What now for Argo Blockchain and the future of Bitcoin
“…right now ARB’s focus is survival. The share price currently stands at 8p, down from 34p as recently as October and a fraction of the remarkable peak of 282p reached early last year. Its not clear whether ARB could be said to be in value territory, or whether the price is likely to go lower still…”
Cryptocurrency miner Argo Blockchain (LON: ARB; NASDAQ: ARBK) has been on a wild ride over the past two years, the company’s price touching heights of nearly 300p as recently as last February, before plummeting all the way down to 8p at the time of writing. A brutal combination of high energy prices and a prolonged slump in the value of Bitcoin has brought ARB to its knees. Can the North American based company survive, and, if so, where might it fit into a crypto sector humbled by a prolonged downturn that has shaken investor confidence?
ARB ‘mines’ Bitcoin by using banks of powerful computers to verify new blocks on the blockchain, the process through which new crypto tokens are deemed trustworthy in a financial ecosystem that bypasses third parties such as banks and exchanges. Miners compete against each other to verify blocks, receiving new tokens in return. Though mining is the company’s core business, ARB launched Argo Labs earlier this year to identify opportunities within the broader Web3 and blockchain ecosystem, including emerging decentralised finance (DeFi) technologies and the fast evolving world of non-fungible tokens (NFT).
Acutely aware of the sector’s extensive carbon footprint – Bitcoin mining requires extraordinary amounts of energy – ARB makes great play of the company’s green credentials. Committed to the adoption and verification of blockchains powered purely by renewable sources by 2025, ARB offset scope 2 and 3 greenhouse gas emissions over the past two years. The company’s commitment to sustainability was tested this summer when Texas energy regulators issued a conservation alert in response to severe heatwaves, obliging ARB to voluntarily suspend operations.
The company beefed up its crypto mining power over the past two years in anticipation of higher bitcoin prices, in pursuit of a self-hosted business model committing the company to owning and operating its own machines and infrastructure. It began rolling out the strategy last year with the acquisition of two data centres in Quebec: Mirabel, ARB’s first large-scale mining facility, and Baie Comeau, which draws on power from a local hydroelectric dam. The company’s flagship mining facility, Helios, located in Texas, is uses proprietary immersion-cooling technology designed to facilitate cost-effective, high-speed mining in warmer climates. The completed facility will draw on up to 800MW of electricity. The first phase, a 126,000 square foot data centre comprising some 50,000 machines supporting 200MW, commenced mining operations in May.
A change in the weather
Despite deteriorating market conditions ARB was able to report a steady ramp up in mining power through H1 2022, increasing the company’s hashrate capacity by 38pc from 1.6 EH/s (Exahash per Second – the speed of processing) at the end of 2021 to 2.2 EH/s by August this year. ARB acquired 10,000 new state-of-the-art S19J Pro machines, allowing the company to move beyond remaining third-party hosting arrangements, and was anticipating the delivery of 20,000 more for installation by October. ARB was able to report 939 Bitcoin mined during H1 2022, a 6pc increase on the previous year, and expected to achieve 3.2 EH/s of total hashrate capacity by the end of 2022 and to increase capacity in Q1 2023 to 4.1 EH/s. The company was also developing a custom mining machine in collaboration with ePIC Blockchain designed to maximise the performance of the cutting edge Intel Blockscale ASIC chip.
But ARB’s interims acknowledged the going was getting tougher, lower Bitcoin prices forcing the company to work ever harder to generate ever more tokens to maintain revenues. ARB’s mining margin was down to 71pc from 81pc in H1 2021, and revenues had fallen 14pc to £26.7m. The company, which reported a pre-tax loss of £36.9m, was making greater use of derivatives to sell its Bitcoin at an average realised price of $28,500, realising hedge gains of $1,500 per coin. It was also raising capital through debt financing, securing £20.2m in March from crypto trading firm NYDIG, and access to a further £56.3m in May, tying both agreements to the value of its mining machines. ARB was also evaluating opportunities to execute a long-term, fixed price power purchase agreement (PPA) to lock in electricity prices and reduce exposure to short term price fluctuations.
By October, however, the company seemed to be in freefall. Rising energy prices, coupled with the continued depression in the crypto market, obliged the stark concession that it was taking ‘several strategic actions … intended to bring in additional capital to the business and ensure that the Company has the working capital necessary to execute its current strategy and meet its obligations over the next twelve months.’
Painful new measures designed to ensure ARB’s ‘working capital will be sufficient for … at least the next twelve months’, included the suspension of the company’s ambitions to continually expand its hashrate. 3,400 of the new S19J Pro machines had been sold for £6m, reducing ARB’s hashrate capacity to 2.9 EH/s. It had amended its existing equipment financing agreement with NYDIG, releasing some £5m cash. And it had entered into a non-binding letter of intent with a strategic investor to raise £24m through the issue of 87 million shares at £0.276p, in return for which the funder would take a 15.46pc holding in the company, and assume the right to nominate two new non-executive directors to ARB’s board.
A subsequent update, however, published with somewhat unfortunate timing on Halloween, stated that the company ‘no longer believes that this subscription will be consummated under the previously announced terms’ and while it was ‘continuing to explore other financing opportunities … there can be no assurance that any definitive agreements will be signed or that any transactions will be consummated. Should Argo be unsuccessful in completing any further financing, Argo would become cash flow negative in the near term and would need to curtail or cease operations.’
