Bitfarms: A Good, Low-Price Bitcoin Mining Play

Summary

After the smoke clears, BITF should continue to do very well.
The one fundamental investors need to watch with BITF.
Why the price of Bitcoin seems to be moving in correlation with the correction in Tech stocks.
What institutional investors gave to Bitcoin, institutional investors, temporarily, are now taking away.

Bitfarms (BITF), for investors looking for a lower-price Bitcoin (BTC-USD) and/or crypto play, is a good option to consider, as it has been trading below $4.00 per share recently and, I think, will jump much higher once Bitcoin reverses direction and resumes its inevitable upward move.

In my opinion there's no doubt that is how it'll play out, but in the near-term investors do need to be cautious in how they build their positions in Bitfarms and similar crypto companies because there are factors at play now that haven't been in the past, and they need to be taken in consideration when making decisions. In this article we'll look at those factors, along with the only fundamental that needs to be considered with Bitfarms. We'll also look at the one catalyst that will determine the performance of Bitfarms over the long haul.

The one catalyst investors should consider with Bitfarms
I've been hitting the obvious and simple theme recently on Bitcoin and crypto miners concerning that fact that the price of Bitcoin is really the only catalyst you need to watch to determine the future performance of Bitfarms and its peers.

The reason I've been repeating it a lot is because many financial writers continue to act as if the price movement of these companies are determined by fundamentals, when they demonstrably aren't, based upon share price movements that directly correlate with the price movement of Bitcoin.

If investors start to believe fundamentals are what drive the performance of Bitfarms and similar companies, they're going to make investing decisions based upon the wrong criteria. That's important to understand because what seem to be weak fundamentals could drive a shareholder out of a position that has a lot of upside potential.

The one exception to that obvious rule is the balance sheet health of a company, and its access to capital. My point is the share price of Bitfarms will move in direct correlation to the price of Bitcoin. Anything else is noise, again, with the exception of how much cash is on hand and the ability to raise capital if Bitcoin prices remain low for a prolonged period of time.

Investors in companies like Bitfarms don't want them to sell Bitcoin in order to raise capital.

As for its latest numbers, at the end of September 30, 2021, the company had $43.3 million in cash and $101.2 million in digital assets. As of November 12, 2021, it held 2,780 in BTC, representing a value of $178.4 million at the time. Total liquidity at the end of the third quarter stood at $244.5 million.

Long-term debt as of Sept. 30, 2021, stood at $10.9 million.

The company also lowered its production costs per Bitcoin from about $9,000 in the second quarter to $6,900 in the third quarter. In the last earnings report management stated the latest facility it acquired had production costs of approximately $4,000 per Bitcoin; that should significantly reduce its production costs, depending upon how many Bitcoins are produced there versus its other production facilities.

As far as expectations go, it should noted that during the third quarter the average price of Bitcoin was about $63,000; that's going to be much lower in the current quarter.

Being a low-cost producer, Bitfarms should perform better than most of its peers, although it has been spending a lot on expanding its mining capacity.

There has been some dilution, with the company issuing a total of $18.7 million under the ATM program, raising close to $108 million at an average price of $5.96 per share. Management said its growing asset base will allow for non-dilutive ways of raising capital.

Concerns about the correlation of Bitcoin to Tech stocks
Something unique in the relatively short history of Bitcoin has been happening recently, and it's important to understand the underlying reasons for it, and why it's only temporary.

What has happened is Bitcoin has been moving in what appears to be in correlation to tech stocks, which has given the false impression it is now aligning with tech as an asset class, suggesting it's going to continue to move in that direction going forward. Nothing could be more wrongheaded in regard to Bitcoin.

Why has it happened? Because what large institutional investors gave to Bitcoin in pushing its price up, have also taken away, as they panic-sold on the news of higher interest rates because of the change in sentiment by the Federal Reserve. Over time they're going to regret that decision.

What investors need to take into consideration is institutions like nations, insurance companies, hedge funds, and pension funds, along with individual wealthy investors, make investing decision based upon what is called a discounted cash flow (NYSE:DCF) model.

