Time to argue the case for Argo Blockchain
“…With money in the bank (digital or otherwise), increased infrastructural firepower, a stake in avant-garde blockchain developments, and – importantly – savvy communications, Argo Blockchain would seem particularly well placed to benefit from whatever advances the sector continues to make…”
Cryptocurrency miner Argo Blockchain (LSE:ARB), listed on the LSE Main Market, and since February the US OTCQX Best Market (OTCQX:ARBKF), has enjoyed a spectacular if not wholly smooth ride during bitcoin’s stop-start rally over the past six months.
Argo’s share price has soared from around 10p last December to around 140p, at times scaling heights over £3 a share. Led by CEO and co-founder Peter Wall, a technology entrepreneur, journalist, and filmmaker who now takes his salary in bitcoin, the company mines bitcoin from two server farms in Quebec, occupying a collective 60,000 square feet and running at a 20 megawatt capacity. In March Argo completed its acquisition of a 320 acre plot in Texas, where it intends to build a new 200 megawatt facility by Q1 2022.
Last month the company published annual results to 31 December 2020 that tell the story of its exceptionally strong performance towards the end of the year. Argo moved into profit for the first time, recording a £1.4m gain against a £0.9m loss for the previous year, and revenue of almost £19m, up 120pc. EBITDA increased from £1.4m in 2019 to £7.9m in 2020, the company’s capacity to respond to mushrooming bitcoin demand having been secured through investment in its infrastructure earlier in the year. Argo achieved ‘a 207pc increase in petahash mining infrastructure from 210 petahash at the end of 2019 to 645 petahash on SHA-256 and from 180 Megasols to 280 Megasols on Equihash’. In brief, it was able to mine substantially more bitcoin.
Swelling demand for the cryptocurrency allowed the company to take the hit to its mining margins caused by a ‘bitcoin halving’ last May: the bitcoin protocol requires that the amount of the coin issued to miners as a reward for mining a block be cut by 50pc every four years so as to maintain the currency’s fixed supply. According to the currency’s founding White Paper, only 21 million bitcoins can ever be mined.
Argo’s busy 2021
Argo has maintained a positive news flow this year. The company reported its most profitable quarter to date in Q1, increasing its revenues to £13.4m at a mining margin of over 80pc – a mining margin is the return after power and hosting costs and before administrative and salaried expenses. In April Argo recorded a fourth consecutive month of record mining revenue and profits generating £6.70m.
The company has further strengthened its infrastructure. In February it brought 4,500 new heavy duty mining computers online, adding 430 petahash to its installed computing power, which now stands at 1,075 petahash. And last month it took control of the mining facilities in which its machines are hosted, completing the acquisition of the two Quebec data centres. In March Argo secured funds for its near term growth strategy, completing a placing for approximately £26.8m. Some £7.3m will be used to fund a 25pc shareholding in Pluto Digital Assets Plc, a company focused on in identifying emerging opportunities in the decentralised finance space, which Argo hopes will give it a stake in early-stage projects with high return potential. The remainder will be used to ‘pursue strategic opportunities in crypto mining, capital investment, DeFI/Web 3.0 initiatives, and general working capital purposes’.
Bitcoin’s ongoing story
The financial world’s fascination with bitcoin and wider blockchain technologies has continued unabated since the currency began its vertiginous rise, which we looked at in-depth in January. Major developments since then have included the NASDAQ listing last month IPO of Coinbase, the largest US cryptocurrency exchange, the holder of some 56 million retail customer funds, and the first major crypto company to go public in the US. Described as today’s equivalent of the Netscape IPO that pushed the emerging world wide web to the forefront of mainstream consciousness back in the mid-90s, Coinbase has ridden the crypto-bull run, its earnings rising to $1.1bn on revenues of $1.8bn over the past year, a nine-fold increase. More crypto listings are in the pipeline, including Coinbase’s rival exchange Kraken, and Bakkt, an Intercontinental Exchange-backed provider of blockchain wallets. On IPO investors valued Coinbase at $72bn, putting it equal with BNP Paribas, a French bank founded in 1848.
Our feature on Coinsilium (AQSE:COIN) (OTCQB:CINGF) discussed another significant development, the remarkable surge of interest in NTFs, digital assets exchanged and held on the blockchain, certified and digitally stamped as unique. A jpeg file comprised of digital sketches created by the artist Beeple, made global headlines when it sold for $69.3m. The sale is the most extreme example yet of the rapidly appreciating market for digital artwork sold through the NFT framework. Much of the investment community looked askance at the development, but it proved that for many younger investors digital assets are just as real, if not more so, than physical objects. A breakdown of the bidders for art work by Christies, which oversaw the sale, indicated that 91pc cent were new to the auction house, and 64pc were aged under 40. Research from broker Charles Schwab shows younger investors are more likely to buy cryptocurrencies than equities, and more than half of those surveyed had traded digital currencies.
Despite wild and unpredictable oscillations in bitcoin’s price – often hour by hour – the bubble has not yet burst. The currency’s value is around $45,000 (at the time of writing!). Just last October it was $10,000. Some $54bn is invested across 120 cryptocurrency funds compared with $3.5bn across 89 funds a year ago. Bitcoin bulls insist that the current rally is different from the currency’s 2018 adventure, when its price collapsed from $16,000 to just $3,000, arguing that it is underpinned by demand from professional trading firms and institutional investors, not just opportunistic day traders.
