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Do you want to bet on Bitcoin but don't have any? Take a look at these mining stocks.

Before Bitcoin came to town, Rockdale, Texas, wasn’t attracting much business.
Rockdale, a small town of 5,600 people an hour outside of Austin, lost a key employer when Alcoa closed its aluminium smelter in 2008. However, Alcoa's electrical infrastructure is being repurposed for a new purpose: Bitcoin mining.
At the ancient Alcoa complex, over 11,000 computers hum 24 hours a day, performing billions of calculations every second to help run the Bitcoin network. The devices, which were run by Riot Blockchain (ticker: RIOT), contributed to the "mining" of 1,292 Bitcoins in the third quarter, bringing in $54 million in revenue for Riot.
Rockdale is now one of North America's largest Bitcoin production facilities. Riot plans to add 63,000 computers by the end of 2022, more than doubling its mining capacity.
"We intend to make it one of the world's largest Bitcoin mining assets," Riot CEO Jason Les adds. The Alcoa site had a big electrical switching yard, which was excellent for a miner looking to expand to 700 megawatts of capacity, which would be enough to power 650,000 households.
Crypto mining has been accused of contributing to carbon emissions due to its high electricity usage. However, if you believe in Bitcoin's future, the miners provide an alternative to purchasing the coin: they bet on the network's high-tech plumbing and potential for substantial gains.
Riot is appealing due to its expanding market share and increased efficiency as it expands. Another stock to examine is Core Scientific, a miner that aims to go public through a merger with Power & Digital Infrastructure Acquisition, a special purpose acquisition firm (XPDI).
Marathon Digital Holdings (MARA) has a chance to win as well. The stock dropped this week after the Securities and Exchange Commission announced a probe into the past issuing of restricted shares.
Marathon CEO Fred Thiel tells Barron's, "There's no claim we've done anything improper." Marathon is bringing in mining "rigs" from Malaysia, he says, and expects to more than triple its Bitcoin capacity in the next year.
As Bitcoin has doubled, mining stocks have gained an average of 291 percent this year, significantly outpacing the Nasdaq Composite's 25 percent rise. They are, however, extremely sensitive to fluctuations in Bitcoin values and investor mood. Marathon, for example, was up 628 percent this year until losing more than a third of its gains as a result of the SEC probe and a larger convertible bond offering.

Digging for Digital Gold

Here are three Bitcoin mining stocks to consider:

(1) XPDI is expected to merge with Core Scientific next year. Data for Core Scientific postmerger (2) Price change from IPO earlier this year. E=estimate

Despite the volatility, large-scale miners are profitable, according to adjusted earnings before interest, taxes, depreciation, and amortisation, or Ebitda. According to consensus forecasts, Riot's income would increase to $464 million next year from $220 million this year. From $125 million, Ebitda is predicted to rise to $324 million.

Core, situated in Bellevue, Washington, is also establishing itself as a market leader. The firm has units in Kentucky, Georgia, and North Carolina, and is establishing plants in North Dakota and Texas, with the goal of reaching 1,000 megawatts of total capacity by the end of 2022, outpacing every other North American miner. Core's goal is to provide infrastructure for other miners while also producing its own coins, resulting in more reliable cash flows than if it were a standalone miner.

Core also aspires to be carbon neutral, utilising renewable energy and carbon offsets. "They have solid long-term contracts with energy providers," says an XPDI shareholder who owns more than 5% of the company's stock. He believes the stock will eventually reach $20, up from $13.75 recently. When the merger comes up for a vote in January, investors can cash out at $10, just like any other SPAC.

Core is a "best in class" operator, according to D.A. Davidson analyst Christopher Brendler, who expects earnings to rise as the company expands. Over the next year, he expects revenue to more than double to $1 billion, with adjusted Ebitda of $565 million.

Marathon, on the other hand, is betting on an asset-light strategy, contracting for energy from hosting facilities and investing nearly all of its money in mining machines. The company employs only ten people and outsources the majority of its activities. Thiel claims that the company is buying machines in bulk for 30% less than the industry average, resulting in Bitcoins costing around $6,200, significantly below the $10,000 industry average. Marathon's sales are expected to more than quadruple between 2021 and 2022, hitting $750 million, resulting in Ebitda of $581 million, according to Wall Street.

