The soaring price of Bitcoin (BTC 1.01%), now up more than 100% year to date, has catapulted Bitcoin mining stocks into the stratosphere. The biggest Bitcoin mining stocks, such as Riot Platforms (RIOT -4.85%) and Marathon Digital Holdings (MARA -4.46%), are now up more than 180% for the year as investors race to find companies that are highly leveraged to the price of Bitcoin.
But this single-minded focus on the price of Bitcoin may be missing a developing new story in the Bitcoin mining industry: the conversion of Bitcoin computing infrastructure into artificial intelligence (AI) computing infrastructure. Yes, that's right, a growing number of Bitcoin miners are looking to profit from the AI boom, although many investors have little idea this is happening. Here's what you need to know.
Who's making the move into AI?
Two different Bitcoin miners caught my attention recently, and not for how much Bitcoin they were mining, how many new Bitcoin mining facilities they were launching, or how many new super-powerful Bitcoin mining rigs they were buying. Instead, they were announcing major moves to convert some of their Bitcoin computing infrastructure into AI computing infrastructure.
Image source: Getty Images.
The two companies I have in mind are Bit Digital (BTBT -4.50%) and Hive Digital Technologies (HIVE -1.98%). In October, Hive Digital released further details on its plans to diversify into AI computing. The company is converting 38,000 Nvidia data center graphics processing units (GPUs), previously used to mine crypto, into an on-demand cloud service capable of servicing AI clients. Also in October, Bit Digital released plans to diversify into AI. The company plans to buy $35 million of new GPUs to service AI clients, with the aim of generating future cash flows to support its core mining operation.
Why the move into AI?
The biggest question, of course, is why these Bitcoin miners want to move into AI computing. After all, Bitcoin mining right now is incredibly profitable. The more Bitcoin they can mine, the more money they can make. And with the price of Bitcoin rebounding, they are quite literally minting money (if you consider cryptocurrency to be a form of money).
But there's an important consideration: The Bitcoin mining industry is incredibly cyclical and highly leveraged to the price of Bitcoin. Thus, in any year when Bitcoin is losing value, Bitcoin miners are highly unprofitable. For that reason, Bitcoin miners have always sought to diversify their businesses, which usually includes selling a mix of IT services to third-party clients.
And don't forget about the upcoming Bitcoin halving, which CNBC has called an "extinction-level event" for the Bitcoin mining industry. This halving, which takes place in April 2024, will reduce the reward for mining Bitcoin by half. Put another way, Bitcoin miners will make only half as much as they did this year because their rewards are being cut by 50%.
It's easy to see why the halving event could force Bitcoin miners to seek a new strategic direction. Unless these miners dramatically boost their computing capacity or the price of Bitcoin doubles, they are likely going to be losing money in 2024. Some will surely go out of business unless they make changes now.
Plus, did I mention that selling AI computing power is incredibly profitable? Bit Digital, for example, says that a new AI computing contract could generate as much as $250 million in revenue over a three-year period. By way of comparison, in all of 2022, Bit Digital posted just $32 million in Bitcoin mining revenue. And Hive Digital Technologies says that its new computing business is currently generating 15 times more revenue per megawatt than Bitcoin.
But will it work?
Given these numbers, it seems expanding into AI computing infrastructure could be a very profitable strategy. This assumes, of course, that AI computing power will continue to be in high demand, and that Bitcoin miners won't have to take on too much debt to finance the purchase of new computing equipment or retrofit existing infrastructure. If all goes according to plan (which it rarely does), Bitcoin mining stocks might have found a very clever way to remain profitable, even when the current rally Bitcoin ends.
However, if there's one caveat here, it's that investors have to be careful about investing in companies that are reinventing themselves to jump on an investment bandwagon. We've seen this before, with companies going to great lengths to cash in on an emerging technology only to see it flop. The metaverse immediately comes to mind.
So if you're thinking of investing in a Bitcoin mining stock, make sure you do your due diligence. The next time these miners report earnings, take a closer look at how much money they are actually making from their noncore (i.e., non-Bitcoin) businesses and whether their future growth projections seem feasible.