Although the Financial Conduct Authority continues to forbid the sale of crypto derivatives to UK retail customers, warning this year that investors ‘can lose all of their money’ when punting on cryptocurrencies, one of the clearest indications yet that mainstream financiers are considering the longer term possibilities digital currencies might offer came when Rishi Sunak addressed UK Fintech Week last month. The Chancellor sparked talk of a possible ‘Britcoin’ by announcing a Treasury and Bank of England taskforce that will examine the possibility of a UK Central Bank Digital Currency. Referencing the fact that the UK received $4.1bn of fintech investment in 2020, more than the next five European countries combined. He suggested London markets could potentially become the financing launch pad for businesses innovating to revolutionise how the system itself works. Earlier this month further respectability was conferred when hedge fund legend Stanley Druckenmiller argued bitcoin is here to stay as an investment asset class, suggesting limited supply, as well as its durability, divisibility, and portability, qualify it as credible store of value, a kind of digital gold.
Elon Musk, crypto kingmaker
There have been somewhat more mixed signals from crypto’s most influential advocate, Elon Musk. The mercurial entrepreneur’s statement earlier this year that Tesla had bought $1.5bn worth of bitcoin and would accept it as a means of payment helped power the currency’s surge earlier this year. He almost single handedly inspired the rise of another cryptocurrency dogecoin, which soared by more than 800pc last month, touching a market value of $70bn. Musk has even said that SpaceX will accept dogecoin – which started off a crypto joke named after its creator’s dog – as payment, tweeting that the commercial space exploration firm will launch the ‘DOGE-1 Mission to the Moon’ early next year.
But the self-styled Tesla ‘Technoking’ seems to have had a change of heart this month, calling dogecoin ‘a hustle’ on US TV, sending its value down 15pc, before announcing Tesla will no longer accept the cryptocurrency as payment, and will not trade its bitcoin holdings. The currency, which jumped 15pc on the day that Musk’s bitcoin investment was revealed, fell by 6pc the day after the about-turn.
Musk’s reasons highlight perhaps the two most fundamental challenges to the future of cryptocurrencies: their stability as a means of exchange and carbon intensity. The latter is emerging as an existential threat given the climate change concerns expressed by the younger generations who have so far been the quickest to adopt cryptocurrencies.
Bitcoin’s climate challenge
Analysis by the University of Cambridge shows that the infrastructure used to verify bitcoin transactions uses more than 121 terawatt-hours annually, equivalent to the entire energy consumption of the Netherlands during 2019. Around 60pc of bitcoin mining is powered by fossil fuels, and two-thirds of it by Chinese coal plants: a temporary cessation of coal production recently in the province of Xinjiang cut the bitcoin hashrate by a third. Crypto mining also generates vast amounts of e-waste because it burns through computers so quickly.
The industry is scrambling for initiatives to address an increasingly serious image problem. A new report by Square, a fin tech company run by Twitter CEO Jack Dorsey, and endorsed by avant grade investment house Ark Invest and Musk, argues that bitcoin miners must tap into the surplus energy produced by renewables companies when sunlight and wind are abundant, energy that – at least until battery solutions are rolled out at scale – is often wasted. Some crypto miners are using natural gas, a wasted byproduct of oil drilling, to fuel their operations: the International Energy Agency calculated that in 2018, gas flaring caused 275 million metric tons of CO2 emissions, more than the carbon emissions of Argentina.
Argo’s communications channels show the company is keenly aware of the issue, CEO Peter Wall telling one interviewer that ‘We cannot keep using fossil fuels to mine cryptocurrencies.’ The company is negotiating an agreement to source the energy for its Texas site from hydropower, seeking to follow in the footsteps of cryptocurrency miners in Iceland and Norway powered by hydro-electricity and geothermal energy. In March Argo signed an MoU with DMG Blockchain Solutions to launch the first bitcoin mining pool powered exclusively by clean energy, and last month signed the Crypto Climate Accord (CCA), a private sector-led initiative with 40 signatories including 20 prominent cryptocurrency companies, declaring an intention to decarbonise the global cryptocurrency industry and transition the sector to net-zero greenhouse gas emissions by 2040. The CCA is ‘developing a working group to more clearly outline the accord’s aims while deploying new technologies that increase the transparency of the renewable energy sourcing of crypto mining’. These and other initiatives have drawn charges of greenwashing, but they are signs the industry is acutely aware of the mortal threat it faces if it does not take credible action. The industry’s opponents are pressing for legislation to stop bitcoin mining altogether.
Argo: a gateway to bitcoin?
As we discussed in our January article and subsequent features on cryptocurrencies, investors taking a stake in bitcoin should not expect a serene journey. The price is as charged as an electric wire. There are very few crypto funds and ETFs, and those that exist are heavily diluted by regulators. The industry’s long-term future remains uncertain. But bitcoin and the underlying blockchain technology do now seem sufficiently embedded to persist in some form, with a robust community behind them, and leading corporate and institutional investors thinking through how the technologies might be integrated into the world’s financial machinery.
With money in the bank (digital or otherwise), increased infrastructural firepower, a stake in avant-garde blockchain developments, and – importantly – savvy communications, Argo Blockchain would seem particularly well placed to benefit from whatever advances the sector continues to make.