Scrambling to ‘complete such financing transactions to provide the Company with working capital sufficient for its present requirements, that is for at least the next twelve months from the date of this announcement’, ARB said it had sold a further 3,843 S19J Pro machines, representing around 384 PH/s of total hashrate capacity, for just under £5m, capping the company’s total hashrate capacity at 2.5 EH/s. It did, however, go on to deny reports that Quebec’s power utility had proposed to stop providing electricity for ARB’s ongoing mining operations. The company had spoken with representatives from the utility, and was ‘confident that its current access to power at its two Quebec facilities will continue for the foreseeable future.’
The future of crypto
The stark truth, however, is that, whatever internal measures ARB takes, the nature of the company’s business binds its fortunes to crypto market cycles, which – the rhetoric of Bitcoin’s champions notwithstanding regarding the currency’s supposed value as a hedge against inflation – have proved anything but counter-cyclical. Digital assets have sunk along with the wider tech sector this year.
After touching highs of $70,000 late last year, Bitcoin has rarely risen above $21,000 in recent months. Perhaps, as defenders argue, this is just another ‘crypto winter’, presaging an inevitable thaw and higher prices. But for some commentators ‘the length of this now-drab phase, combined with the thousands of job losses in the sector in recent months, suggests this is more of an ice age, with no grand theories emerging as the next source of fuel for rallies.’ As readers will well know, tech stocks have had a dreadful year, the NASDAQ falling by a third, one of the worst performances in any developed market. But Bitcoin has fallen further yet, by 70pc, reducing the industry’s market cap from $3.2tn to less than $1tn. The collapse of the luna token and the exposition of vulnerabilities with the supposedly trustworthy stablecoin ecosystem have shaken confidence. The average annualised volatility for Bitcoin is now the lowest since October 2020, the flat price leaving the market to long term bulls known as ‘Hodl-ers’, true believers ‘Holding On for Dear Life’. Morgan Stanley estimates that nearly four-fifths of all Bitcoins have not been used for any transaction in the past six months.
Miners like ARB have been caught in the embarrassing position of ramping up their capacity just as the price has tumbled, forced to use their expensive new firepower to tread water, or indeed limit losses, rather than make new gains, spending ever more on energy in order to generate more Bitcoin, locked in unhappy competition with their peers. Bitcoin’s hashrate has increased by two-thirds this year as miners have scrambled for revenue. A severe shakeout is underway. US-listed Core Scientific has warned it could file for bankruptcy protection by the end of the year, Computer North has gone under with debts of $500m, following former crypto stars including the lending platform Celsius Network and hedge fund Three Arrows Capital.
The immediate difficulties come on top of looming longer term structural challenges. The Ethereum ‘Merge’ that took place in September rendered mining for the currency – the second most used after Bitcoin – obsolete by switching to a different system for transaction verification, increasing the pressure on miners to double-down on the generation of new Bitcoins. And the next Bitcoin halving event is on the horizon, the process through which the reward for mining new Bitcoins is cut by 50pc to respect the protocol that underpins the currency’s value specifying that the coin’s supply be capped at 21 million. Halvings reduce the rate at which new coins are created and therefore lower the available amount of new supply, even as demand increases, placing even further pressure on miners to increase production to maintain revenues. The collapse last week of the crypto exchange FTX has further highlighted the profound challenges facing the sector. Described as ‘the crypto version of the 2008 Lehman Brothers shock’, the implosion came after panicking customers pulled $6bn from the exchange when it emerged its balance sheets had been padded by massive holdings of a digital token issued by none other than FTX itself.
The debacle may, however, expedite the development of regulations, currently before US policymakers, designed, it would seem fair to say, to save the sector from itself. By obliging industry participants to exhibit greater transparency, and breaking up concentrations of power – FTX was simultaneously a broker, proprietary trader, lender and custodian for the crypto world – proper oversight could do much to restore and maintain investor confidence.
Indeed, though it’s unclear how long the sector’s current slump might last, crypto is now embedded within the wider financial system. Governments are copying some of the underlying technologies themselves to experiment with central bank digital currencies (CBDCs) designed, to some as yet unknown extent, to complement established fiscal and monetary policymaking. And institutional investors have continued to build long term stake in the technology, signalling faith crypto is here to stay, in some form. This summer BlackRock, whose CEO Larry Fink had been highly critical of digital assets, launched a spot Bitcoin private trust, responding to ‘substantial interest from some institutional clients in how to efficiently and cost-effectively access these assets using our technology and product capabilities’. Schroders has taken a stake in the crypto-focused fund manager Forteus, and Fidelity has announced plans to allow investors to add cryptocurrencies to their portfolios in 401(k) retirement schemes. FTSE stalwart Abrdn has acquired a substantial interest in regulated UK digital assets exchange Archax. And though private investors may be shunning direct investment in Bitcoin and other digital currencies, crypto ETPs that invest on their behalf have recorded global net inflows of $379m so far this year. Nearly 40 crypto ETPs were launched in H1 this year, a rate of innovation broadly in line with the 68 launches during 2021. investors have been taking advantage of volatility to add exposure instead of moving away.
If, then, ARB can weather the current storms that beset the company, severe as they are, it may, as a relatively established player in the crypto sector, be able to carve out a niche as a participant in a mature industry. Right now ARB’s focus is survival. The company’s share price currently stands at 8p, down from 34p as recently as October, and a fraction of the remarkable peak of 282p reached early last year given the profound nature of the challenges the company currently faces, it’s not clear whether ARB could be said to be in value territory, or whether the price is likely to go lower still. But if the company can hold on, and it can establish its footing in a chastened crypto industry, whatever that might look like, its value may once again start to move through the gears.