managed to increase its deployed hash rate to 31.5 EH/s, a 155% increase YoY, which even outpaces the growth of the entire Bitcoin network. Meanwhile, its average operating hash rate improved to 27.4 EH/s. This basically allows Riot to mine more bitcoin without a parallel increase in costs. The fact is that Riot is the fastest growing miner in the world. It increased its mining capacity by 52% QoQ in Q3 2024 and by an additional 26% by December 2024. CoinShares We also like Riot's most recent move to combine the building of new mining facilities (a process that takes years and R&D investments) with an acquisition approach, targeting ready-to-run sites. Riot has recently purchased Block Mining , adding an additional 60 MW and 1 EH/s to its operations immediately, with plans to further expand to 16 additional EH/s by 2025. The acquisition also allows Riot to reduce its reliance on its Texas facilities by diversifying into Kentucky, where electricity is cheaper . Kentucky also offers special energy-saving programs that Riot can take advantage of. Its reliance on Texas energy has been a point of criticism by analysts. Riot Platforms Investor Presentation Riot’s ambitious goal is to reach 100 EH/s by 2027 and position itself as the leader in the mining industry. The Rise of Bitcoin Treasuries Riot Platforms and most of the bitcoin miners are beginning to favor the “HODL strategy”, slowly moving away from the traditional “mine & sell” business plan. This strategy essentially means that miners are now holding on to the Bitcoin that they mine instead of selling it immediately. CoinShares’ 2025 Outlook report highlights how Bitcoin miners are now deciding to leverage their Bitcoin reserves to secure loans and reinvest in more mining infrastructure or Bitcoin acquisitions. This essentially allows Bitcoin miners to acquire further value through their Bitcoin holdings, especially as Bitcoin’s price rises. This “bitcoin-as-a-collateral” model has been popularized in 2024 by none other than Michael Saylor’s MicroStrategy. Riot’s Bitcoin holdings now serve three key purposes: They are a major source of revenue, they are being used as a financing tool, and they also attract the attention of investors. Riot can now grow its operations and infrastructure using an appreciating asset, while reducing their reliance on equity financing and share dilution. Valuation Analysis Valuing Bitcoin mining companies is a difficult task because we cannot rely on traditional cash flow calculations to measure intrinsic value. The majority of miners remain unprofitable, or their profits are insanely volatile and depend on Bitcoin’s price. For this reason, we choose to value Bitcoin miners using a few different and novel methods, such as their premium to NAV based on their Bitcoin holdings, their liquidation value, their power capacity, and price-to-book ratios. An increasingly popular valuation method is the premium to NAV. We personally believe that the rise of “Bitcoin treasuries” is something more analysts need to pay attention to. As of the end of 2024, Riot holds 17,722 Bitcoin on its balance sheet, valued at approximately $1.69 billion, assuming a BTC price of $95,000. The company’s liabilities stood around $173.3 million according to their latest earnings report. Therefore, Riot’s net BTC assets are worth around $1.51 billion. At a market cap of around $4 billion, the company trades at around 2.6x its NAV. This valuation is heavily reliant on Bitcoin’s price, but it also allows us to have a clear picture of how high the value of the company can go, should Bitcoin’s price keep increasing. At current BTC holdings, some examples include: $125,000 per BTC: Implied share price of $16 (30% upside) $200,000 per BTC: Implied share price of $27 (125% upside) $250,000 per BTC: Implied share price of $34 (183% upside) HedgeMix Now as long as the company keeps holding on to its mined Bitcoin, we can also expect its share price to increase while its NAV multiple remain steady. We believe this is an excellent way for a growing company to easily scale its operations until it reaches maximum operational capacity and energy efficiency, which will allow it to mine even more coins, with minimal costs. Some analysts are now recognizing this strategy as a viable way for companies to leverage their balance sheets and attract investor inflows. For example , JPMorgan has recently raised its price targets for a small number of Bitcoin miners, citing how they are now valuing these companies based on the value of their land, power, and Bitcoin holdings, which was referred to as the “HODL premium”. Another popular method of valuing companies that depend on electricity for their operations, is to value their current megawatts. VanEck’s report found that Bitcoin miners trade at around $4.5 million per megawatt of installed capacity. Factoring in Riot’s 1160 of MW as of December 2024, this values the company at around $5.2 billion. That is a potential upside of 31% from its current market cap. HedgeMix Lastly, Riot’s valuation is extremely attractive to us as its price-to-book ratio is significantly lower than the rest of its competitors. HedgeMix Our Bullish Point of View We maintain a very bullish outlook for Riot as we anticipate a number of catalysts and favorable market conditions to play out over the next couple years. First of all, we believe that the crypto market is still in its early stages of a bull run and Bitcoin finds itself in the middle of increased institutional adoption and favorable regulatory frameworks. There are more reasons to be bullish on crypto than not. Investors are also attracted to the rise of BTC-yielding companies, and it is clear to us that Riot is one of the few companies that will capture this interest over the next few years. This rise of “Bitcoin treasuries” has also brought to the table a novel approach to financing and growth for these companies. Thanks to this new approach of using Bitcoin as a financing tool, we expect that smart Bitcoin miners will keep accumulating coins in the short-term, in order to raise more funds through low-interest loans and invest in more infrastructure. This will significantly raise their hash rate and operational capacity. Additionally, as the Federal funds rate decreases throughout 2025 and 2026, it should act as a tailwind for companies that focus on increasing their debt financing. We are also excited about the potential that AI and high-performance computing (HPC) can offer to Bitcoin miners. VanEck estimates that miners that pivot towards AI and HPC could unlock an additional $37.6 billion in revenues by 2027. Riot already possesses the infrastructure needed for this shift, and with a strong balance sheet, we believe the company is going to make some big moves very soon. VanEck estimates that if the synergies between bitcoin mining, AI/HPC and energy grids continue to improve, the market cap of mining companies could double by 2028, even with Bitcoin’s price remaining stagnant. The $4.5M/MW valuation that was used in this report is significantly lower than the $30M/MW that is used for the average data center stock, leaving a huge valuation gap for Bitcoin miners. We are also expecting a more favorable M&A environment in 2025 and 2026, which should help bitcoin miners achieve better synergies and cost-effective growth. Finally, Riot is already getting some acknowledgment by ETF providers. For example, Defiance ETF recently announced its 2X long ETF on Riot , $RIOX, which seeks to provide 200% long daily targeted exposure to the Bitcoin miner. Takeaway message We maintain a very bullish outlook for Bitcoin miners over the next years. While the recent Bitcoin halving has raised mining difficulty, we anticipate that Riot’s growth in hashrate and operational capacity will help offset this very soon. Although Bitcoin’s price potential is uncertain, we are very optimistic about the digital currency in the long run. We believe that the company’s strategy to keep acquiring more coins and leveraging them to borrow and invest in infrastructure is a very intelligent move. The market is acknowledging this move since it is willing to pay a premium to the net assets of Riot. Now disregarding BTC’s price, there is also the potential for an AI/HPC pivot which is a large, untapped market. We are very optimistic that Riot’s plan to reach 100 EH/s by 2027 is on track, and perhaps can even be surpassed. Valuations for the stock are attractive, and we believe our bullish thesis is yet to be priced in.
