Jefferies Mining Primer October 2021.pdf -

Please enable JavaScript to view the full PDF

EQUITY RESEARCH Global | Cryptocurrency Mining Cryptocurrency Mining Cryptocurrency Mining Primer: How to Run a (Digital) Exhibit 1 - Return on Investment Scenarios: Mining BTC Outperforms Money Printing Operation Buying BTC 2000% October 18, 2021 1500% Bitmain S9 Purchase Price: $1,130 on 31 Dec '17 1790% 1000% Cost/yr @ 5c KWh: $484 Key Takeaway Th/s: 11.5 500% Watts: 1,127 307% 191% 0% Cryptocurrency (e.g. Bitcoin) mining is functionally the process through which -500% Dec-17 Mar-18 Sep-18 Dec-18 Mar-19 Sep-19 Dec-19 Mar-20 Sep-20 Dec-20 Mar-21 Sep-21 Dec-21 transactions are added and verified on a blockchain. Miners are rewarded with new digital Jun-18 Jun-19 Jun-20 Jun-21 This report is intended for [email protected]. Unauthorized distribution prohibited. coins for their efforts, which is the predominate source of mining revenue. Bitcoin (BTC) . Mine + Sell BTC Buy + Hodl BTC Mine + Hodl BTC mining has grown to an expected $15B of revenue in 2021, up 3x from 2020. Our primer Source: Blockchain.com, Hashrate Index, Jefferies explores this growing market and how large-scale miners drive profitability. Exhibit 2 - BTC Mining Profitability What is cryptocurrency mining? Cryptocurrency "mining" is the process through which Formula the blockchain is secured and new cryptocurrency coins are brought into circulation. Miners verify the record of transactions on the distributed ledgers (i.e. "nodes") in order to ensure that they are not fraudulent. Specifically for Bitcoin, miners verify a "block" of transactions, and then compete to solve for a 64-digit hexadecimal hash; the first miner to solve the hash is rewarded with 6.25 new Bitcoin (about $375k) plus transaction fees (about 1% to 15% of revenue). BTC rewards are granted every 10 minutes. Solving the block is essentially a game of probabilities — the more "hash power" that a miner has, the . more often they will win a block. The amount of hash power on the BTC network is readily Source: Jefferies available information ("network hash rate"), so estimating the amount of BTC rewards that a mining fleet will earn is simply a function of their market share. Each cryptocurrency has its own mining algorithms and hardware preferences. Bitcoin is mined using Application-Specific Integrated Circuit ("ASIC") miners, which are specifically designed for BTC mining. Since inception, BTC mining has generally been very profitable. The cost to buy an ASIC miner is generally earned back within 6-12 months. Our analysis of mining BTC vs buying & holding BTC finds that mining has resulted in up to 5-6x higher returns over multi- year periods (See Exhibit 1). If the price of BTC goes down, that will hurt profitability and lengthen payback periods. However, the mining market has two ways of self-correcting: 1) when the price of BTC falls, miners in areas with high power costs will unplug their machines, which increases the potential mining rewards for those that are still mining, by decreasing the network hash rate (i.e. $ per BTC is down, # of BTC mined is up); and, 2) the price to buy new ASIC miners will decline along with the BTC price, which reduces the cost of entry. Becoming an investable asset class. BTC mining is capital intensive. We estimate that the total value of today's BTC mining infrastructure is $15-20B, and growing. With the current BTC price driving annualized mining revenue of ~$19B, and growing, we are seeing the rise of publicly-traded BTC mining companies that are scrambling to increase capacity and gain market share. We estimate that the public North American miners have 8% share of the network hash rate, which will grow to 15% by YE22. The sector currently consists of seven companies with a combined market cap of ~$12B. Jonathan Petersen * Equity Analyst Initiating Coverage of ARBK: In conjunction with this report, we have launched coverage (212) 284-1705 of Argo Blockchain (ARBK). See our note. [email protected] ^Prior trading day closing price unless otherwise noted. Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 19 to 24 of this report. * Jefferies LLC / Jefferies Research Services, LLC EQUITY RESEARCH Global | Cryptocurrency Mining Table of Contents Cryptocurrency: What is it?................................................................................................... 3 What is Cryptocurrency Mining?............................................................................................. 