Some publicly traded block reward mining companies have approached their Bitcoin halving financial strategy as if some divine aura will wash over the BTC network causing token prices to rocket into the stratosphere. This belief rationalizes their decisions to take on debt that can quickly become unmanageable if the bull market does not materialize which appears to be the case.
One company that may find itself on the wrong side of the break-even point is DMG Blockchain Solutions Inc. (TSX-V: DMGI) (DMGGF: OTC US) (FRANKFURT: 6AM). The Canadian-based company, listed on the TSX Venture Exchange, is doubling down on the BTC network, hoping to reap massive returns. This looks like a bad bet, I mean strategy.
DMG’s CEO and founder, Dan Reitzik, recently announced that the company had secured third-party financing to expand its fleet of ASIC processing hardware:
“DMG successfully negotiated third party financing for this recent purchase, believed to be one of the first instances of specific crypto equipment financing in the industry. This deployment of capital represents only 20% of the total amount offered to DMG under this non-dilutive debt financing.”
The terms of the agreement are unknown. DMG bases its prediction on an internal forecast for network hash rate adjustments and token price post-halving. Rather than going into an in-depth analysis, let’s take a step back instead and look at an aerial view of the dilemma they’re in.
Taking on debt is a strategic advantage helpful to public companies in good times because it allows them to scale more quickly.
Debt can creep up until it is out of control. It’s best to take on debt when there is some level of certainty on future cash flow. When a company’s financial outlook turns upside down, the amount of debt taken on can quickly turn into a death sentence for its operations.
DMG’s financial indicators aren’t complicated. Like other pure-play block reward mining companies, DMG needs the BTC token value to rise to counterbalance the 50% reduction in tokens awarded for discovering a block. Tokens awards are DMG’s chief sources of revenue. Their business model is primarily reliant on price inflation instead of providing services.
If that doesn’t happen, DMG and its shareholders are in obvious trouble. Very few companies can survive if its revenue is reduced in half, yet expenses and debt obligation remain mostly unchanged. All block reward mining companies are not exempt to this basic rule of economics. But for publicly traded companies, the financial market is a monster and it does not care or tolerate excuses when financial performance starts falling apart.
Wisdom can come from many sources. It can even come from sources who admittedly don’t understand or support the industry you are in, such as notated Bitcoin detractor Warren Buffett. How, because wisdom cuts across many sectors and applies in many walks of life.
Only when the tide goes out do you discover who has been swimming naked. – Warren Buffet
This first lesson is a warning to anyone financially invested in the BTC community. During the next couple of hours, conjecture will end, and reality will start setting in, leaving many over levered block reward mining companies worried about their future after the BTC halving.
The sad part about all of this is that the management teams of these block reward miners shouldn’t have to worry if they were competent. Satoshi Nakamoto already answered the question of how to remain profitable when he published the whitepaper showing a diminishing subsidy fading away and that reduced revenue being more than made up for over time by processing transactions. Still, many BTC block reward mining companies have continued focusing on the wrong things chasing short-term profits over long-term growth.
Risk comes from not knowing what you’re doing. – Warren Buffet
This lesson applies to all block reward mining companies from individual pool members, private companies to publicly traded organizations. “BTC only” miners like DMG Blockchain Solutions have put themselves at risk because of short-sighted and ineffective planning. Not all of these companies will survive for too long once the protocol reduces the subsidy award in half.
Bitcoin herd thinning is coming, and publicly traded mining operations aren’t exempt.
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