Bitcoin Mining Stocks With Over 80% Upside & Sell-Off Protection, Cowen – Business Insider

Investment bank Cowen is known for its focus on disruption, with deep dives into themes that are transforming sectors from retail, to transportation and payments.

In 2021, the cryptocurrency space truly established itself as a disruptor, capturing the attention of investors and analysts with the remarkable returns from the assets and the buzz created around decentralized topics like central bank digital currencies, decentralized finance, NFTs and the metaverse.

Cowen's already been at the forefront of the cryptocurrency space in many ways, helping bitcoin mining companies go public, leading financing for crypto startups and covering crypto within their Washington research group.

This year, they've upped the ante with the launch of their own coverage of the bitcoin mining sector.

"It's a new space, nascent industry," Stephen Glagola said. Glagola is Cowen's equity research analyst for cryptocurrencies and digital assets. "A lot of education and work still needs to be done in terms of just getting everyone on the institutional side up to speed on bitcoin mining and cryptocurrency in general," he said.

"I would say bitcoin mining is the start of broader coverage for Cowen," he added.

Glagola spent over eight years covering the media and entertainment sectors and providing stocks recommendations on the likes of DraftKings and LiveNation. He was also featured in Insider's 2021 list of rising stars in equity research.

Bitcoin is a completely different business model, Glagola said. He's spent almost every waking hour of the last few months getting up to speed on the business model.

"I would say I characterize the bitcoin mining industry as a commodity business at the end of the day, with a new technology wrapped around a new technology," Glagola said.

But Glagola doesn't want to be making a broad call on the commodity itself. Instead he's focused on the micro company-specific factors that will drive those businesses over the next 12 to 24 months.

"I really wanted to focus on really enlightening investors on the economics of these businesses, and just really hone in on the mining economics," Glagola said.

Bitcoin's value is determined by supply and demand, Glagola said. It's impossible to value it using a classic discounted cash flow model, because there is no cash flow.

"We know the supply curve is fixed, we know the production schedule of bitcoin," Glagola said. "The value is really going to come from the demand curve, which is variable."

The lack of understanding about the microeconomics of miners and the importance of the supply and demand curve means investors are underappreciating miners as an investment opportunity, according to Glagola.

Miners that have cost leadership and production scale can provide asymmetric upside to volatile bitcoin prices, he said.

If bitcoin prices fall, the least efficient products on the network fall off, absorbing the decline.

The miners that continue to operate will benefit from a decreasing cost of production, which creates some downside protection, Glagola said. This decreasing cost of production could come from a fall in hash rate, or downward difficulty adjustments.

"The most efficient producers actually can maintain fairly healthy margins, even on a decline in the bitcoin price," Glagola.

Many of the most efficient producers are the listed US public companies, Glagola said.

"The least efficient producers will take that hit initially if the price were to see any type of significant drawdown," Glagola said.

Alternatively, if bitcoin is rising, miners experience leveraged upside. This is because bitcoins are being produced at a much lower cost than the spot rate, Glagola said.

There's an upside benefit from already operating at scale, he added.

Bitcoin miners appear well positioned for this current market environment and can offer investors the opportunity to weather some of bitcoin's volatility .

Since hitting an all-time high of $68,789 in November, bitcoin has fallen by 39% and is currently trading around $41,800 - its lowest in several months.

Bitcoin mining stocks can operate with very healthy margins even if bitcoin trades in the range of $30,000 to $40,000 due to the current cost of production, Glagola said.

The challenge currently is that mining company stock prices still remain heavily correlated to the value of bitcoin itself, he added.

"What I've seen in my correlation analysis is that the more bitcoin held on the balance sheet, a higher percentage of your market cap , the higher correlation there tends to be with the stock," Glagola said.

However, this correlation doesn't take away from the businesses with strong fundamentals.

Glagola sees these strong fundamentals in companies, such as Stronghold Digital Mining and Iris Energy. These are also two companies that Cowen helped take public.

They are both execution stories, Glagola said.

"We have confidence in both management teams at both companies," Glagola said. "But it really is that both are being [discounted] because of higher perceived execution risk and I think it's really just a matter of both the management teams executing on their plans that they've laid out to investors over the next 12 months."

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Bitcoin Mining Stocks With Over 80% Upside & Sell-Off Protection, Cowen - Business Insider