4 The Economics of Mining: Increasing the Odds.......................................................................... 5 Is Mining or Buy & Hold More Profitable?................................................................................ 12 Sensitivity Analysis: BTC Price and Network Hash Rate...............................................................13 Mining Coins: Different Coins = Different Mining Protocols.......................................................... 14 Regulation and Government Acceptance................................................................................. 15 Publicly Traded Cryptocurrency Miners................................................................................... 16 Valuation of Crypto Miners................................................................................................. 16 October 18, 2021 2 Please see important disclosure information on pages 19 - 24 of this report. EQUITY RESEARCH Global | Cryptocurrency Mining Cryptocurrency: What is it? Exhibit 3 - Top Cryptos by Market Cap At a basic level, cryptocurrencies are a digital store of value that can be used for transactions. Since Bitcoin's invention in 2009, cryptos have steadily gained the attention BTC ETH $448 $1,145 of both investors and the general public. Bitcoin and other "altcoins" have evolved from being generally viewed as a joke to now being viewed as a potential alternative to gold and/ BNB $78 or a replacement for "fiat" currencies. Today, there are over 10,000 cryptocurrencies and ADA $71 Bitcoin itself trades at about $60,000 per BTC and a market cap of over $1 trillion. USDT $69 Cryptocurrencies rely on blockchain technology, which is a distributed ledger system XRP $52 used to record transactions and other data, like smart contracts. Each cryptocurrency SOL $48 uses a unique blockchain that is programmed to have differing characteristics and rules DOT $41 that ultimately govern the financial incentives, potential use cases, and security of that USDC $33 particular blockchain. For example, some key characteristics programmed into the BTC DOGE $31 blockchain include: UNI $16 1. The total number of BTC that can ever be created is limited to 21 million. LUNA 2. The computational power needed to process a block of transactions (referred to BUSD $13 as "Difficulty") automatically adjusts to keep the frequency at which new BTC are AVAX released into the market constant at 10 minutes; LINK $13 3. After every 210,000 blocks of transactions that are processed (roughly every 4 LTC years), the reward given to miners in the form of new BTC tokens is halved; WBTC $12 4. The size of a block is limited to ~2MB (originally it was 1MB) BCH In comparison, Ethereum's blockchain uses similar technology to Bitcoin's but has no ALGO $11 limitations on block size, and the time to process each block is only about 12 seconds SHIB versus Bitcoin's 10 minutes. This allows the ETH blockchain to quickly process larger Billions pieces of data, like smart contracts and other applications. Also unlike BTC, there is no . limit to the number of new ETH that can be created, so it lacks the scarcity of BTC (one Source: Jefferies, CoinMarketCap reason the price of BTC has been driven so high). Scarcity is often cited as a reason to view BTC is "digital gold". Besides BTC and ETH, which have the largest market shares of the crytocurrency market, there are thousands of other cryptocurrencies designed for various use cases. For example, there are cryptos like Litecoin that functions similarly to Bitcoin, but is built with payments capacity in mind. There are others, including Cardano, that offer similar use cases to Ethereum like smart contracts. Polkadot provides interoperabiity between blockchains, while Stellar provides enterprise solutions for financial institutions. The list is vast and rapidly evolving. October 18, 2021 3 Please see important disclosure information on pages 19 - 24 of this report. EQUITY RESEARCH Global | Cryptocurrency Mining What is Cryptocurrency Mining? Cryptocurrency "mining" is the process through which the blockchain is secured and new cryptocurrency coins are brought into circulation. Miners verify the transactions