Basically, what that means is as the yields on the 10-year Treasury climb, their valuation on future cash flows drop.

Since institutional and individual wealthy investors have no idea how to measure the price of Bitcoin, they have gone to the only model they use, which is DCF. In other words, they're treating Bitcoin and other cryptocurrencies as if they're tech companies, rather than the uncorrelated asset class they represent.

This is what has generated the idea the Bitcoin and tech stocks are now correlated. That has brought about the sell-off in Bitcoin by these institutions and wealthy individuals, in the same way they've sold off tech stocks.

Remember, there is no direct correlation between Bitcoin and commodities, stocks, or bonds. And as far as the Federal Reserve, monetary policy also has no direct correlation with Bitcoin either. The point is, the big investors coming into the space was one of the positive catalysts among many, that have supported the price of Bitcoin, now that the price of Bitcoin has corrected, they've went back to the only thing they know: DCF modeling. That is a huge mistake they're going to regret for years.

Once the market discovers interest rates and Bitcoin aren't connected, the upward trajectory of Bitcoin is going to resume, and those holding on will do better than they ever have.

Also bear in mind that over 60 percent of Bitcoin hasn't moved for over a year, and most miners are holding onto it, rather than sell it into weakness.

Since Bitfarms is a proxy for Bitcoin, it's going to move in conjunction with its upward price movement in the future.

Bitcoin price movement
Another interesting thing to think about with the price of Bitcoin as it relates to Bitfarms and its peers is this: it doesn't matter if there are positive or negative catalysts - the share price is still going to move in relationship to the price of Bitcoin.

For example, recent HIVE Blockchain Technologies Ltd. (HIVE) earnings results didn't produce much price movement outside of Bitcoin's movement. All I can say is, concerning the crypto stocks I watch, it was only a percentage point or two above where they were trading; that will adjust in the near term. It doesn't matter much whether there are negative or positive catalysts with these companies - it's all about the price movement of Bitcoin in either direction. Like mentioned earlier, fundamentals at this time don't matter for Bitfarms, outside of its balance sheet. The only thing that will drive its share price one way or the other is Bitcoin. Period!

Test this thesis using charts of Bitfarms and other companies to against Bitcoin at different time frames. You'll find that no matter what temporary catalysts come about, the share price movements correlate directly with the price movement of Bitcoin.

The only time I've seen this temporarily change was when China made its decision concerning miners, and they had to migrate out of the country to other jurisdictions. Under that scenario there were temporary decoupling from the price of Bitcoin as they sold off some of their equipment while setting up shop in new locations. Even there it didn't take too long before the share price of these companies started once again moving in conjunction with Bitcoin.

3-month price of Bitcoin (Trading View)

3-month chart of BITF (Trading View)

Conclusion
Bitfarms is poised to move in relationship to the price movement of Bitcoin. There is nothing directly correlated to tech stocks that has or will change that over the long term.

As mentioned, we should be careful to not follow in the footsteps of many institutional or wealthy investors that have made a huge mistake in classifying, in their minds, Bitcoin as being correlated to high-growth tech stocks. Again, it isn't going to be long before they regret making the decision to sell their Bitcoin.

Bitfarms appears to have a strong enough balance sheet to weather this temporary downturn in the price of Bitcoin, and once it starts to rebound, I believe the share price of Bitfarms will soar with it.

One area to be careful because of the temporary correlation of Bitcoin to tech stocks is that there could still be more sell-off before the crypto market reverses direction.

If you're interested in Bitfarms, it would be best to buy in increments and average down if it falls further. Also, be sure to position size so you don't put so much capital in that you're tempted to sell into weakness because of further downside.

Using that strategy some of the upside is less than it might have been, but so is the downside. I think under these economic conditions where institutional investors are treating Bitcoin like a high-growth tech stock, it's best to play it safer than normal, even though there is no doubt in my mind that those building positions now are going to do very well in the future.