Bitcoin Miner Revenues Explode Thanks to Runes: Should You Load Up on Miners?

👇1-12) Bitcoin miner revenues have exploded with the launch of Runes, a new fungible token standard created by creative organelles. Runes allows people to inscribe arbitrary data on Bitcoin-like art. Runes remind us of Ordinals, which had an outsized impact on miners' revenues in late 2023 and early 2024 and was associated with a golden opportunity for Bitcoin mining companies. In later Q3, we made super aggressive mining calls that paid off (here).

👇2-12) Ordinals, unique identification numbers assigned to each satoshi on the Bitcoin blockchain, have sparked a resurgence in on-chain activity, leading to substantial transaction fees. Miners have reaped the rewards, with over $200m in transaction fees from Ordinals, constituting approximately 20% of their total revenue by February 2024.

👇3-12) Among other factors, this caused Bitcoin mining stocks to rally by +100% to +300% in Q4 2023 as ordinals massively contributed to the rewards for Bitcoin miners. Are Runes a replay of this period, and therefore, a massive rally for publicly listed Bitcoin miners, such as Marathon Digital, awaits?

👇4-12) The setup differs from when we made those calls. Not only was Bitcoin trading at 27,000 on September 28, but mining stocks were extraordinarily cheap and neglected by investors as no Bitcoin Spot ETFs were yet available to get stock-type exposure. Transaction data was significantly lower and had room to positively contribute to miners' revenue once the network was going through some revival.

👇5-12) Based on Q3 2023 all-in cost Bitcoin mining data, the industry likely mines Bitcoin near $50,000 per BTC post halving. Marathon has indicated that its costs increase from $23,000 to $46,000 – similar to Bitdeer while Riot ($50,000), Iren, hive BITF and BTBT are closer to mid-$50,000 if not higher.

👇6-12) The mining industry has some buffer for as long as transaction fees are high. The chart below shows Bitcoin (white, LHS) vs. daily miner revenue (blue, RHS), which went up to $107m on the halving date as the Rune minting generated massive fees.

Bitcoin (white, RHS) vs. Daily Miner Revenue (blue, LHS, $ million)

👇7-12) Interestingly, there is a close correlation between the two data series. This indicates that for a Bitcoin price of 70,000 to be sustainable, miner revenue should be close to $100m daily. In Q4 2021, when Bitcoin traded at 65,000, and miner revenue was just $65m, Bitcoin prices eventually corrected as revenues did not catch up.

👇8-12) The situation looks similar, as revenues have dropped back to $50m, which the correlation analysis would indicate values Bitcoin closer to 40,000/45,000. This correlation has remained valid for the last three years and much longer. However, another exciting relationship indicates that Bitcoin prices are relatively high based on transaction data.

👇9-12) Although the relationship is not as strong as the correlation with daily miner revenues, the cost per transaction has also been closely correlated with the price of Bitcoin. A fee per transaction of $250/ $275 correlates with the current Bitcoin price of $65,000, while the cost has declined to $60. If those relationships still hold, a similar 40,000/45,000 fair value could be derived.

You can see better versions of those two charts here and here.

Bitcoin (white, RHS) vs. Cost per transaction (blue, LHS, $)

👇10-12) Although the correlation between Bitcoin and Bitcoin mining stocks has declined during the last few months, based on their three-year price relationship with Bitcoin, they appear roughly 50% undervalued (+100% upside) – IF Bitcoin prices stay within this 65,000/70,000 area.

👇11-12) It’s not a screaming buy, as in late September (here) when Marathon traded at just $8 (vs. $19 now or vs. $28 when we turned cautious on December 28); the mining stocks could offer upside potential if this Bitcoin bull market continues. After the 2020 halving, it took a few months (and fiscal stimulus) to ignite the Bitcoin rally, which caused miners to explode. An immediate catalyst is not yet visible, but some miners could be ‘value plays’.

👇12-12) We have argued why Bitcoin could consolidate. Still, without a more extensive correction, the Bitcoin miners with enough buffer (all in cost sub-$50,000 per BTC, such as Marathon) could be attractive despite the declining daily revenue. Therefore, picking the most cost-effective miners (selectively) could still be a winning strategy.

Bitcoin vs. Marathon Digital (middle chart, fair value based on regression)