MGT Capital Investments Inc. (NYSEMKT:MGT): Untangling The Latest Bitcoin Mining Update

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MGT Capital Investments Inc (NYSEMKT:MGT) is bang in the middle of a swarm of ambulance chasers right now, and it’s press release stream is warped as a result. The average investor logging on to a news feed will see MGT surrounded in lawsuits, litigation deadlines, that sort of thing. Buried below this mountain of bad press, however, is a recent update as to the company’s bitcoin mining operation.

This is the first time we’ve had an update on this sort of thing from the company, and it finally offers some insight into the scale and prospects for this area of McAfee’s business. For many, this is still a murky operation, but we’ve attempted to shin light on the various aspects of McAfee’s MGT over the last few months, and now it’s time to do the same here.

So, most reading will know what bitcoin is by now, and will have some idea of how it’s mined. Simply put, a miner uses his or her computing power to verify transactions on the blockchain (bitcoin’s blockchain) and in return, receive an amount of BTC. The amount returned shrinks over time, and is very small right now (and only going to get smaller) and is dictated by what’s called Difficulty. Difficulty increases somewhere around two or three times a month, depending on the transaction rates during the month in question.

So, McAfee says he has mined around 90 BTC in the first full month of operations. This falls pretty much in line with the current difficulty, and the hashpower (think of this as compting power) he reportedly has at his operation in Washington State.

Initially he said the target hashrate was was 2 Petahash. An update mid September altered this to 2.6. The screenshot below illustrates these numbers and the expected BTC output across the period in question:

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Note, a couple of things are different on the above calculation than the MGT calculation. First, Difficulty will have been lower (not massively, but a bit) and so monthly BTC haul would have been a bit higher (falling in line with the 90 that the company claims to have generated in the first full month). Second, the price this calculation is based on is around $10 higher per BTC than the MGT calculation, which was $611 per BTC (price has risen a bit since the press release).

So next month, the same power is going to generate 76 BTC, or around 7% lower than this month. However, McAfee has said he is going to expand to 5 Petahash before the end of 2016, and then 10 Petahash early 2017. For reference, an increase in Pethash just requires an increase in mining power, and MGT is using ASIC miners, so it’s just a case of buying this extra power.

Estimated Difficulty for the end of first quarter 2017 is 3.35 (this is estimated, and assumes a little over 2.8% Difficulty increment ). If MGT can up its hashpower to the target 10 Petahash by then, here’s what the facility will be generating:

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More than 231 BTC monthly. At current rates, that’s worth a little over $144,000.

Now, the problem is electricity. To run this sort of hashpower, electricity costs are high. In a standard operation, the cost would at very best make the profitability razor thin. MGT is using hydroelectric power, however, and so is far more profitable on its operations than other entities in the US. Hydropower is the future of mining bitcoin. A number of the world’s biggest mining operations are in Tibet right now using hydro power. Not only can you use the electricity, but you can also use the water to cool the miners. Again, this may sound like nonsense to some readers, but it’s happening, right now.

As outlined here, MGT is attempting to compete with the some of this biggest miners in the world, all based in China.

More importantly, MGT has some of bitcoin’s biggest names supporting these operations. Roger Ver, Erik Vorhees and Bruce Fenton all have a stake in MGT, and these are demigods in the cryptocurrency sector. If there was anyone we’d want associated with the company as far as legitimization goes, it’s these three.

We’re not saying that MGT is going to justify its market capitalization (or even add value, right now) with these operations. Later down the line, however, there’s massive potential. This is just the beginning.

As the supply of bitcoin constricts (it’s limited at 21 million BTC, and currently circa 16 million of these have been mined) common sense suggests per coin price will rise. The degree to which, nobody really knows. There are estimates that base price on the market cap of gold, and these put the price of 1BTC in the hundreds of thousands of dollars’ region. This is probably optimistic, but that MGT is hoarding BTC while it can, and doing so with very low output costs (cheap hydroelectric power) provides a nice cushion to support market capitalization and fund future operations medium term.

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Disclosure: We have no position in MGT and have not been compensated for this article.

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