Bitcoin mining isn't the same as extracting gold from the ground. Rather, it entails the creation of Bitcoins as a byproduct or reward for confirming transactions on the blockchain network. Miners accomplish this by continuously running computers in order to estimate a string of alphanumeric characters for each block of transactions. If you guess correctly, the block is validated and added to a chain of preceding blocks (hence the term blockchain). The main prize for coming in first is payment in Bitcoin, which is distributed at a rate of 6.25 Bitcoins every block per the network's programming.

Along with the price of Bitcoin, one important factor is mining difficulty, or how many guesses the network makes each second to validate, or "hash," the next block. Exahash, or 10 to the 18th power hashes per second, is the unit of measurement for hash rate. It's already about 170 exahash and, according to Thiel, could more than double in the next year if miners can lock in power deals and get their machines up and running.

What is the significance of this? Because a higher hash rate reduces each miner's potential profits. After China stopped Bitcoin mining this summer, the rate fell, but it has since risen. Analysts predict that it will climb, making it more difficult for miners to receive Bitcoin rewards and requiring more electricity for each coin.

"We’re very focused on playing this arms race. But it will get harder going forward.

— Fred Thiel, CEO of Marathon Digital

Higher Bitcoin prices attract more miners, increasing the hash rate of the network. Miners are consequently locked in a never-ending arms race, constantly expanding and upgrading equipment in order to meet production goals. They also have a habit of raising funds in a series for new infrastructure and machinery, potentially diluting equity owners and putting a burden on their balance sheets. Riot, for example, paid $651 million for mining assets in Rockdale and promises to invest $160 million in infrastructure development. Marathon raised $650 million lately.

A greater carbon toll is another effect of rising hash rates. According to the Cambridge Bitcoin Electricity Energy Consumption Index, miners use 0.5 percent of the world's electricity. Companies may consume more electricity as mining becomes more difficult, potentially increasing carbon emissions even as many countries aim to reduce them.

Industry groups say that 58 percent of global Bitcoin production is now carbon neutral, owing to the use of renewable energies. El Salvador is using geothermal energy from a volcano to mine Bitcoin, which has become the country's official currency. However, coal is still used to make a lot of Bitcoin in locations like Kazakhstan.

With more than 40% of the global hash rate, North America is also becoming a mining hotspot. According to the industry, renewable energy currently accounts for a third of U.S. output, potentially lowering carbon emissions. Stronghold Digital Mining (SDIG), for example, intends to turn dangerous coal waste in Pennsylvania into Bitcoins.

"In energy markets that are correctly designed, miners don't contribute to carbon emissions," says Peter Cramton, an economist and former Texas energy regulator. He points out that miners in particular markets absorb renewables that would otherwise be wasted as surplus power. This can supply demand for wind and solar power providers, incentivizing them to invest in renewable energy with long-term clients. "Excessive power companies are looking to Bitcoin mining as a means to increase baseload usage for renewables," Thiel explains.

Riot planning to increase capacity in Texas and add a "immersion cooling" device to keep circuits cold. According to Riot, the cooling baths will increase the computers' hash rate by 25% and eliminate downtime, resulting in a 50 percent increase in overall performance.

"It will result in fewer machines producing the same hash rate," says Kevin Dede of H.C. Wainwright, who rates the company as a Buy with a $50 price target.

Mining stocks are popular on Wall Street because of their capacity development plans and high gross margins. The stock's multiples are far lower than those in other areas of crypto; exchanges like Coinbase Global (COIN) and mining chip maker Nvidia (NVDA) both trade at much higher multiples.

The miners' discounts indicate worries about their capital intensity as corporations compete for output, betting on greater prices for a hazardous and divisive asset. In other cyclical industries, like as Texas' century-old oil field, investors have seen this storey turn to tears.

As the hash rate rises, bitcoin mining will become more difficult. In 2024, the amount of Bitcoins given out for validating blocks will be cut in half, to 3.125 per block, prompting miners to increase capacity to compensate for lost revenue.

Costs are still cheap enough that large, efficient operators can make a lot of money. However, as the margins narrow, size will become more important than ever. Thiel says, "We're really keen on playing this arms race." "However,  it will get harder going forward.”