Key Takeaways

• Bitcoin miners are facing pressure on their margins due to current market conditions.
• The upcoming Bitcoin halving is a critical event that miners need to factor into their strategies.
• Bitcoin miners are increasingly shifting focus towards providing data center capacity for AI workloads.
• The demand for data center capacity for AI workloads is expected to remain robust.
• Despite market fluctuations, the demand for Bitcoin miners remains strong.
• Co-location leases help Bitcoin miners avoid aggressive capital expenditure cycles.
• Hyperscalers are offering better financing terms to Bitcoin miners, indicating a shift in negotiation dynamics.
• Data center REITs are trading at a discount compared to traditional data center companies.
• Continuous access to power is essential for maintaining data center valuations.
• Bitcoin miners often enter co-location leases, avoiding GPU capital expenditures.
• The financial challenges faced by Bitcoin miners are closely tied to market price levels.
• Strategic shifts towards AI workloads indicate resilience in the Bitcoin mining industry.
• The leasing model provides a strategic advantage by mitigating financial risks for miners.
• Better financing terms from hyperscalers could impact overall market dynamics.
• Understanding the valuation metrics for data center REITs is crucial for investors.

Guest intro

John Todaro is Managing Director of Crypto & HPC/AI Equity Research at Needham & Company. He launched Needham’s dedicated crypto coverage in 2021. Todaro analyzes Bitcoin miners’ pivot to AI data center hosting and their equity valuations amid market stress.

The financial challenges of Bitcoin mining

• The current market conditions are putting pressure on Bitcoin miners’ margins.

  — John Todaro

• Miners face a danger zone when operating at breakeven costs.

• If you get you know in the fifties low sixties you know you’re putting that margin a little bit more under pressure.

  — John Todaro

• The Bitcoin halving event adds another layer of complexity to miners’ strategies.

• You have to think what the next halving is coming up that’s starting to loom right.

  — John Todaro

• Market price levels directly impact mining profitability.
• Miners must adapt to fluctuating market conditions to maintain profitability.
• The financial challenges highlight the need for strategic planning in the mining sector.

The shift towards AI workloads

• Bitcoin miners are increasingly focusing on AI data center capacity.

• Providing data center capacity for AI workloads hasn’t changed at all from our last conversation.

  — John Todaro

• The shift towards AI workloads is a response to Bitcoin market weaknesses.

• If anything they’ve gone more into that with the Bitcoin weakness.

  — John Todaro

• The demand for AI data center capacity is expected to remain strong.

• The demand is is still very strong and if anything has gotten better.

  — John Todaro

• New leasing contracts reaffirm the strong demand for AI workloads.
• This strategic shift indicates resilience in the Bitcoin mining industry.

The demand for Bitcoin miners

• The demand for Bitcoin miners remains strong despite market fluctuations.

• The market is viewing it a little bit longer term.

  — John Todaro

• Long-term market perspectives influence demand for mining equipment.

• How much cap bags are we gonna ultimately spend on this?

  — John Todaro

• The refresh cycle of mining equipment is a concern for the industry.
• The ongoing demand suggests a positive outlook for Bitcoin miners.
• Understanding the relationship between AI spending and mining demand is crucial.
• The demand dynamics highlight the importance of strategic planning.

The role of co-location leases

• Co-location leases help miners avoid aggressive capital expenditure cycles.

• A lot of them are doing colo leases so you you’re not on the same kind of aggressive capex cycle.

  — John Todaro

• These leases mitigate financial risks by avoiding GPU depreciation.

• You at least don’t have that very real and significant depreciation on the GPUs.

  — John Todaro

• Co-location leases provide a strategic advantage to Bitcoin miners.
• The leasing model allows miners to focus on operational efficiency.
• Understanding the structure of co-location leases is crucial for the industry.
• This approach highlights the importance of financial strategy in mining operations.

The impact of hyperscalers on mining

• Hyperscalers are becoming more lenient with Bitcoin miners.

• Hyperscalers are being a little bit more lenient with their these counterparties.

  — John Todaro

• Better financing terms are being offered to Bitcoin miners.

• They’re also looking to or willing to extend full credit over the entire length of the lease.

  — John Todaro

• This shift indicates a change in negotiation power for miners.
• The impact of hyperscalers could affect overall market dynamics.
• Understanding the dynamics between hyperscalers and miners is crucial.
• This trend highlights the evolving landscape of crypto investments.

Valuation of data center REITs

• Data center REITs are trading at a discount compared to traditional companies.

• If you comp them to data the large traditional data center REITs like Equinix or Digital Realty these are trading at a discount.

  — John Todaro

• Investors need to understand current market conditions and valuation metrics.
• The discount presents potential investment opportunities in the sector.
• Continuous access to power is crucial for maintaining data center valuations.

• You need to show that you can continuously get power.

  — John Todaro

• Power access impacts the business model and valuation of data centers.
• Understanding operational challenges is key for investors in this space.

The importance of power access

• Continuous access to power is essential for data center companies.

• That is a big question in the market right now.

  — John Todaro

• Power access impacts the valuation and market perception of data centers.
• Companies must demonstrate their ability to secure reliable power sources.
• This operational factor is crucial for maintaining competitive valuations.
• Understanding power dynamics is key for investors and operators alike.
• The reliance on power underscores the importance of infrastructure planning.
• This insight highlights a critical aspect of data center operations.

Co-location leases and GPU expenditures

• Bitcoin miners often enter co-location leases to avoid GPU capex.

• The argument I was making is these Bitcoin miners aren’t responsible for the GPU capex.

  — John Todaro

• Tenants bring in their own GPUs under co-location leases.

• It’s called a co-location lease where the tenant brings in their own GPUs.

  — John Todaro

• This structure reduces financial responsibilities for miners.
• Understanding co-location leases is crucial for financial planning.
• The approach allows miners to focus on operational efficiency.
• This strategy highlights the importance of cost management in mining.