record on the distributed ledgers (i.e. "nodes") in order to ensure that they are not fraudulent. Investment in mining is most profitable on "Proof-of-Work" blockchains, which reward those that invest the most resources to mining. Bitcoin and Ethereum are both currently Proof-of-Work blockchains. In the process of Bitcoin mining specifically, miners first verify a "block" of transactions, and then compete to solve for a 64-digit hexadecimal hash; the first miner to solve the hash is rewarded in new Bitcoin. More simply, "solving the hash" means that the miners is randomly guessing numbers until a miner finds the number that is less than the target hash. The miner that solves the block is awarded 6.25 newly minted BTC. However, that 6.25 BTC reward will decline over time as the system is designed so that the reward is cut in half every four years (commonly referred to as the "halving"). The reward will continue to decline until it is effectively zero, which will happen in the year 2140. In addition to the reward, the miner also receives the transaction fees that were paid by those submitting new transactions, which generally fluctuates by the number of transactions. In recent months, transaction fees have made up 1-15% of revenue, but it is expected that transaction fees will become the primary revenue source for mining over time. . Source: Jefferies October 18, 2021 4 Please see important disclosure information on pages 19 - 24 of this report. EQUITY RESEARCH Global | Cryptocurrency Mining The Economics of Mining: Increasing the Odds The strongest revenue-generating mining operations have numerous mining machines, with above-average hash-power per machine. The processing power of a BTC miner is measured by the amount of hashing that can be completed in a second. The processing power of miners has increased substantially, with the current high-end machines mining at 110 terahash/second (TH/s), which is up nearly 10x from about 12 TH/s in 2017. This rapid increase in hash-power on new machines is what drives the general expectation that miners will only be profitable for about three to four years. In terms of expense, the largest operating expense, by far, is the cost of power. This is why professional BTC miners spend considerable effort finding locations with the lowest power rates. Currently, in North America, the cheapest power is found in Texas where commercial rates are generally 2-3 cents per kilowatt hour. This is 70+% lower than the average residential power rate. The current BTC price and market size are such that just about anyone with a modern BTC miner can mine profitably, but as difficulty increases and/or the price of BTC declines, those with the lowest power rates will be the last ones standing with profitable operations. In terms of capital expenditures, there are essentially two large expenses: 1. The ASIC ("Application Specific Integrated Circuit") miners that are specifically designed to mine digital currencies at maximum efficiency; and, 2. A data center to operate the miners. Typically, the miners are the largest of the two expenses, and the data center is built to maximize efficiency at the lowest cost possible. The cost of individual miners fluctuates with the price of BTC, and tends to represent 9-12 months of revenue. The large-scale miners, which order tens of thousands of miners at a time, will pay significantly less per machine than the hobby-miner who is only buying a few machines. Exhibit 4 - Bitcoin Mining Profitability Formula Exhibit 5 - Projections of Major Mining Metrics Total Mining BTC Price YoY Network Hash YoY YoY Rewards + Fees ($USD) Growth Rate (TH/s) Growth Growth ($USD) 2011 $6 6 $17,527,179 2012 $8 41% 16 167% $22,081,409 26% 2013 $180 2043% 1,410 8713% $285,664,045 1194% 2014 $530 194% 140,000 9829% $779,816,706 173% 2015 $270 -49% 403,000 188% $366,969,442 -53% 2016 $560 107% 1,520,000 277% $592,430,020 61% 2017 $3,900 596% 6,260,000 312% $2,756,444,824 365% 2018 $7,600 95% 36,300,000 480% $5,214,967,094 89% 2019 $7,300 -4% 66,700,000 84% $4,963,338,686 -5% 2020 $11,000 51% 120,000,000 80% $5,049,021,852 2% 2021E $47,800 335% 146,000,000 22% $15,714,760,109 211% 2022E $58,900 23% 236,000,000 62% $19,391,420,235 23% 2023E $73,500 25% 367,000,000 56% $24,222,266,775 25% 2024E $93,200 27% 516,000,000 41% $19,290,037,380 -20% 2025E $122,800 32% 802,000,000 