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Conversion of Crypto Mining Centers into Data Centers -An Investment Opportunity

Conversion of Crypto Mining Centers into Data Centers -An Investment Opportunity
July 10, 2024

New data center providers are coming to the market focused on power-dense computer applications, including AI and Bitcoin farming, and doing so in a way that lends itself to the demands of sustainable GPU computing.

Although Bitcoin mining and more traditional data center operations might seem like unlikely bedfellows, the high-capacity GPU infrastructure required for crypto-mining can easily be converted to serve the soaring demand for AI applications and infrastructure. The question is where the greater profits come from.

Nvidia CEO Jensen Huang recently extolling the need for dedicated ‘AI Factories,’ and Bitcoin miner IRIS Energy recently announcing plans to convert its high-performance bitcoin mining computing operations to AI, it seems that this trend will continue to unfold over the coming months.

1. APLD and IREN’s Conversion, What About MARA and RIOT?

APLD (Applied Digital) and IREN (Iris Energy) have been actively converting their crypto mining centers into data centers to address the growing demand for data storage and processing capacity in North America. This transition leverages the significant power infrastructure initially built for mining operations. At the last NVIDIA conference, where top developers of artificial intelligence tools attended, Iris Energywas recognized for the capabilities of its data storage centers and an ongoing plan to negotiate to expand to new capacities. There are a lot of analysts noting that AI could help Iris Energy after the purchase of 248 NVIDIA H100 GPUs.

MARA (Marathon Digital Holdings) and RIOT (Riot Platforms), while primarily focused on Bitcoin mining, have not explicitly stated plans to convert their facilities into data centers. They continue to prioritize their core operations in cryptocurrency mining​​.

2. Business Models of IREN, MARA, and RIOT

IREN (Iris Energy) sells the Bitcoin it mines daily, providing a steady cash flow and avoiding the risks associated with holding a volatile asset. This approach minimizes potential losses from price fluctuations. Iris Energy has been focused on Bitcoin mining for the past five years, building five data centers in relatively remote locations (three in British Columbia and two in Texas) where land and renewable power are cheap and plentiful.Once the data centers are paid off through crypto-mining operations, IREN has hundreds of megawatts of data centers built and ready for high-demand AI operations, Dan Roberts, CEO of IREN, tells Data Center Knowledge.

MARA (Marathon Digital Holdings) and RIOT (Riot Platforms), on the other hand, hold onto their mined Bitcoin, treating it as an asset on their balance sheets. To finance operations and expansions, they often issue new shares, which can dilute the value of existing shares​​.

3. Better Business Plan for Shareholders

The better business plan for shareholders depends on market conditions and individual risk tolerance:

IREN’s Approach: Selling Bitcoin daily provides consistent revenue and reduces exposure to Bitcoin’s volatility, which can be appealing in a bearish or highly volatile market.
MARA and RIOT’s Approach: Holding Bitcoin can lead to significant gains if Bitcoin prices rise, but it also exposes shareholders to higher risk during market downturns. Issuing new shares can dilute the value but also provide necessary capital for growth.

4. Financial Stability and Operational History of MARA, RIOT, APLD, and IREN

Marathon Digital Holdings (MARA)

Financial Stability:

Revenue and Earnings: Marathon Digital reported a significant increase in revenues for 2023, reaching $387.5 million, a 229% increase from 2022. The company reported a net income of $259.1 million for 2023, a notable improvement from a net loss of $694.0 million in 2022​​.
Assets and Liabilities: As of December 31, 2023, Marathon held $357.3 million in unrestricted cash and cash equivalents, along with 15,126 Bitcoin, bringing the combined total to approximately $997.0 million. This strong cash position supports their operations and growth plans​​.
Impairments: The company saw a reduction in impairments in 2023, with no impairments recorded compared to significant impairments in 2022, which included $572.4 million due to various operational challenges and vendor issues​​.

Operational History:

Mining Expansion: Marathon Digital has focused on expanding its mining operations, becoming one of the largest Bitcoin mining companies in North America. They have significantly increased their mining capacity and efficiency over the past few years​.
Risk Factors: The company faces risks related to market volatility, regulatory changes, and the high cost of energy and equipment. Additionally, the issuance of new shares to fund operations has led to concerns about shareholder dilution​.

Riot Platforms (RIOT)

Financial Stability:

Revenue and Earnings: Riot Platforms also experienced significant growth, driven by increased Bitcoin production and higher market prices. They have managed to reduce their operational costs and improve profitability over recent quarters.
Assets and Liabilities: Riot maintains a substantial amount of Bitcoin on their balance sheet, similar to Marathon, and uses it as a strategic asset to support their financial stability.

Operational History:

Strategic Acquisitions: Riot has expanded through strategic acquisitions, including data centers and mining equipment, to enhance their operational capacity. Their focus remains on increasing their hash rate and overall mining efficiency.
Challenges: Like Marathon, Riot faces challenges related to energy costs, regulatory risks, and the inherent volatility of the cryptocurrency market. They have also faced issues with shareholder dilution due to funding strategies​.

Applied Digital (APLD)

Financial Stability:

Revenue and Earnings: APLD has been transitioning from a pure crypto mining company to a data center provider, leveraging its existing infrastructure. This shift aims to capitalize on the growing demand for data center capacity in North America.
Assets and Liabilities: APLD has invested heavily in upgrading its facilities to support data center operations, positioning itself to benefit from higher-margin business opportunities beyond cryptocurrency mining.

Operational History:

Diversification Strategy: APLD’s strategy includes diversifying its business model to reduce reliance on cryptocurrency mining. This involves converting existing mining facilities into data centers, which can provide more stable and diversified revenue streams​​.

Iris Energy (IREN)

Financial Stability:

Revenue and Earnings: IREN operates with a unique business model where they sell mined Bitcoin daily, providing a steady cash flow and reducing exposure to market volatility. This strategy supports consistent revenue generation and financial stability.
Assets and Liabilities: By avoiding holding large amounts of Bitcoin, IREN minimizes the risks associated with asset impairments and market fluctuations, maintaining a more predictable financial position.

Operational History:

Daily Bitcoin Sales: Iris Energy’s approach of selling Bitcoin daily has been a key part of their operational strategy, ensuring they have the necessary funds to cover operational costs and investments without relying on external financing.

Conclusion

Each company has a distinct approach to managing financial stability and operations:

Marathon Digital Holdings (MARA) and Riot Platforms (RIOT) rely heavily on holding Bitcoin as a strategic asset, exposing them to higher market risk but also potential gains.
Applied Digital (APLD) is diversifying into data center operations to create more stable revenue streams.
Iris Energy (IREN) focuses on selling mined Bitcoin daily, ensuring consistent cash flow and minimizing market risk.
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