In late 2018, at the depths of the previous Bitcoin market cycle, I started a newsletter to which many of you subscribed, called, Fundamental Bitcoin. If you were a subscriber then, I have added you here on the reboot of that letter at Substack. Feel free to unsubscribe if you don’t want to hear from me.
What Happened?
Almost five years ago, it seemed urgent to buy bitcoin. (it was) I was inspired to educate my friends on the basics of bitcoin and why they should own it. Plenty of people do the education thing better now. There is a wealth of books, podcasts, and news sites covering bitcoin.
While I published 25 editions of the newsletter through 2019 into 2020, the events of 2020 eventually brought other concerns to the fore, such as schooling for our children during Covid. Thus we undertook another relocation, this time from Puerto Rico to Florida. I apologize for not continuing the letter even infrequently. If you were positioned, you have likely done well.
I hope you held on to your bitcoin, or sold some above $50k and have reacquired your stack. The last 11 months have been a fantastic time to add. We did not see the widely anticipated six figure bitcoin price in the last cycle due to a number of factors. Chief among them were, in my view, the China mining ban in May of 2021 and the incredible proliferation of crypto scams that attracted so much speculative attention.
Learning to Mine
In 2020, I was looking for a way to transition into Bitcoin full time — to align my interests and values with how I earn a living. I had a technology business unrelated to bitcoin which proved difficult for me to scale beyond a certain size.
This is when I began to invest in bitcoin mining. I sought bitcoin income and wanted a business that could scale with capital. At first I dipped a toe in with a small investment. In Q2 2020 bitcoin was trading between $8k-$10k and my margins were around 10%. While that was unimpressive, I was confident bitcoin would run to $20k by the end of that year. My margins would grow from 10% to 60%.
Naturally I wanted to do more but I didn’t want to buy more equipment right away. I started to look at publicly traded bitcoin mining stocks, figuring their margins would also expand dramatically. Through the magic of equity multiples, substantial gains seemed likely. At the beginning of October 2020, I bought MARA and RIOT at $2 and $3. My thesis was correct and by late December these reached $20 and $30, eventually these topped near $80. I was hooked.
I thought I could take my winnings and leverage them to buy more machines and start to build a real income stream in bitcoin. I didn’t know that Core Scientific, another publicly traded miner, had just borrowed a billion dollars. They were buying up much of the forward supply of the mining machines without facilities to deploy them. This sent equipment prices soaring. I overpaid on my second mining investment. I used leverage. I experienced many delays. I learned much more about operations, timing and whom to trust.
Despite significant setbacks, I kept at it, determined to apply my experience to generate income in bitcoin in a scalable way. Earlier this year, I partnered with a local fund (Bequest Funds) and an oil and gas operator in Oklahoma to redeploy my mining units on “stranded” natural gas. Now in Q4 2023, as we emerge from a long and difficult bear market, I have fully transitioned my business focus to Bitcoin mining. We are deploying megawatts as I write. Hallelujah!
Celestial Mining Management
Through CMM, I source bitcoin mining related opportunities and manage mining operations on behalf of investors. We work in JV structures where interests are maximally aligned. I source locations and sites with inexpensive energy and select a set of hardware that my models indicate will generate the best returns over a 3 or 6 year period in that location. My focus has been stranded natural gas resources. Stranded gas allows us to realize an effective energy cost under $0.03/kWh which is below the industry average. I also evaluate grid sites where I can find low power rates.
At this point in the bitcoin cycle, the risk-reward in mining skews heavily to the reward side. It doesn’t really get better than this. I presently have high-return income opportunities for investors in both bitcoin mining and related power infrastructure ranging from $100k up to $60 million.
Modeling Mining Investments
In order to model bitcoin mining opportunities you must have well-developed projections on two related quantities: the bitcoin network “hashrate” and the bitcoin price. Hashrate is a measure of computing power devoted to bitcoin mining. (You can see what it takes to produce hashrate in the video above.) The network hashrate is the total computing power dedicated to mining at any given time. During Bitcoin bull markets the bitcoin price “outruns” the total network hashrate. These are extremely profitable periods for miners. Profits go from marginal to exceptional. I expect the next such period to start within approximately 12 months.
For bitcoin price projections, I created four scenarios covering the next 6 years. One of them is called “Weimerica.” When I started modeling in earnest 18 months ago, I assigned 10% probability to this scenario. I am keeping it there for our proformas but as we watch events unfold, it seems ever more likely.
Earlier this year, the US Congress gave themselves an 18 month break from the self-imposed debt ceiling. With the shackles removed, the US Treasury has been borrowing at an annualized pace of $6 Trillion per year. Interest on the debt already exceeds the defense budget while $7 Trillion of bonds must be refinanced at higher rates in the coming year. And we aren’t even really fighting a war yet.
Traders tell me that bitcoin will top out just over $100k in this cycle. I believe this signaled level is left over from the unrealized top that would have happened in 2021 but for the mining ban and other shenanigans. If we are entering “Weimerica,” this cycle is likely to exceed dampened expectations.
The Wall Street marketing machine is gearing up to sell their shiny new product: Bitcoin ETFs. On financial television, Larry Fink described bitcoin’s recent move as a “flight to quality”—a marked shift in language from even a year ago. They are figuring out how to sell Bitcoin right in front of our eyes.
It’s all going according to schedule. The halving is coming in April. The narratives are almost polished. The powers that be have arranged a variety of crises for us just in time for the bitcoin halving and the ETF launches. And of course we have election year ahead.
A cursory estimation of the prospective ETF fund flows suggests that tens to hundreds of billions of dollars are likely to try to squeeze into bitcoin. Bitcoin has a very narrow gate. Much is made of the ₿21 million supply cap but less than 10% of that supply is actually on exchanges and only a fraction of that is for sale. ETF demand will drive price. ETFs are regulated entities that must own what they claim to own unlike many of the villains of the last cycle.
Bitcoin remains as fascinating and promising as ever. There is so much more to discuss than price but I have to be laser focused on the economics now. And now that I have a more focused motivation for writing, I will try to publish regularly about Bitcoin from a miner’s perspective. I hope you enjoy this content and find it valuable.
If you are a qualified investor seeking income opportunities, or you want help acquiring and storing bitcoin please do not hesitate to contact me. I will gladly put you in touch with the right people.
Cheers!
Steven
Disclaimer: This is not financial advice. This is intended for educational and entertainment purposes. Please do your own research and consult knowledgable professionals when making investment decisions.