55% $20,352,313,260 6% 2026E $155,300 26% 1,244,000,000 55% $25,764,223,410 27% 2027E $193,700 25% 1,863,000,000 50% $32,166,587,115 25% '15-'21 CAGR 137% 167% 87% . '21-'27 CAGR 26% 53% 13% Source: Blockchain.com, Jefferies . Source: Jefferies October 18, 2021 5 Please see important disclosure information on pages 19 - 24 of this report. EQUITY RESEARCH Global | Cryptocurrency Mining Miner Hash Rate: The total hash rate of a fleet of miners is Beginning from the top left of the formula, the higher a mining operation's hash rate in calculated as: # of ASIC miners multiplied by the comparison to the network hash rate, the higher its revenues will be. To calculate a mining average hash-power per ASIC miner operation's hash rate, you have to understand both (1) the number of miners in the fleet, Exhibit 6 - EH/s Forecasting and (2) the hash rate of each miner. The largest public BTC mining operations like MARA 20 and RIOT currently have over 20,000 miners in their respective fleets, with plans to increase 15 this number to upwards of 100,000 over the next year. Each individual miner in a fleet EH/s 10 contributes to the overall hash rate of that mining operation. Currently, the highest end 5 machines contribute ~110 TH/s and older machines contribute in the 10-50 TH/s range. 0 Jul-21 Oct-21 Feb-22 May-22 Aug-22 Dec-22 Mar-23 Summing the total of the hash rates of each machine gives you the total hash rate of . ARBK MARA RIOT BITF the mining operation. However, depending on the age of the machines and the facilities/ Source: Jefferies, Company Reports infrastructure used to run them, the true hash rate of the fleet over time might average to about 80% or so of the full potential hash rate due to maintenance downtime of certain machines, or having to decrease the operations of the fleet in order to manage the excess heat given off by the machines in certain environments or during certain times of year (i.e. summer in Texas). Most first-generation mining facilities have been implemented in warehouse-type environments that require extensive amounts of air cooling to prevent miners from overheating and breaking down. Some mining companies have attempted to solve for this by implementing new facility/infrastructure designs. This can range from simply orienting the stacks of mining machines in a way that maximizes airflow, to using immersion cooling infrastructure where miners are submerged in a dielectric liquid to disperse heat. When successfully implemented, immersion cooling technologies can allow mining operations to both increase their hash rate significantly, while also reducing electricity consumption. Argo Blockchain has announced that they will use immersion cooling infrastructure in their new Texas site being built out over the next year. Riot Blockchain's immersion-cooled operation in Texas came into full production in July. While Texas offers cheap, renewable electricity for mining operations, the hot climate can be expensive for air-cooled operations; immersion cooling technology can resolve this. Network Hash Rate: The total network hash rate is calculated as: As previously described, a mining company's revenues are earned in proportion to their total # of ASIC miners operating at any given total hash rate divided by the network's total hash rate. The network hash rate increases time multiplied by the average hash-power per as more mining machines are brought onto the network and decreases as they are taken ASIC miner in operation. off. Network hash rate is correlated to a number of variables, the first being the price of Bitcoin (or whichever coin is being mined). As the price of Bitcoin rises, more miners join the network, increasing the network hash rate. However, when the price of BTC falls, you tend to see smaller mining operations drop off the network. Smaller miners tend to have less efficient fleets, and when the price of BTC falls it is no longer profitable for them to remain operating. Larger mining companies benefit from the resulting drop in network hash rate, enabling them to mine more coins than at the previous network hash rate. Therefore, these larger mining operators won't necessarily see a decline in revenues when the price of BTC drops if it is followed by a drop in the network hash rate. In the past year, the rising price of BTC has not been fully matched by a rise in