LearIM published on Bitcoin (BTC) in the 2021 Song of the Week titled “Mo Money, Mo Problems.” The topic of digital assets is worth a revisit as a new chapter in the notorious BTC saga has begun. We stand behind our early assessment of BTC. It is not a new “currency” used for the purchase of goods and services. However, it has been more widely accepted as an investable asset class. 

In the first note, we suggested those with a need for a dopamine rush could have 1-3% of investable funds in digital assets. We warned investors to tread lightly as the government was a potential roadblock for digital assets. This remained the case for several years.

The evolution of BTC happened suddenly, then all at once. The world changed in November as the U.S. elections resulted in a call for change. The new regime is making waves in several areas -including the crypto space. The following is an update on this dynamic topic because the “money” now has less “problems”.

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In 2021, digital assets lacked clear regulations, making it difficult to purchase by professional investors. This was one major reason we cited for caution. That concern is almost gone (for now) with the new regime in D.C. rewriting the government’s stance on the role digital assets

NEW SHERIFF IN TOWN - The Trump pick for the head of the SEC, Paul Atkins, is a crypto advocate. Atkins is co-chair of the Token Alliance, a cryptocurrency lobbying group for the Chamber of Digital Commerce which seeks to establish clear and balanced digital asset regulations. Nothing has happened yet, but there is a wider acceptance of digital assets as a part of innovation and global security.

INTERESTED NOW? - Regardless of your level of understanding of digital assets, it is hard for investors to ignore this space.  Below is a price chart of BTC since the election:

The price of the BTC crossed the $100K mark in early December.  The price was $55K in March of 2021 when first published. The price then plummeted to $16K in 2022 before a massive rally in the past few years. The question today: is this an asset that should be a part of an investor’s portfolio?

SELLING SHOVELS - There are several securities listed on regulated exchanges to gain exposure to Bitcoin — exchange-traded funds. We do not currently own these funds. However, we have selected to “sell shovels” in the gold rush with the addition of Bitcoin miner named Iris Energy (NASDAQ: IREN) in select portfolios. What is a Bitcoin miner? According to bankrate.com:

Bitcoin mining is the process of creating new bitcoins by solving extremely complicated math problems that verify transactions in the currency. When a bitcoin is successfully mined, the miner receives a predetermined amount of bitcoin.

UNDER THE HOOD - There is more to a Bitcoin miner than meets the eye. In addition to printing money when BTC is at these price levels, a miner is basically a data center with ownership of coveted real estate close to cheap power, long-term electricity agreements, and highly coveted Nvidia processing units. The bitcoin miners have what most companies in the world need — power and computer processing infrastructure. The miners were early to the data center party as mining BTC was their business before the mass adoption of artificial intelligence and global thirst for electricity.

Some bitcoin miners are exploring options to generate revenue from their assets by leasing infrastructure to companies seeking access to high-speed computing.  We believe this potential new source of revenue could increase the valuation of miners.

TIME IS MONEY - Companies looking to build new data centers are facing a harsh reality.   It is estimated that it will take years to get power for a new data center, especially in attractive markets. Texas had nine data centers in 2019. The Texas Comptroller of Public Accounts reported 57 registered data centers as of August 2024, including 40 built after 2022. To register and connect to the ERCOT grid, these centers must obtain interconnection permits, a process requiring an average of 3.5 years.  We have heard stories of the profit taking closer to seven years.

For further evidence of the scarcity of the resources the Bitcoin miners have in place today we look to McKinsey.  

McKinsey research shows that time to power is the biggest consideration for data center operators when building new sites. Adding to investor tension, as access to grids has declined, timelines for investing in and further building out grids for regulated utilities have become longer than the development cycle of data centers.

With the government now transitioning to a more digital-asset-friendly stance the country could be entering a golden age for cryptocurrencies. The government support in addition to the value of the infrastructure established by the miners makes for a risk worth taking in a moderate risk portfolio. 

PUBLIC SERVICE ANNOUNCEMENT - Bitcoin is a risky investment and is different than stocks or bonds because there is no cash flow from operations. Further, there are many layers to the risk unique to this digital asset. 

IN SUMMARY - Digital assets have leveled-up in popularity after the election of Trump & Co. Cryptocurrency has entered the investment discussions of many institutional investors and governments. We have selected to add exposure to the asset class with a miner of the digital asset. The miners present a double play on the AI craze and BTC mania. While this is a very exciting space, there is a lot of risk, and we anticipate heavy volatility in 2025. 

Lear Investment Management (“LIM”) is a Registered Investment Advisor based in Dallas, Texas and registered with the Securities and Exchange Commission. Registration does not imply a certain level of skills or training. This content is for informational purposes only, contains the observations and opinions of LIM, is not intended to provide investment advice, and should not be relied upon for investment decisions. Past performance is no guarantee of future results and information pertaining to LIM’s processes is subject to change at any time without notice.

Lear Investment Management (“LIM”) is a Registered Investment Advisor based in Dallas, Texas and registered with the Securities and Exchange Commission. Registration does not imply a certain level of skills or training. This content is for informational purposes only, contains the observations and opinions of LIM, is not intended to provide investment advice, and should not be relied upon for investment decisions. Past performance is no guarantee of future results and information pertaining to LIM’s processes is subject to change at any time without notice.

This document is intended for informational purposes only and does not constitute an offer to sell or solicitation of an offer to buy any securities. The information contained herein is not intended to be, and should not be construed as, investment advice. The views and opinions expressed in this document are those of the authors and do not necessarily reflect the official policy or position of any SEC registered investment firm. 

Investing in digital assets, including Bitcoin, involves a high degree of risk and may not be suitable for all investors. The value of digital assets can be extremely volatile and may be affected by various factors, including regulatory developments, market conditions, and technological advancements. Investors should conduct their own research and consult with their financial advisors before making any investment decisions.