Mining By Another Name Is … Crypto

This week’s #silversqueeze was more of an “end-of-first-date, let’s-just-be-friends side hug” than a big squeeze But it was fun theater either way. There are, however, some ripples in the water that are causing other mining stories to move. I’ve written a lot about traditional mining lately (and will continue to in the future), but today let’s go in a different direction. Fast and Furious By way of background – I founded and ran a blockchain company a few years ago. Bitcoin and Ether have had a fast and furious week thus far. As of this writing:
  • BTC = up 16.3% since Sunday to $38,691
  • ETH = up 32.3% since Sunday to $1,691
But I’m not here to talk about owning crypto, which I think is a good long-term hold (and certainly high-octane to trade). We know that crypto is highly volatile … But there are some dots to connect on a few crypto companies. Digital Convergence A number of ripples are colliding and amplifying Gary Gensler, a crypto advocate, is going to be the next SEC Chairman … And rising crypto prices are causing systemic problems that can be exploited. Let’s take a look at Biden’s nominee to head the SEC, who will be instrumental to the future of crypto currencies … Gary Gensler, SEC Gensler has a deep background in crypto. He has testified on digital currencies policy and regulation before Congress and has taught blockchain and digital currencies at the MIT Sloan School of Management. Although the Senate has not yet scheduled a hearing on his nomination – it’s busy with other priorities (and some nonsense) – he is expected to easily pass. He received 88 Senate votes for confirmation as chairman of the Commodity Futures Trading Commission in 2009 when Democrats controlled the majority. Gensler has a reputation as a tough regulator who is expected to bring greater federal oversight to the crypto market. And he’s been very open about his views on crypto:
  • Pure-cash cryptocurrencies like Bitcoin “need more protection.”
    • Cryptocurrency exchanges require more regulation. “If it gets broad adoption, if we really think the crypto world is going to be part of the future, it needs to come inside of the public policy envelope,” Gensler said in 2018. “That means we need to guard against illicit activity. And yes, we need to protect investors. The crypto exchanges, big exchanges like Coinbase, need to come within the SEC or the CFTC.”
  • Greater oversight will lead to greater mainstream adoption.
Gensler has also advocated against illegal securities offerings and will support the SEC’s efforts to go after them, such as the recent lawsuit against Ripple Labs Inc. related to its crypto currency XRP. In a 2019 keynote at Harvard Law School, Gensler said, “I don’t think the SEC is going to leave many (initial coin offerings) off the hook.” Regulations can be positive or negative, but Gensler’s positions are generally viewed as good news for digital assets.  He’s seen as open-minded about crypto and he believes that regulators can play a role in boosting innovation. And greater main-stream adoption would most likely lead to more money in digital assets — and higher prices. The Downsides of Higher Prices Now for a little inside baseball — the crypto mining and its speciality hardware markets have historically predictable moves that track with the price of BTC and ETH. When crypto is down, hardware for “mining rigs” is ample and affordable but investment capital is scarce … When crypto prices pop, investment capital flows freely but hardware is scarce and expensive. I had a conversation over the weekend with a friend who runs a large server farm. His demand for space is going through the roof – everyone wants machines, but chips are scarce – which means that hardware prices are going vertical. Crypto Mining Ripples Crypto mining is the process of obtaining cryptocurrencies by solving cryptographic equations with computers. “Miners” validate data blocks and add transaction records to a public record, or ledger, known as a blockchain. The global crypto mining market is projected to go from $1b+ today to $2.6b in 2026, for a 16.8% compound annual growth rate. COVID hurt crypto mining companies, both logistically and in terms of miner supply. A return to post-COVID normal will be a positive factor for crypto miners, so I’m going to watch a few: Riot Blockchain Inc. (Ticker: RIOT): This Colorado-based company focuses on BTC mining and has a market cap of $1 billion+. Over the past year it has increased its BTC mining hash rate by “an expected 65%” by upgrading chips and machines. The company has so far been unprofitable but the increase in BTC price could be a catalyst for change. Marathon Patent Group (Ticker: MARA): This Nevada-based company made big moves in 2020 and grew to a market cap of $600 million, with an exponential growth rate as BTC prices increase. Marathon invests in expansion, so further BTC price appreciation should boost profitability. Canaan (TICKER: CAN): Most BTC mining equipment comes from China, and Canaan is a Chinese BTC hardware manufacturer. Rising BTC prices should lead to more hardware sales. In September 2020, the company repurchased $10mm shares. This was a fun trip down the crypto mine. Back to more tactile efforts in the next issue. Cutting Through the Noise for You. Frank

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