Bitcoin, Ethereum, And AI
One Of Our Two Lottery Tickets Last Month
Bit Digital, Inc. (BTBT -7.26%↓) was one of two “lottery ticket” trades we made last month in the Portfolio Armor trading Substack.
Uniquely for a Bitcoin miner, Bit Digital also has operations in AI and in Ethereum staking. I reached out to the company to find out more about it. Below is my Q&A with Bit Digital’s CEO, Sam Tabar. Following that, we'll close with a brief reminder about risk management, in light of the latest war breaking out between Israel and Iran.
For those of who you with too short attention spans to read this whole interview, I'm going to quote what I thought was the most important part of it right here. When I asked Bit Digital's CEO about their AI business, he said this:
I need to put capital into businesses that make money for shareholders and not just hope that Bitcoin goes up.
A Conversation With The CEO of Bit Digital
Portfolio Armor: Thank you for taking the time to answer a few questions about your business. Bit Digital has been actively staking Ethereum–do you know if any other publicly traded Bitcoin miners are doing this?
Sam Tabar—CEO, Bit Digital: As far as we are aware, no other publicly traded Bitcoin miner is staking Ethereum. We have pioneered a business model we call The Bit Digital Flywheel that harnesses the synergy between Bitcoin mining and Ethereum staking, allowing us to continuously earn rewards to reinvest back into our operations. The beauty of this business model is in its simplicity. Earn rewards by sustainably mining Bitcoin, exchange a portion of Bitcoin mining rewards for Ethereum, stake Ethereum to earn yield and accumulate rewards, use Ethereum yield to pour back into our operations, and Repeat.
PA: Bitcoin is sometimes analogized as “digital gold”--for investors who are only vaguely familiar with ETH as the second biggest coin by market cap, how would you describe it?
ST: Bitcoin is the perfect store of value and it will eventually replace gold as a store of value. Ethereum is a completely different technology and has many different use cases with its unique market characteristics. It has programmable language with smart contracts and will eventually replace the financial system and lawyers. Bitcoin and Ethereum are a powerful duo together.
PA: Could you elaborate on how Ethereum staking fits into your overall strategy, especially in terms of diversifying revenue streams?
ST: As Bitcoin margins shrink post-April halving, miners had to diversify into new revenue streams to stay competitive. We were well prepared for the halving. As just one of our three revenue streams, Ethereum staking compliments our Bitcoin mining and HPC/AI businesses. We think the concept of earning passive yield, in ETH terms, is very attractive relative to a static notional balance.
On another note, the initial approval of Ethereum ETFs marked another major milestone for mass adoption. However, we believe the ETFs may have flaws. Investing in an ETH ETF is one way to gain exposure to digital assets, but it excludes a major benefit ETH offers. The issuer cannot stake the Ethereum in an ETF, so it cannot earn yield or even access the network. As one of the only capital markets proxies for ETH staking economics exposure, Bit Digital offers shareholders exposure to both Ethereum and the benefits of staking, unlike the ETH ETFs.
PA; Can you elaborate on how you manage the risks associated with Ethereum staking, such as slashing or liquidity risks with liquid staking protocols?
ST: We do not currently liquid stake.
PA: Beyond the election in November, what potential catalysts do you see for BTC and ETH over the next several months, particularly with the ETF launches now in the rearview mirror?
ST: Besides the November election, shifts in monetary policy, such as potential rate cuts by the Fed, could drive renewed interest in digital assets as an inflation hedge. Increased regulatory developments, whether positive or negative, will affect both Bitcoin and Ethereum. Clarity or favorable rulings may attract more institutional investors, which will ultimately attract more retail investors. High inflation and economic uncertainty could further increase demand for Bitcoin as a store of value.
Even with the ETF launches in the rearview mirror, growing institutional interest in both Bitcoin and Ethereum remains a significant driver. More companies may follow in adopting blockchain technology, whether through holding digital assets on their balance sheets, or using DeFi and smart contracts for financial services.
PA: The other aspect of your business that seems unique for a Bitcoin miner is your AI infrastructure services. You have a fleet of Nvidia H100 GPUs at a Tier 3 data center (one with high levels of security and redundancy). Are these GPUs used for your mining operations as well? If not, are there any other synergies between your AI business and your Bitcoin mining and Ethereum staking?
ST: The H100s are used solely for our HPC/AI operations. Diversifying revenue streams by adding HPC/AI services and Ethereum staking to our core Bitcoin mining business has proven to be an effective strategy post-April halving. As someone running a publicly listed company, we need to think about shareholders and shareholder value. I need to put capital into businesses that make money for shareholders and not just hope that Bitcoin goes up. Hoping that Bitcoin goes up is not the right way to run a business.
Bitcoin miners can leverage their existing skills; procuring specialized hardware, selecting the correct data centers, and earning customers. We were able to build the HPC/AI business with the same team we had in place to run our Bitcoin mining business and have recently announced new key hires for Head of Revenue, Chief Technology Officer, an experienced sales team, and top-tier AI/ML engineers to help scale the HPC/AI business.
We like the steady and predictable revenue and cash flow stream that HPC offers us to complement our variable Bitcoin mining and Ethereum staking revenue. The HPC cash flow stream also provides us with cash flow that can be spent on Bitcoin mining equipment at the right stage of the cycle when ASICs are cheapest and other miners don’t have the cash flow to expand. Capital allocation optionality is really the key benefit of having these synergistic businesses in place.
PA: Can you elaborate on what AI infrastructure services entail, beyond the use of your GPUs?
ST: Our AI infrastructure services extend well beyond just renting GPUs. We provide customized solutions that optimize efficiency and scalability based on each customer's needs. In addition to supplying computational power, we manage the full infrastructure lifecycle, including network design, installation, optimization, and ongoing maintenance. We collaborate with top-tier data centers to ensure exceptional uptime and leverage our procurement expertise to get clients up and running at industry-leading speeds. Moreover, we have in-house machine learning engineering expertise and partnerships that help our customers enhance the efficiency of their training and inference processes. By offering support up the stack, we ensure that customers are maximizing the performance and value of the infrastructure we provide.
PA: Your stock is currently trading below $3 per share; share prices that low often suggest weak balance sheets at a company, but your balance sheet has no debt and considerable cash on hand. Have you considered a reverse split?
ST: We believe our stock is misunderstood, undercovered and undervalued. Our balance sheet is certainly not an issue with over $200 million of liquidity and no debt at the end of August. A Reverse split isn’t something we’re thinking too hard about at the moment, however. We think the share price will normalize over time as investors begin to understand the business, and also believe we are working on some exciting things that will catalyze the share price higher.
A Reminder About Risk Management
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