In recent months, investors have been looking for ways to play bitcoin’s eventual turnaround. One way to profit off such a move is to bet against it. This strategy has paid off handsomely for some traders over the years, including those who shorted gold during the financial crisis. But there are risks involved. For example, you could lose money betting against bitcoin because many people believe it will continue rising indefinitely.
That’s why Irena Paparizou, CEO of Iris Energy Ltd., says she is taking a different approach. Instead of trying to predict where bitcoin prices might go next, Iris Energy focuses on making sure that it doesn’t fall too far. In doing so, the company aims to benefit from one of the most important aspects of cryptocurrencies — volatility.
The market for cryptocurrency futures contracts is still relatively small, but according to Paparizou, it’s growing rapidly. And while bitcoin futures trading volumes remain low compared to traditional markets, the trend suggests that institutional investors are warming up to the idea of investing in digital assets.
If the price of bitcoin falls, Iris Energy will make money buying shares of the currency and selling them back later at a lower price. If the price rises, Iris Energy will sell the shares and buy bitcoins again. The goal is simple: profit from falling prices without having to guess whether that happens.
An overview
Bitcoin miners are struggling to make money because both the difficulty level and the price of bitcoin remain low. This makes it difficult for miners to make enough profit to cover the costs of electricity and hardware maintenance.
The majority of bitcoin miners have already sold off their equipment due to this problem. However, some companies such as Bitmain continue to operate profitable operations.
Iris Energy is attempting to scale-up a large mining operation while promoting themselves as a green energy producer. They claim that they use renewable energy sources to power their facilities. In reality, they use coal to generate electricity.
Profitability vs. Hashrate
The Bitcoin mining industry is a competitive one. Those who mine find themselves competing against each other for the chance to earn the next block reward.
When the hashrate of the network is high, it’s generally more difficult for miners (and others) to get the block reward. This is because there are fewer transactions being processed per second. Miners must compete harder to solve blocks. They spend more money on electricity to keep up with the increased difficulty.
This doesn’t necessarily mean that there aren’t enough coins being generated. In fact, the opposite could be true. However, it does make it more expensive to generate those coins. As a result, profit margins decline.
In times like this, it makes sense for miners to cut back on spending. If prices drop, miners won’t lose much money. But if prices rise, they might end up losing money.
On the flip side, when the price of Bitcoin rises, it becomes easier for miners to turn a profit. More people want to buy Bitcoin. So, miners are able to charge more for their computing power. Profit margins increase.
Iris Energy
Iris Energy Inc. (NYSE: IIS) (TSX: IRF), a leading North American independent power producer focused on renewable electricity generation, today announced that it has entered into a binding agreement with Canaccord Genuity Corp., under which Canaccord will provide financial advice to Iris regarding the listing of shares of common stock on the TSX Venture Exchange (“TSXV”).
Canaccord will advise on the timing, structure and terms of the proposed initial public offering, including the size and price range of the IPO, and assist in preparing the prospectus required for the offering. In addition, Canaccord will arrange for the placement of the shares of common stock to be offered in the IPO.
The Company intends to use the net proceeds from the sale of the securities being offered pursuant to the IPO to repay indebtedness incurred in connection with the acquisition of certain assets located near the City of Fort Saskatchewan, Alberta, Canada, and to fund general corporate purposes.
Insiders and Institutional Holdings
Looking at the shareholder breakdown compared with peers, we see a larger position held by insiders. This is largely due to the fact that there are fewer shares outstanding than most companies listed on the NYSE. In addition, the company noted that the institutional figure for IREN is incorrect. The company contends that their institutionals holdings percentage is likely more in alignment with peers.
Shareholders in the US include individuals, trusts, investment funds, pension plans, endowments and foundations. Foreign investors include sovereign wealth funds, family offices, hedge funds, banks, insurance companies, mutual funds and pension funds.
The company stated that their institutional holding percentage for IREN is likely more in alignment than the public market figures.
Aspects of risk
Investors looking to invest in cryptocurrencies face significant risks. They include:
1) Regulatory Environment – Cryptocurrency companies operate in a highly unregulated space. This creates uncertainty around how regulators might treat them. For example, some countries have banned initial coin offerings outright. Others have imposed restrictions on trading activity. Some jurisdictions have even gone so far as to classify certain types of virtual currency as securities. As such, there is no guarantee that a particular investment strategy will work or that you won’t lose money.
2) Volatility – Cryptocurrencies are extremely volatile. Their value fluctuates widely over short periods of time, making it difficult to predict whether prices will go up or down. You could see losses of 50% – 90%.
3) Speculation – Cryptocurrencies are very much like commodities. People buy them because they believe they’ll appreciate in value. When people start buying, demand increases. And when demand increases, price goes up. But it doesn’t always happen that way. Sometimes, speculators sell off their holdings, causing prices to drop.
4) Mining Costs – Miners are required to purchase specialized hardware to verify transactions on the blockchain network. Because of this, mining costs vary depending upon where you choose to mine. If you decide to mine in China, you’re going to pay much less per unit of electricity than someone doing the same thing in North America.
5) Jurisdiction Risk – Many countries do not recognize cryptocurrencies as legal tender. So, while you may be able to use Bitcoin to make purchases, you cannot exchange those Bitcoins into fiat currencies. Instead, you’d have to convert them into another form of payment, such as US dollars.
6) Power Consumption – Miners consume large amounts of energy to run their computers 24/7. Depending on where you live, you may be paying a lot of money each month just to keep the lights on.
Here’s a summary
I’m looking for a short entry into Iris Energy because the company is now offering a dividend yield of over 10%. In addition, the company has been able to raise $1 billion in capital since listing earlier this year. This is a huge step forward for the company and could lead to a significant increase in revenue. I think the stock is undervalued given the potential upside.
The company operates in Australia and New Zealand where there is a large demand for energy storage solutions. They’re currently building out a massive lithium ion battery plant in Western Australia. Their target is to produce around 40 megawatts per year starting next year.
They also recently announced a deal with China’s state owned power grid operator to build a 50 MW solar farm in Queensland. The project is expected to start construction later this year and is scheduled to be completed in 2020.
In terms of valuation, the company trades at just 11x 2017 earnings estimates. Given the growth prospects, I see no reason why this won’t rise above 20x within the next few years.
If you’d like to learn more about how to buy stocks for income investors, check out my special report “How To Buy Stocks For Income.” You’ll discover 5 ways to profit from rising interest rates even during a rising inflation environment. Plus, I show you exactly what you need to know to invest successfully today. Click here to access your free report.
You May Enjoy
– Google Now Is Testing A New Feature On Android And iOS Devices
Google Now is testing a new feature called “recommended for you,” according to 9to5Google. This feature could be coming to Google Search, Maps, Gmail, YouTube, Chrome, and even Assistant. If this feature does come to fruition, it’d make sense because Google already knows what we’re interested in based on our previous searches.
The recommended for you feature appears in the bottom left corner of the screen. When you open up a web browser, the feature will show you news articles about topics that are relevant to you. In addition, if you’ve searched for something recently, Google will suggest related queries.
This feature could be useful for those who use Google Now daily. However, there’s no way to turn off the feature. So far, this feature seems to work best in the United States.
Leave a Reply