One Of Our Two Lottery Tickets Final Month
Bit Digital, Inc. BTBT was highlighted as one of two “lottery ticket” trades we made last month within the Portfolio Armor trading Substack. This designation reflects the speculative nature of the investment, where the potential for significant returns is coupled with a higher risk profile.
What sets Bit Digital apart from other Bitcoin miners is its unique approach to diversifying revenue streams. In addition to Bitcoin mining, the company has ventured into AI operations and Ethereum staking. To gain deeper insights into this innovative strategy, I reached out to Bit Digital’s CEO, Sam Tabar. Below is a Q&A that highlights the company’s vision and operational strategies. Following the interview, we’ll touch on the importance of risk management, especially in light of recent geopolitical tensions.
A Conversation With The CEO Of Bit Digital
Portfolio Armor: Thank you for taking the time to answer a few questions about your business. Bit Digital has been actively staking Ethereum—are you aware if any other publicly traded Bitcoin miners are doing this?
Sam Tabar—CEO, Bit Digital: As far as we’re aware, no other publicly traded Bitcoin miner is staking Ethereum. We have pioneered a business model we call The Bit Digital Flywheel that harnesses the synergy between Bitcoin mining and Ethereum staking. This model allows us to continuously earn rewards that we can reinvest back into our operations. The beauty of this model lies in its simplicity: we earn rewards by sustainably mining Bitcoin, exchange a portion of those rewards for Ethereum, stake Ethereum to earn yield, and then reinvest that yield back into our operations. It’s a cycle that we can repeat.
PA: Bitcoin is often analogized as “digital gold.” For investors who are only vaguely familiar with ETH as the second largest coin by market cap, how would you describe it?
ST: Bitcoin is the perfect store of value and will ultimately replace gold as a store of value. Ethereum, on the other hand, is a very different technology with various use cases and unique market characteristics. It features a programmable language with smart contracts and has the potential to revolutionize the financial system and legal processes. Together, Bitcoin and Ethereum form a powerful duo.
Bit Digital On Ethereum Staking
PA: Could you elaborate on how Ethereum staking fits into your overall strategy, particularly in terms of diversifying income streams?
ST: As Bitcoin margins shrink post-April halving, miners needed to diversify into new income streams to remain competitive. We were well-prepared for the halving. Ethereum staking is just one of our three income streams, complementing our Bitcoin mining and HPC/AI services. We believe that the concept of earning passive yield in ETH terms is very attractive compared to a static notional balance.
Moreover, the initial approval of Ethereum ETFs marked a significant milestone for mass adoption. However, we believe these ETFs may have limitations. Investing in an ETH ETF is one way to gain exposure to digital assets, but it excludes a major benefit that ETH offers. The issuer cannot stake the Ethereum in an ETF, which means they cannot earn yield or access the network. As one of the few capital market proxies for ETH staking economics exposure, Bit Digital provides shareholders with exposure to both Ethereum and the benefits of staking, unlike ETH ETFs.
More Of Bit Digital On Ethereum
PA: Can you elaborate on how you manage the risks associated with Ethereum staking, such as slashing or liquidity risks?
ST: We do not currently liquid stake.
PA: Beyond the election in November, what potential catalysts do you see for BTC and ETH over the next several months?
ST: Aside from the November election, shifts in monetary policy, such as potential rate cuts by the Fed, could drive renewed interest in digital assets as an inflation hedge. Increased regulatory developments, whether positive or negative, will impact both Bitcoin and Ethereum. Clarity or favorable rulings could attract more institutional investors, which would ultimately draw in more retail investors. High inflation and economic uncertainty may further increase demand for Bitcoin as a store of value.
Even with the ETF launches behind us, rising institutional interest in both Bitcoin and Ethereum remains a significant driver. More companies may follow suit in adopting blockchain technology, whether by holding digital assets on their balance sheets or utilizing DeFi and smart contracts for financial services.
Bit Digital On AI
PA: The other aspect of your business that seems unique for a Bitcoin miner is your AI infrastructure services. You have a fleet of Nvidia Corporation NVDA H100 GPUs at a Tier 3 data center. Do you use these GPUs in your mining operations as well? If not, are there any other synergies between your AI business and your Bitcoin mining and Ethereum staking?
ST: The H100s are used solely for our HPC/AI operations. Diversifying income streams by adding HPC/AI services and Ethereum staking to our core Bitcoin mining business has proven to be an effective strategy post-April halving. As someone running a publicly listed company, I need to consider shareholders and shareholder value. I must invest in businesses that generate profits for shareholders rather than just hoping that Bitcoin goes up. Relying solely on Bitcoin’s price appreciation is not a sustainable business strategy.
Bitcoin miners can leverage their existing skills, such as procuring specialized hardware, selecting the right data centers, and acquiring clients. We were able to build the HPC/AI business with the same team we had in place for our Bitcoin mining operations and have recently made key hires for Head of Revenue, Chief Technology Officer, an experienced sales team, and top-tier AI/ML engineers to help scale the HPC/AI business.
We appreciate the steady and predictable revenue and cash flow that HPC provides, which enhances our variable Bitcoin mining and Ethereum staking income. The HPC cash flow also allows us to invest in Bitcoin mining equipment at the right stage of the cycle when ASICs are most cost-effective, and other miners lack the cash flow to expand. Capital allocation optionality is a key benefit of having these synergistic businesses in place.
More Of Bit Digital On AI
PA: Can you elaborate on what AI infrastructure services entail, beyond using your GPUs?
ST: Our AI infrastructure services extend well beyond simply renting GPUs. We provide customized solutions that optimize efficiency and scalability based on each client’s needs. In addition to supplying computational power, we manage the entire infrastructure lifecycle, including network design, installation, optimization, and ongoing maintenance. We collaborate with top-tier data centers to ensure exceptional uptime and leverage our procurement expertise to get clients up and running at industry-leading speeds. Furthermore, we have in-house machine learning engineering expertise and partnerships that help our clients enhance the efficiency of their training and inference processes. By offering support up the stack, we ensure that clients maximize the performance and value of the infrastructure we provide.
PA: Your stock is currently trading under $3 per share. Share prices that low often suggest weak balance sheets at a company, but your balance sheet has no debt and considerable cash on hand. Have you considered a reverse split?
ST: We believe our stock is misunderstood, undercovered, and undervalued. Our balance sheet is certainly not an issue, with over $200 million of liquidity and no debt at the end of August. A reverse split is not something we’re thinking too hard about at the moment. We believe the share price will normalize over time as investors begin to understand the business, and we also believe we are working on some exciting initiatives that will catalyze the share price higher.
A Reminder About Risk Management
As a reminder, you can hedge your long positions and manage market risk using our optimal hedging app.
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