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From pancake batter to bitcoin digging, troubled companies try 2017-style hotspots

5 min reading

Bitcoin digging or Pancake business which is more difficult to sustain? and will this remain a great precipice for the time-being? well lets take a look.


What's harder to dig for bitcoins or sell pancake batter?

Nate's Foods will find out soon enough. A little-known public company headquartered in Huntington Beach, California announced on October 25 that it has started extracting the oldest and largest cryptocurrency by market value. Dumping the original product - pre-mixed batter for pancakes and waffles in a pressurized box - the miner Nate hired, was created by Bitmain to earn new bitcoins at a rate of 500 terahashes per second. 

Nate said it plans to increase the hashrate, or processing power, to 1,500 terahash per second with the two-year-old S-17 miner. Nate expects this machine to make about $17,060 in monthly sales. That would be a step forward from the grocery store, which is like a pancake financially - reporting no sales for the fiscal quarter ending August 31, the latest period for which results are released. Nates Penny's over-the-counter stock has grown since the company's January 1 announcement.

Nate's is the latest in a long line of companies from various industries to enter or diversify into mining or other crypto-related activities. The trend, which was first seen during the 2017 bull market, goes back when Bitcoin is trading near historical highs and the suppression of the cryptocurrency in China, once a global mining hub, has thinned out competition. 

To understand the depth of this situation it has been classified into two separate categories:

1.    Weak tea

2.    Day of Abundance

Weak tea

The unfavorable interpretation is that the move is just a trick to increase the stock price of the bankrupt company. This appears to be the case with Long Blockchain, formerly Long Island Iced Tea, whose attempt to cash in on the blockchain craze in 2017 failed and made it a poster for excesses during the boom. Its shares were eventually scrapped due to the company's failed attempts to become a blockchain player. The US Securities and Exchange Commission accused three people of insider trading.

However, if done right, the transition to digging can be successful, even if the company's previous business had nothing to do with crypto. For example, Riot Blockchain, formerly a biotechnology company called Bioptix, changed its name and business model in 2017. It is one of the most popular publicly traded crypto miners today, with a market cap of over $2 billion.

Nate's Food forayed into cryptocurrency after its CEO Nate Steck saw other over-the-counter companies enter the sector. He wants to protect his company from other supply chain crises, such as those caused by the coronavirus pandemic, he said in an emailed statement.

"I want to get out of all the goods and services nuisance," Steck said. So, he contacted a cryptocurrency advisor and started ticking the boxes, which would quickly add shareholder value and increase sales. “The bottom line is cryptocurrency mining pays off immediately,” said Steck. "Future projects will develop when the capabilities of the coin platform resemble the early stages of the Internet," he said. Nate's has set up a subsidiary, Nate's Mining, and a Twitter handle to reflect its new focus.

Other recent cryptocurrencies include Chinese sports lottery company (NYSE: WBAI), which announced it would buy bitcoin miners in January and increase its business this year. Shipping company Sino-Global (SINO) hired an executive in February to lead the company's entry into Bitcoin mining. In April, Florida-based maker of longevity and health products Graystone Company (GYST) announced it was seeking bitcoin to improve its own financial health. 

Day of Abundance

Turning to crypto mining is not surprising when companies lose money or lack a sustainable business model. According to research notes by Jonathan Peterson, an analyst with investment firm Jefferies, Bitcoin mining is a high-margin business with a short payback period, or the long time it takes an investment to pay off its initial costs.

"This year has been one of the best BTC mining environments in North America due to a drop in competition following China's mining ban and the ongoing global chip shortage which also ended the introduction of new BTC excavators," he wrote.

DA Davidson analyst Christopher Brandler estimates that for a "best-in-class" miner with access to cheap energy, the average price of digging a Bitcoin is around $5,000, with a gross margin of up to 90% on its own when Bitcoin is trading at $50,000. (It was over $50 at the time of the press release.) He estimates for miners like Digital Marathon, the gross margin, or the company's retained earnings after operating expenses, will be 89.6% in 2021 and 90.8% in 2022.

With margins like these, it's easy to see why companies are tempted to start a cryptocurrency mining business. However, it requires a long-term strategy to make the move truly profitable, said Zach Voel, director of content and research at Compass Mining.

“Current market conditions make Bitcoin mining a very profitable business for almost everyone. But the rush to fund a large mining operation based on current profitability could result in disaster,” he said, warning potential miners against Fear of Spill (FOMO). “Any company that wants to dig into cryptocurrency should ignore FOMO and prepare a multi-year strategy for its operations,” said Voel.

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