network hash rate. There are two major factors that have caused this. • The ongoing global chip shortage has significantly reduced the ability of manufacturers of BTC miners to obtain the semiconductor chips needs to increase October 18, 2021 6 Please see important disclosure information on pages 19 - 24 of this report. EQUITY RESEARCH Global | Cryptocurrency Mining manufacturing to meet demand. The chip shortage is ongoing and will continue to limit growth in the network hash rate. • In June, China banned any cryptocurrency mining. In the beginning of 2020, Chinese miners accounted for close to half of all capacity. These miners coming offline resulted in a dramatic decline in the global network hash rate, and was a major windfall for the rest of the mining network. Much of this capacity is being relocated to neighboring countries, like Kazakhstan. However, much of this capacity was older machines that are likely not worth spending the shipping costs to relocate. Against this backdrop, it is fairly clear that the current network hash rate is well below equilibrium. We expect the network hash rate will increase substantially through the end of 2022 until it reaches a more balanced level vs the BTC price. Specifically, through the end of 2022, we expect the price of BTC to increase roughly 15% from current levels, but we expect the network hash rate to increase by about 70%. Exhibit 7 - Network Hash Rate Over Time. China Ban Cut Capacity by 40% 300,000,000 $70,000 China Bans Mining 250,000,000 $60,000 $50,000 200,000,000 $40,000 150,000,000 $30,000 100,000,000 $20,000 50,000,000 $10,000 0 $0 Jan-19 Jan-20 Jan-21 Jan-22 Oct-19 Oct-20 Oct-21 Oct-22 Jul-19 Jul-20 Jul-21 Jul-22 Apr-19 Apr-20 Apr-21 Apr-22 Network Hash Rate BTC Price ($USD) . Source: Blockchain.com, Jefferies Estimates Price of Bitcoin: Where is the Limit? Over the past three years, BTC has grown at a CAGR of over 100%. If someone invested $1,000 in BTC on January 1st, 2011, they would now have over $160 million. Against those past returns, how does one think about where the price of BTC is going? With a market cap of over $1 trillion, BTC is far too large to ignore. At this point, one has to begin to ponder where the digital coin fits in the world of investments and currencies. Gold: The most common comparison for BTC is gold. In fact, it is often referred to as "digital gold". The fact that BTC has a finite number of coins, as Gold is theoretically a finite resource, means that the value of the coin will never be diluted by newly issued coins like fiat currencies are when governments print more money. The comparisons to gold are not perfect, however. Gold does have some functional value (jewelry, etc.), and many more years to prove that it is a viable store of value. October 18, 2021 7 Please see important disclosure information on pages 19 - 24 of this report. EQUITY RESEARCH Global | Cryptocurrency Mining In the table below, we demonstrate the price that BTC could reach if its market cap grew to a significant share of the current market cap of gold. Should BTC truly replace Gold in value, that would imply a 10x upside to a price per BTC of more than $600,000. Currency Replacement: Another argument for the future value of BTC is for the coin to replace fiat currencies in the money supply. Currently, paying for just about anything with BTC is very difficult or impossible. However, in the next few years, we believe this could start to change. However, the BTC blockchain itself doesn't lend itself to handle a volume of transactions necessary for payments as BTC's blockchain can only handle about 5 transactions per second, which is a fraction of the 1,700 transactions that Visa's network can process every second. There are a growing number of crypto projects that are working to solve this issue, such as the Lightning Network. As demand to pay in BTC grows from customers, we expect solutions to be developed. Replacing a portion of the global money supply with BTC would imply significant upside. In the table below, we demonstrate the price that BTC could reach if its market cap grew to a significant share of the combined M3 money supply of the USD, Euro, & British Pound. Exhibit 8 - BTC Price Based on Market Share Exhibit 9 - BTC Price Based on Market Share If BTC reached the value of Gold, it would trade of Gold Scenarios of M3 Money Supply