The Lowest Producer Always Wins in Commodities

Low cost commodity producers always win—whether it’s oil, gold, copper, natgas—or even bitcoin.
Yes, bitcoin is a commodity.

And Gryphon Digital Mining (GRYP-NASD) is one of the lowest-cost bitcoin producers in the world.

Bitcoin is an odd one though, as its most basic use is only in the 2^nd and 3^rd world—where people can electronically own it to hedge against their government’s corruption which leads to huge inflation.

Of course, that happens in the 1^st world too but just not so much on a dire scale.

But bitcoin is definitely popular in the 1^st world as well—see this chart of bitcoin ETF inflow/outflow this year.

What do I notice? After a huge influx once the ETFs were made legal in January 2024, excitement has died down.

But nobody is selling. Grayscale (GBTC-NYSE) is the only size seller throughout the entire life-span of these ETFs.  People who bought the new ETFs are HODLers—Holding On For Dear Life.

And bitcoin pricing has so far held up well after a huge run (US$40K – US$60K) leading up to the latest “halving”, which was April 20. A halving, which happens every 4 years, is when the amount of bitcoin released to bitcoin miners as they earn them, is cut in half—essentially doubling their cost to produce.

I am not here to tell you anything about the price of bitcoin because I have no idea.

My job is to find out of favour small caps wherever I can and see if there is a reasonable investment thesis around it.

Gryphon Digital Mining (GRYP-NASD) is one of those companies.  It’s a super-low cost bitcoin miner.

Bitcoin miners are really out of favour right now, which is why they are cheap.  Yet their product’s price is holding up well, and it’s getting more scarce by the day.

Did you know that 93% of all bitcoins that can be mined, have been?  There’s only 7% left to mine, which will take until 2140 I believe.

Gryphon CEO Rob Chang was CFO at an original public bitcoin miner, RIOT-NASD.  He has lots of experience in the sector—and prior to that he was an investment banker with Cantor Fitzgerald.

The CFO, Sim Salzman, was CFO of Marathon Digital (MARA-NASD)—again, lots of experience.

Gryphon’s Q1 financials came out this morning, and show a cost per bitcoin of Chang says his cost per bitcoin is now implied at $44,989 after the April 20 halving, keeping his gross margin at a much higher level than most of his competition—this chart is from his powerpoint:

Chang says that his company has been ranked as one of the lowest bitcoin miners FOR YEARS.  This again is from his powerpoint:

“We have never had a single month where our gross margin has been negative,” he told me in a recent interview. “We’ve always been gross profit positive our entire history, which I’m not sure many of our peers could say.

“On top of that, we also have fantastic operating metrics. The most important metric in the space is bitcoin efficiency, which mathematically is really easy.

“It’s the number of bitcoin generated divided by the hash-rate. And you would think that everyone would have similar numbers given that we’re running similar machines, but no, there’s dramatic differences.

“And throughout our history, when we compare against every publicly disclosing company, we have generally been number one, either outright or tied for over half of our existence.

UNIQUE DEAL FOR LOW COST, 100% GREEN POWER

“We have one of the lowest costs per bitcoin around. In 2023, we reported an average cost of $18,200, which we believe is among the lowest on an all-in operating cost basis for a Bitcoin miner.”

Chang says GRYP is a low-cost producer for a couple reasons.  One is—there’s only 3 (three) employees.  And two, they have a deal where their power prices are tied to bitcoin.

“We currently have 28 megawatts operating in upstate New York in an economic opportunity zone.

“We adopted a shared pain, shared gain methodology with our partner, whereby when things are going poorly, like they did in the past year and a half, our costs flex down to as low as three or four cents per kilowatt hour.

“And the reason being is that there’s just less profit to be shared. So we both get less. And in the meantime, we’re covering all the costs. So there’s nothing out of pocket for them.

“There is no situation where we’re doing well, but our host partner is doing poorly and they’ll be forced to shut down on us anyway, which doesn’t help or any other situation like that.

“So because of that, our costs flexed down during down periods. And of course, when things are going very well, which we look like we’re heading towards, we might pay a little bit more than the average.

“But our goal is this. We believe that investors care a heck of a lot more that we don’t go bankrupt during down periods than if we’re making every incremental penny when everyone is doing really well anyway.

“So we designed our cost structure to be flexible that way.

That gives Chang a low-cost model, so all his cash flow can go into keeping his computing power strong and NEW.

The other benefit with their power supply–it is 100% hydropower. In fact, it is independently certified to be 100%.

“We are actually a zero carbon emitting for scope one and scope two, because we are 100% carbon neutral.” Says Chang.

NOW IS OPPORTUNE TIME FOR PUBLIC BITCOIN MINERS

Chang sees the next few months as a great opportunity for public miners like Gryphon:

“Our focus right now is on the acquisition of private companies. With the halving, many companies that are private—they may have decent operations and low cost operations, but maybe not the capital to replenish their machines.

“Because with the halving and with the revenues being cut in half, they might not have machines that would be economic post halving, or even break-even post halving.

“And so, the replenishment of those machines requires capital. And given that they’re private, they may not have access to capital.”

He wants to act fast, as he sees the hash-rate for bitcoin dropping soon.  That’s the amount of energy being used to mine bitcoin.

“There is no way that all pre-halving hash rate stays online.

“I think there’s going to be a dramatic number of hash rate dropping off, probably at least 20%, if not 30 or 40% that will drop off, and that is because with high bitcoin prices, some of the older machines were turned on, which may now be shut off.

“And so I think there’s going to be notably less competition, at least for a period, which is standard post halving.

“And by the way, this is my third halving. So I’m very used to this now.”

Like I say, I have no idea where the price of bitcoin is going. But I do know that the lowest commodity producers always win.  Gryphon has positioned itself to be one of the lowest cost in the world.

Gryphon Digital Mining has reviewed and sponsored this article. The information in this newsletter does not constitute an offer to sell or a solicitation of an offer to buy any securities of a corporation or entity, including U.S. Traded Securities or U.S. Quoted Securities, in the United States or to U.S. Persons. Securities may not be offered or sold in the United States except in compliance with the registration requirements of the Securities Act and applicable U.S. state securities laws or pursuant to an exemption therefrom. Any public offering of securities in the United States may only be made by means of a prospectus containing detailed information about the corporation or entity and its management as well as financial statements. No securities regulatory authority in the United States has either approved or disapproved of the contents of any newsletter.