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Iris Energy: A Way to Play Bitcoin’s Ultimate Role (NASDAQ: IREN)

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As the broad cryptocurrency market continues to slide with Bitcoin (BTC-USD) below $30,000, companies built around the cryptocurrency industry have also suffered quite a bit. While companies like Coinbase (COIN) and Galaxy Digital (OTC:OTCPK: BRPHF) and Silvergate Capital Corp. (SI) provides exposure to the crypto space through a more traditional equity carrier, the companies that may have the most direct exposure to the price of Bitcoin over time are pure mining operators. Among them is Iris Energy Limited (Nasdaq: IRIN). While every mining operation is different, the publicly traded stocks of the larger operations are largely traded side by side.

Cryptocurrency miners since the beginning of the year

YTD Crypto Miners (Looking for Alpha)

Year-to-date performance of Iris and Hut 8 Mining Corp. (HUT) and Marathon Digital Holdings, Inc. (MARA) and Riot Blockchain, Inc. (RIOT) and Hive Blockchain Technologies Ltd. (HIVE) Almost identical. There are two important inputs that affect the performance of these two metals; Bitcoin price and mining cost. The best representation of the mining cost for the entire industry is the Bitcoin network hash rate.

Profitability vs Hashers

When the Bitcoin network hash rate is high, it is generally difficult for miners to obtain the block reward from newly minted bitcoins. The more difficult the block reward is to get, the more energy it will cost miners to secure the network.

Bitcoin Hash

Bitcoin Hash Rate (Bitinfocharts)

This is not necessarily a problem when the price of Bitcoin goes up. It is a big problem when the price of bitcoin goes down. When that happens, miner profitability drops.

Bitcoin miner profit

Bitcoin Miner Profitability (Bitinfocharts)

And when miners’ profitability drops, miners’ share prices reflect this change, which is exactly why most publicly traded mining stocks are down 75-80% from their highs. As a group, these miners will struggle unless the bitcoin price goes up or my difficulty goes down. Since we are in a situation where miners perform pretty much the same regardless of other variables, it can provide an opportunity to research mining operations that might have a fundamental advantage over other mining pools.

Iris Energy

Iris Energy is one of the smallest Bitcoin miners by market cap but an interesting option for investors looking for a stock-based Bitcoin game. Eris positions itself as a clean Bitcoin miner. The company claims that 98% of its energy comes from direct renewable sources and 2% from REC purchases. Iris currently has two direct operations in British Columbia, Canada. There are plans for an additional site in British Columbia and a large capacity site in Texas.

location MW capacity Real estate condition
Canal Apartments (British Columbia, Canada) 30 100% owned Connected
Mackenzie (British Columbia, Canada) 80 100% owned Online / Construction
Prince George (BC, Canada) 85 50 year rent building
Childress County (Texas, USA) 335 100% owned building

Source: Iris Energy

The company owns the vast majority of the properties on which construction is taking place. Iris expects total planned capacity to connect and activate by the third quarter of 23. So far, the company has met or exceeded construction schedules. Notably, Iris is quoting $1 billion in capital expenditures to build its planned data center operation and $750 million has been secured from that capital expenditure, meaning that there is still $250 million in funding that still needs to be secured for Iris to reach its target. timetables.

Hashrate . forecast

Hashrate Projection (Iris Energy)

In addition to its clean energy exploration, Iris is positioning itself as a value game in the bitcoin mining industry based on its market capitalization compared to its expected operating capacity. But I repeat that this is dependent on Iris securing the necessary funding to continue to expand its operations. If you make it to those timelines, Iris will be among the largest mining operators in the space.

Insiders and institutional holdings

Looking at the shareholder distribution compared to peers, we see a much larger position held by insiders and smaller institutional ownership in Iris Energy.

Ownership sharing insiders institutional
Iris Energy 19.3% 7.6%
Digital Marathon 6.3% 40.0%
Hut 8 Mining 1.7% 19.5%
Blockchain riot 0.9% 36.7%
HIVE Blockchain 0.4% 12.1%

Source: Find Alpha

What is striking is the expiration of the last lock for Iris Insiders. Since the company went public in November 2021, there has been a 6-month period for closing shares to insiders. Booking ended May 16th. Given that, the number of quoted insiders is very likely to decline and the surge in volume earlier this week could be an indication that those insiders have already started selling shares. IREN shares traded with a 10x increase in average daily volume on Monday 5/16 and a continued 5x increase in volume on Tuesday 5/17. As of writing this Wednesday morning, volume was much closer to normal averages; Which indicates that the hold expiry sale is mostly over.

daily stock volume

Daily Post Size (author created, Yahoo)

What I would like to see in the future is increased ownership of institutional funds. If this fund’s ownership number increases further in line with its peers, say 20-30% of ownership, that should put a solid bid under Iris Energy in the short to medium term. I think if Iris Energy can continue to implement its schedule and operational build, we will see crypto ETFs like Grayscale Future of Finance ETF (GFOF) and Bitwise Crypto Industry Innovators ETF (BITQ) enter or increase Iris Energy positions. Currently, the Grayscale Fund is not subject to IREN exposure and the Bitwise ETF has a 2.7% weighting of IREN shares.

Risks

There are significant risks when investing in any cryptocurrency company. The industry remains highly volatile and speculative. There is still a regulatory environment for digital asset investors to consider when allocating capital. In addition, miners specifically face jurisdiction risks. While I’m not concerned about Iris Energy’s jurisdiction, it’s worth noting that it presents a potential headwind. The company is likely to be more exposed to risks when operations in Texas currency-friendly come online.

Additional mining risks could include a potential negative feedback loop of low bitcoin prices to fund operations. Bitcoin miners are bitcoin sellers. If Bitcoin demand cannot absorb this selling offer, miners can inadvertently harm their business model by lowering profitability when they need to sell Bitcoin to fund operations.

summary

If you think Bitcoin is going back to its recent highs, cryptocurrency-focused stocks are a great way to learn about this trade. I generally don’t like mining as long-term investments, but as a trade I think it can provide some serious alpha for a bullish move in crypto. If Iris Energy can get the funding needed to continue expanding its business, it will be a major player in the mining space and institutions will likely make a significant market offer.

While I don’t think the cryptocurrency market has found its local bottom yet, I took a small long position in Iris Energy. I think it’s a really interesting option after closing. I see this stock expanding in 3 or 4 lots of stocks and selling high if/when Bitcoin breaks its downtrend. My IREN average is currently $5.55.

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