Scenarios at $632k per BTC (10x upside) Constants M3 Money Supply Approximated by Total of Total BTC Float 18,749,000 USD, GBP, EUR If BTC reached the values of the M3 money Gold Market Cap (Billions) $11,859 (M3 Supply Approximated by Total of USD, GBP, and EUR) Scenario 1: BTC Worth 10% Gold Market Share supply in Western Countries, it would trade at> Constants BTC Price $63,249 M3 Money Supply (USD, Billions) $42,914 $2M per BTC (30x upside) Upside +4% Total BTC Float 18,749,317 BTC Market Cap (Billions) $1,186 Scenario 1: BTC Worth 25% M3 Money Supply BTC Share of Store of Value Commodities 10.0% BTC Price $572,205 Scenario 2: BTC Worth 25% Gold Market Share Upside +895% BTC Price $158,122 BTC Market Cap (USD, Billions) $10,728 Upside +159% BTC Share of M3 Supply (USD, GBP, EUR) 25% BTC Market Cap (Billions) $2,965 Scenario 2: BTC Worth 50% M3 Money Supply BTC Share of Store of Value Commodities 25.0% BTC Price $1,144,410 Scenario 3: BTC Worth 50% Gold Market Share BTC Price $316,244 Upside +1889% Upside +418% BTC Market Cap (USD, Billions) $21,457 BTC Market Cap (Billions) $5,929 BTC Share of M3 Supply (USD, GBP, EUR) 50% BTC Share of Store of Value Commodities 50.0% Scenario 3: BTC Worth 75% M3 Money Supply Scenario 4: BTC Worth 100% Gold Market Share BTC Price $1,716,615 BTC Price $632,489 Upside +2884% Upside +937% BTC Market Cap (USD, Billions) $32,185 BTC Market Cap (Billions) $11,859 BTC Share of M3 Supply (USD, GBP, EUR) 75% BTC Share of Store of Value Commodities 100.0% Scenario 4: BTC Worth 100% M3 Money Supply Scenario 5: BTC Worth 150% Gold Market Share BTC Price $2,288,819 BTC Price $948,733 Upside +3879% Upside +1455% BTC Market Cap (USD, Billions) $42,914 BTC Market Cap (Billions) $17,788 . BTC Share of M3 Supply (USD, GBP, EUR) 100% . BTC Share of Store of Value Commodities 150.0% Source: Jefferies, St. Louis Fed Source: Jefferies, World Gold Council Block Reward, Transaction Fees, and The "Halving" The current block reward of 6.25 BTC will be cut When the BTC blockchain was launched in 2009, the reward for solving a block was 50 in half every four years, with the next halving in BTC. Roughly every four years, that reward is cut in half and will continue to be cut until 2024 it is effectively zero in the year 2140. The last two halvings have resulted in about half a Transaction fees are paid by those submitting year of decreased mining rewards, but the acceleration in the price of BTC has more than transactions to the blockchain. The winner of offset the impact over time. Following the July 2016 halving, it took nine months for the the block gets these fees, which are typically value of mining rewards to reach pre-halving levels. After the May 2020 halving, it took six 1-15% of the block reward months to regain pre-halving revenue. Historically, investing in BTC in the months following October 18, 2021 8 Please see important disclosure information on pages 19 - 24 of this report. EQUITY RESEARCH Global | Cryptocurrency Mining a halving have been some of the best entry points as the price of BTC increase more than 5x in the 12-months following the 2011 and 2016 halvings. Transaction fees have been less predictable. These fees are paid by those that submit transactions to the blockchain. When there are many transactions competing to be placed on the blockchain, fees will increase as those submitting transactions will want them placed on the blockchain as quickly as possible. Periods of sharp rises in BTC price have, such as late 2017 and early 2020, have corresponded with the highest level of transaction fees. Should BTC be increasingly used as a form of currency, we would expect transaction fees would rise substantially. As the block reward continues to be cut in half and the BTC price stabilizes, it is expected that the primary source of mining revenue will come from transaction fees. We believe we are still 10+ years away from transaction fees surpassing mining rewards. Exhibit 10 - Total Mining Revenues; BTC Rewards + Transaction Fees $2,000,000,000 $70,000 $1,800,000,000 $60,000 $1,600,000,000 Halvings $1,400,000,000 $50,000 $1,200,000,000 $40,000 $1,000,000,000 $800,000,000 $30,000 $600,000,000 $20,000 $400,000,000 $10,000 $200,000,000 $0 $0 Transaction Fees Mining Rewards BTC Price ($USD) . Source: Blockchain.com, Jefferies October 18, 2021 9 Please see important disclosure