no investment advice - A Case Study on Valuation and Price Sensitivity

Posted on December 09, 2023

I recently delved into the intricacies of new valuation techniques in a rapidly evolving market. My conviction is that objective targets are crucial; they mitigate emotional responses to price volatility and maintain focus on long-term goals.

Utilizing Bitfarms Ltd., a crypto mining company, I'll demonstrate how to target price determination while considering the development of shares, outstanding shares, and market capitalization trends. All referenced company information is publicly available.

The current market cap stands at 719 Mn EUR, with a historical peak around November reaching 1.6bn EUR. The number of shares outstanding has increased from 170 Mn to 278 Mn. One could speculate that issuing more shares serves to psychologically reduce perceived price; I remain undeterred by such tactics.

At the end of November, Bitfarms issued additional shares to institutional investors. Proceeds are earmarked for acquiring miners, expanding infrastructure, and bolstering working capital. While expansion is positive, it begs the question of shareholder dilution. Selling shares at C$1.35 each resulted in a 17.33% dilution, potentially decreasing individual share value. Prior to this, shares traded at C$1.61, which adjusted post-dilution would be C$1.34.

Fast forward two weeks, and the share price has leapt by 143%. If we adjust for dilution, the "real" share price would be C$2.92. Such a metric is vital for forecasting. Since December 2020, the outstanding shares have surged by a factor of 3.46. This growth pattern might signal anticipation of another bullish phase for the company, historically aligning with new share issuances and funding rounds to enhance mining operations.

Investors could anticipate an average dilution rate of 59.31% based on the historical growth rate of outstanding shares. With Bitcoin's limited supply, increasing demand could at least replicate the previous market cap of 1.6Bn EUR, and potentially, a doubling of the cap seems plausible. Currently, the market cap approximates half of its historical maximum, not fully reflecting Bitcoin's 34% reduction from its all-time high. Yet, we anticipate seeing these peaks again. My personal stance, informed by historical patterns, suggests a significant price increase may not occur until 2027. Whether the market dips or rises, my position remains advantageous, having recently divested some Bitfarms shares while retaining a stake.

Hence, the baseline scenario anticipates a return to all-time highs: a conservative estimate yields at least a 2x return on investment. In the last 30 days alone, Bitcoin's price increased by 16.74%, with Bitfarms' price soaring by 111.45%—a testament to the company's price sensitivity to Bitcoin's movements.

Three Scenarios for Bitfarms Ltd. in the Evolving Crypto Landscape

It's crucial to acknowledge the different risk profiles between holding Bitcoin and investing in a Bitcoin mining company. Bitcoin's fixed supply and market-driven price contrast with a mining company's value, subject to operational efficiency, mining costs, regulatory changes, and competition. While investing in mining companies is high-risk, it's not a mere gamble. These companies provide leverage to Bitcoin's price; their stock may experience disproportionate gains with Bitcoin's rise, yet also suffer more when it falls, compounded by share dilution.

Worst-Case Scenario: High Dilution and Low Bitcoin Prices

In our worst-case projection for the next 24 months, we confront a situation where Bitfarms Ltd. continues to dilute shareholder value at an alarming average of 59%. Concurrently, Bitcoin struggles to maintain its price, potentially falling below the critical $20,000 mark. This price point is significant as it approaches the cost of production for one Bitcoin, potentially rendering mining operations unprofitable. Should these conditions persist, particularly with inadequate preparation for Bitcoin's halving event, Bitfarms Ltd. could face severe financial distress, possibly leading to bankruptcy. In this scenario, the investment value could plummet to zero, underscoring the high-risk nature of investing in crypto mining enterprises.

Moderate Scenario: A Return to All-Time Highs

In a more tempered yet optimistic view, we see Bitcoin's price ascending to $100,000 within the next two years. Bitfarms Ltd., anticipating this rise, has streamlined its operations to mine Bitcoin efficiently. The company manages to lower its dilution rate to a still significant 20-30%. With these adjustments, the market cap revisits its former apex of 1.6 billion EUR, pushing the share price to an estimated 6 EUR. This scenario yields a solid 2x return on investment over the 24-month period, a conservative yet favorable outcome.

Bull Case Scenario: Skyrocketing Bitcoin and Strategic Expansion

In our most bullish forecast, Bitcoin not only breaches the $100,000 barrier but soars to unprecedented heights of $250,000 within the 24-month window. Bitfarms Ltd. capitalizes on this surge by expanding its mining operations, establishing itself as a dominant force in the crypto mining industry. Through strategic growth and minimized dilution—around 5%—the company's market valuation could surge to 10 billion EUR. This scenario reflects not just the inflated price of Bitcoin but also the increased hashing power that Bitfarms contributes to the network. Here, investors could potentially see a 10x return, a testament to the lucrative, albeit speculative, nature of crypto-centric stocks.

Final Summary: Charting a Path Through Crypto's Unpredictable Waters

In scrutinizing the potential paths for Bitfarms Ltd., we're confronted with the stark volatility and speculative nature inherent in cryptocurrency and its associated industries. Each scenario we've painted—from the bearish to the bullish—highlights the delicate interplay between high-return prospects and the substantial risks that accompany them.

These scenarios serve not just as forecasts, but as strategic guideposts for investors who must balance their appetite for risk against the lure of potential gains. The crypto market is fickle, subject to dramatic swings that can test the mettle of even the most seasoned investors. To thrive in this environment, one must remain agile, with a willingness to pivot in response to market indicators. Adopting a stoic approach, we can navigate this uncertainty with a level head, acknowledging that while we strive for favorable outcomes, not all is within our sphere of influence. The philosophy of Seneca reminds us to hold our investments loosely, recognizing them as gifts of fortune that can be retracted as easily as they were bestowed.

As we speculate on Bitfarms Ltd.'s valuation potentially reaching 7 billion EUR, we are reminded of the importance of patience, diligent analysis, and the strategic timing of the next moves. It is with these tools that successful investors will chart their course through the tumultuous seas of cryptocurrency investment. As the New Year dawns—or rather, as we embark on the next 24 months of investment adventures—I extend an invitation for dialogue and exchange. Whether you're looking to discuss investment strategies or share ideas, I am happy to talk. Connect with me at info@sick-ventures.com, and let's discuss these exciting times in partnership.

Here's to a New Year filled with wisdom, prosperity, and the fortitude to face the unpredictable tides ahead.

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