Bitdeer Technologies: Managing The New Economics Of Bitcoin Mining (Rating Downgrade)

Summary Shares of Bitdeer have surged amid sharply higher Bitcoin prices. The company's Q3 earnings report was pressured by shifting market economics following the Bitcoin halving earlier this year. The company is launching a proprietary AISC Bitcoin mining platform, expected to generate financial efficiencies and drive strong growth. Bitdeer Technologies ( BTDR ) has emerged as a leader in the nascent blockchain industry with a unique business strategy. Recognized as one of the world's largest publicly traded Bitcoin ( BTC-USD ) miners, the company also develops data center power infrastructure while offering high-performance cloud computing services for AI applications. We covered some of these themes in a bullish article from 2023 and shares are now up nearly 200% over the past year amid the sharp Bitcoin price rally. While we remain constructive on the stock's long-term potential, the next stage of the rally will likely be more difficult. The company's latest quarterly update highlighted ongoing financial headwinds that could keep shares volatile. A more cautious outlook into 2025 may be warranted. Data by YCharts BTDR Q3 Earnings Recap Several moving parts are important to understand the context of Bitdeer Technologies' third-quarter earnings. Revenue of $62 million declined by -29% y/y and the net loss of -$50.1 million widened from -$1.8 million last year. source: company IR Bitdeer is benefiting as the current spot price of Bitcoin above $90k has climbed more than 3-fold from an average of under $30k in Q3 last year. That should be great for the miners and others powering the network and extracting a portion of blockchain protocol rewards. On the one hand, the Bitcoin halving event earlier this year cut the network block reward in half, effectively limiting the potential revenue for all miners. Separately, higher Bitcoin prices continue to attract more miners to the network which has pushed the hash rate difficulty significantly higher this year, further diluting the reward availability per unit of processing power. The impact is evident across the company's operating segments including the 511 self-mined Bitcoin during the quarter, compared to 1,085 in Q3 2023. Given the new market economics, Bitdeer has also faced lower cloud hash rate service contracts as certain customers removed older and less efficient mining rigs from operation. Revenues from general hosting and membership hosting are down sharply from last year. The metric that stands out is the decline in total hash rate under management, falling to 17.1 EH/s from 21.2 EH/s last year. In this case, Bitdeer has shifted some of that capacity towards its self-mining operation, while the business still generated a negative gross profit this quarter. source: company IR SEALMINER optimism into 2025 The understanding is that Bitdeer is in the middle of a transitional period, with several developments in store for 2025 to support an improved outlook. The good news is that a balance sheet cash position of more than $291 million, along with $40 million in cryptocurrency value as of Sep. 30, provides the company with some financial flexibility and time to execute the next stage of its strategy. Bitdeer is betting big on its proprietary SEALMINER hydro-cooled mining rig, which it believes represents a major competitive advantage that can sharply reduce its mining costs and generate greater margins. Compared to its current fleet of 828k mining rigs running with an average efficiency of 31.4 J/TH, the SEALMINER A2 equipped with the in-house SEAL02 chip has already entered the first-run production phase and boasts an efficiency of 16.5 J/TH. If this metric is confirmed, Bitdeer's AISC technology would be competitive with top-of-the-line mining rigs from leading suppliers like " Bitmain " at a lower cost. The plan is to run its new rigs for self-mining while commercializing the hardware for external customers into a multi-billion-dollar addressable market as a new revenue and growth driver. That SEALMINER capabilities will be leveraged with significant new power infrastructure capacity expected to come online over the next several quarters. Management is confident that the conversion of 100 MW of hosting capacity at its Texas facility to hydro-cooling by Q1 2025 can bring back some hosting customers. Through 2026, Bitdeer has 1,645 MW of pipeline capacity in progress or under planning that will nearly triple its current 895 NW infrastructure. By this measure, the attraction of Bitdeer Technologies as an investment is the roadmap to build a vertically integrated and self-sustaining ecosystem with profitable growth over the long run. Final Thoughts 2025 will be a critical year for Bitdeer to confirm the viability of its business model. The wild card in the equation is where Bitcoin evolves going forward. A scenario for the price of BTC to rapidly climb above $100k would be clearly positive by translating into higher cash flow for the existing operation and adding to the earnings potential as the capacity ramps up. While we've been bullish on BTC, the key risk to consider is the possibility of renewed volatility in the market that would translate into a less attractive market opportunity at lower prices. Any setback in the commercialization timetable for SEALMINER could also spark a large selloff in Bitdeer stock. From our "strong buy" recommendation last year, our call today is that Bitdeer is now more speculative with a different set of uncertainties. We rate the stock as a hold, implying a neutral view on the stock price over the near term, but leaving the door open to make a new assessment with updated data over the next few quarters. Ultimately, we believe there are better opportunities in the market elsewhere right now.