By Scott Tzu
The bitcoin angle on MGT (NYSEMKT:MGT) is certainly an interesting one. We wanted to write about why this angle has us curiously watching a company that we don’t believe is anywhere near investable at its current state. But we’re watching.
MGT is a company that we have been watching over the last few months. We have tried to maintain a neutral stance on the company and provide balanced looks as to some of the ongoing saga surrounding the company. Most recently, we tried to help investors understand what the company’s new SEC subpoena could mean and what NYSE could have been thinking when they prevented the company from issuing the shares necessary for MGT to make a planned acquisition.
Today, we wanted to write about why we are keeping one eye on MGT’s bitcoin mining operations. While we are not advocating for a position in the company, especially now that it has regulatory scrutiny on it, the mining of bitcoin is the first business related concept to come out of the company that has intrigued us in the slightest bit.
Yesterday, the company released a press release stating that it has mined somewhere between $50,000 and $60,000 worth of bitcoin in a month. The company stated,
After the first full month of operations, the Company is pleased to have delivered on the metrics it outlined on September 13, 2016. Specifically, the Company has mined over 90 Bitcoins, presently valued at approximately $611 each. Also, MGT has begun to implement Phase Two of its Bitcoin mining operations scheduled to expand its processing power to more than five PetaHash by the end of the fourth quarter of 2016.
The Company has successfully executed on its strategy to maximize profits from mining operations by capitalizing on low cost hydroelectricity and using proprietary software to optimize and manage the performance of its machines. In addition, MGT is utilizing state-of-the-art 16 nanometer ASIC chips and highly efficient power supplies, further reducing the power requirements of mining operations.
“I wish to thank our shareholders for the positive feedback we have received since completing the first phase of our Bitcoin project. Our machines have been working flawlessly at full potential with a very high level of efficiency. We are excited and ready for the expansion of this activity as we implement the second planned phase,” stated Robert Collazo, Director of Operations for MGT’s Bitcoin mining operations.
This is the first sign of real revenue for MGT. About $60,000 per month equates to about $720,000 per annum. And the company is going to be scaling up their mining operation. Without a breakdown of costs, its tough to guess as to what this means for the bottom line (probably nothing significant for a company with MGT’s market cap); but, we’re watching.
We know that bitcoin mining operations can actually be a profitable endeavor. It costs a significant sum of money to set up the computing power necessary to mine bitcoin on a large scale, and the price of the end product relies significantly on the spot price of bitcoin at the time. It can be a gamble, especially when you are paying the overhead for the hardware and electricity upfront, but it could also be a gamble that could be lucrative if you are optimistic on the future of bitcoin like we are.
Most large bitcoin mining operations cost several million dollars to put together. With the occurrence of coins being mined recently halving, the computing power necessary to mine the same amount of coins one normally would have mined months ago has doubled. Time is of the essence in mining bitcoin, as production of coins will have once again over the next couple of years until it eventually asymptotes upwards and peaks out at its finite number of around 21 million bitcoins. But the time hasn’t passed yet.
For a scrutinized company like MGT, we see the mining operation as a two-part business operation. First, the company can make a small profit mining bitcoin for about $610 per bit coin, we are fairly certain. Second, if the company is going to house bitcoin and become a vault for its own bitcoin, we think that the pay off could be significantly higher.
Those that read us regularly understand that we are long a small amount of bitcoin because we believe that the future value of this one financial asset could rise exponentially, depending on how often it is used as a flight to safety from central-bank-run currencies. We’ve advocated in several of our articles getting exposure to bitcoin in several different ways in order to create some diversification. For instance, we own actual bitcoin and we also own shares in a bitcoin trust.
If MGT is simply going to house bitcoin and keep them on their balance sheet, the company could then in essence become a great way to play the price of bitcoin through the public market. Of course, the amount of bitcoin the company holds and the company’s market would have to converge significantly for these values to get anywhere close to one another, but the future benefit of holding an asset that could potentially appreciates significantly intrigues us.
Given the recent SEC subpoena and the current scrutiny around John McAfee and his business, we would not want to own shares of MGT right now. However, we promise to keep one eye on the company’s bitcoin mining operations and keep an open mind about potential business prospects involving bitcoin going forward.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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