information on pages 19 - 24 of this report. EQUITY RESEARCH Global | Cryptocurrency Mining Cost of Miners: The price of an ASIC miner generally moves with When a miner is purchased can have a large impact on the ROI of the investment. The the price of BTC and is often measured in price worst case scenario is to buy a large fleet of miners just as the price of BTC is peaking per TH/s and potential mining revenues are declining. However, history suggests that those periods Exhibit 13 - Bitcoin Miners correct themselves through declining network hash rates and rebounding BTC prices. Monthly Power Monthly Revenue Mining Miner Release Date Th/s Watts Cost Earnings @ $60k BTC, Margin @ 4c kWh For example, we measured the ROIs (after power costs at 5c kWh) on Antminer S9s bought 150EH/s Bitmain Antminer S9 (11.5Th) June-16 11.5 1,127 $97.37 $284 $186.13 66% Bitmain Antminer S9 (12.5Th) February-17 12.5 1,225 $105.84 $308 $202.32 66% Bitmain Antminer S9 (13Th) July-17 13 1,300 $112.32 $318 $205.92 65% at different periods of time in 2018-2020. Given the movement in BTC price, buying an S9 Bitmain Antminer S9 (13.5Th) Bitmain Antminer S9 (14Th) September-17 November-17 13.5 14 1,323 1,372 $114.31 $118.54 $333 $345 $218.51 $226.60 66% 66% Bitfily Snow Panther A1 January-18 49 5,400 $466.56 $1,156 $689.76 60% in mid-2020 actually resulted in a much better ROI, over a shorter period of time, when Ebang Ebit E10 Canaan AvalonMiner 841 Innosilicon T2 Terminator February-18 April-18 May-18 18 13.6 17.2 1,650 1,290 1,570 $142.56 $111.46 $135.65 $454 $339 $434 $311.04 $227.52 $298.37 69% 67% 69% compared to a purchase in mid-2018. Of course, it's easy to look at these things in hindsight Bitmain Antminer S9i (14Th) May-18 14 1,320 $114.05 $350 $235.58 67% Bitmain Antminer S9i (13Th) May-18 13 1,280 $110.59 $320 $209.38 65% Bitfily Snow Panther B1 July-18 16 1,380 $119.23 $411 $291.46 71% and try to pass judgement. In reality, it is as difficult to time purchases as it is to project Innosilicon T2 Turbo August-18 24 1,980 $171.07 $624 $452.74 73% Bitfily Snow Panther B1+ August-18 24.5 2,100 $181.44 $630 $448.56 71% Bitmain Antminer S9 Hydro (18Th) August-18 18 1,728 $149.30 $447 $297.56 67% Bitmain Antminer S9j (14.5Th) August-18 14.5 1,350 $116.64 $364 $246.96 68% the future price of BTC. MicroBT Whatsminer M10S MicroBT Whatsminer M10 September-18 September-18 55 33 3,500 2,145 $302.40 $185.33 $1,519 $908 $1,216.80 $722.30 80% 80% Innosilicon T2 Turbo+ 32T September-18 32 2,200 $190.08 $870 $679.68 78% Canaan AvalonMiner 921 September-18 20 1,700 $146.88 $516 $368.64 72% For the large-scale miners, there advantage with this cost is their ability to order in bulk — Ebang Ebit E11++ October-18 44 1,980 $171.07 $1,286 $1,115.14 87% Ebang Ebit E11+ October-18 37 2,035 $175.82 $1,050 $873.79 83% Ebang Ebit E11 October-18 30 1,950 $168.48 $825 $656.64 80% Bitfury Tardis November-18 80 6,300 $544.32 $2,105 $1,560.96 74% often tens of thousands of ASIC miners in a single order. Recently, we have seen bulk orders Bitmain Antminer S11 (20.5Th) Holic H28 November-18 December-18 20.5 28 1,530 2,100 $132.19 $181.44 $547 $746 $414.58 $564.48 76% 76% Holic H22 December-18 22 1,700 $146.88 $582 $434.88 75% from the publicly-traded miners that have costs per machine that are at a 50% discount to Innosilicon T3 43T Innosilicon T3 39T Bitmain Antminer S17 Pro (53Th) January-19 March-19 April-19 43 39 53 2,100 2,150 2,094 $181.44 $185.76 $180.92 $1,243 $1,106 $1,574 $1,061.28 $920.16 $1,393.52 85% 83% 89% the spot price that the average consumer pays. Bitmain Antminer S17 (56Th) April-19 56 2,520 $217.73 $1,637 $1,419.26 87% Bitmain Antminer S17 Pro (50Th) April-19 50 1,975 $170.64 $1,485 $1,314.72 89% Bitmain Antminer S17 (53Th) April-19 53 2,385 $206.06 $1,549 $1,343.23 87% Innosilicon T3+ 52T May-19 52 2,800 $241.92 $1,480 $1,238.40 84% Bitmain Antminer T17 (40Th) May-19 40 2,200 $190.08 $1,135 $944.64 83% Exhibit 11 - When to Buy Matters; Antminer S9s Bought in Early-2018 Had Lower ROI vs MicroBT Whatsminer M21S StrongU STU-U8 June-19 July-19 56 46 3,360 2,100 $290.30 $181.44 $1,564 $1,342 $1,274.11 $1,160.64 81% 86% Purchases in 2019/20 Innosilicon T3 50T July-19 50 3,100 $267.84 $1,388 $1,120.32 81% Bitmain Antminer S9 SE (16Th) July-19 16 1,280 $110.59 $419 $308.74 74% MicroBT Whatsminer M20S August-19 68 3,360 $290.30 $1,962 $1,671.55 85% MicroBT Whatsminer M21 August-19 31 1,860 $160.70 $866 $705.31 81% Bitmain Antminer S9k (13.5Th) August-19 13.5 1,310 $113.18 $334 $220.75 66% 900% ROIs StrongU STU-U8 Pro Innosilicon T3+ 57T September-19 September-19 60 57 2,800 3,300 $241.92 $285.12 $1,745 $1,603 $1,503.36 $1,317.60 86% 82% 800% Bitmain S9 844% Ebang Ebit E12+ Ebang Ebit E12 September-19 September-19 50 44 2,500 2,500 $216.00 $216.00 $1,440 $1,241 $1,224.00 $1,025.28 85% 83% Canaan AvalonMiner 1066 September-19 50 3,250 $280.80 $1,375 $1,094.40 80% Cost/yr @ 5c KWh: $484 Canaan AvalonMiner 1047 September-19 37 2,380 $205.63 $1,020 $814.18 80% 700% Bitmain Antminer S17e (64Th) November-19 64 2,880 $248.83 $1,871 $1,622.02 87% Bitmain Antminer T17e (53Th) November-19 53 2,915 $251.86 $1,504 $1,251.65 83% Th/s: 11.5 Bitmain Antminer S17+ (73Th) December-19 73 2,920 $252.29 $2,165 $1,913.18 88% 600% Bitmain Antminer T17+ (64Th) December-19 64 3,200 $276.48 $1,843 $1,566.72 85% MicroBT Whatsminer M30S April-20 86 3,268 $282.36 $2,566 $2,283.61 89% Watts: 1,127 MicroBT Whatsminer M31S Bitmain Antminer S19 Pro (110Th) April-20 May-20 76 110 3,220 3,250 $278.21 $280.80 $2,239 $3,362 $1,960.70 $3,081.60 88% 92% 500% Bitmain Antminer S19 (95Th) Bitmain Antminer T19 (84Th) May-20 June-20 95 84 3,250 3,150 $280.80 $272.16 $2,865.60 $2,509.92 $2,584.80 $2,237.76 90% 89% MicroBT Whatsminer M32 July-20 62 3,348 $289.27 $1,764.17 $1,474.91 84% 400% 422% Canaan AvalonMiner 1166 Pro August-20 81 3,400 $293.76 $2,388.96 $2,095.20 88% Purchase Purchase Purchase Purchase Purchase 362% Canaan AvalonMiner 1146 Pro MicroBT Whatsminer M30S++ August-20 October-20 63 112 3,276 3,472 $283.05 $299.98 $1,803.51 $3,409.46 $1,520.47 $3,109.48 84% 91% 300% MicroBT Whatsminer M30S+ October-20 100 3,400 $293.76 $3,018.24 $2,724.48 90% Price: Price: Price: Price: Price: StrongU Hornbill H8 October-20 74 3,330 $287.71 $2,163.17 $1,875.46 87% MicroBT Whatsminer M32S November-20 66 3,432 $296.52 $1,889.40 $1,592.87 84% $834 $204 $368 $158 $65 MicroBT Whatsminer M31S+ December-20 80 3,360 $290.30 $2,359.30 $2,068.99 88% 200% 192% Canaan AvalonMiner 1246 Bitmain Antminer S19j Pro (100Th) January-21 June-21 90 100 3,420 3,050 $295.49 $263.52 $2,685.31 $3,048.48 $2,389.82 $2,784.96 89% 91% 136% Bitmain Antminer S19j (90Th) June-21 90 3,250 $280.80 $2,700.00 $2,419.20 90% 100% Bitmain Antminer S19j Pro (104Th) StrongU Hornbill H8 Pro July-21 July-21 104 84 3,068 3,360 $265.08 $290.30 $3,179.40 $2,491.78 $2,914.33 $2,201.47 92% 88% Innosilicon T2 Turbo HF+ July-21 33 2,600 $224.64 $868.32 $643.68 74% 0% Innosilicon T2 Turbo 26T July-21 26 2,100 $181.44 $679.68 $498.24 73% Bitmain Antminer S19j Pro (96Th) August-21 96 2,832 $244.68 $2,934.84 $2,690.15 92% Bolon Miner B11 August-21 70 3,300 $285.12 $2,033.28 $1,748.16 86% 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 4Q20 1Q21 2Q21 3Q21 2Q20 3Q20 Canaan AvalonMiner 1126 Pro August-21 68 3,420 $295.49 $1,956.67 $1,661.18 85% . iPollo B2 October-21 110 3,250 $280.80 $3,362.40 $3,081.60 92% iPollo B1 October-21 85 3,400 $293.76 $2,521.44 $2,227.68 88% Source: asicminervalue.com, Jefferies 2Q18 4Q18 2Q19 4Q19 2Q20 . Source: asicminervalue.com, Hashrate Index, Jefferies Exhibit 12 - ASIC Price per Terahash Trends With the Price of BTC $200 $100,000 $150 $100 $10,000 $50 $0 $1,000 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 . BTC Price Bitmain S9 (11.5Th) Bitmain S19 Pro (110Th) Source: Blockchain.com, Hashrate Index, Jefferies October 18, 2021 10 Please see important disclosure information on pages 19 - 24 of this report. EQUITY RESEARCH Global | Cryptocurrency Mining Electricity Costs Electricity is the largest mining expense. The most important cost of mining is the electrical power costs. When the price of BTC Large scale miners often pay 70+% less than is high and the network hash rate is relatively low, then just about anyone can mine residential power rates. profitably. However, when the price of BTC crashes, those with expensive power are the first casualties. This is why the crypto-mining companies seek out areas with the cheapest power in an effort to keep mining margins positive for as long as possible. The analysis below is a demonstration of the beneifts of low power. We looked at the theoretical mining margins of a Bitmain Antminer S9 from 1Q17 through today. A miner with a 2c/kWh rate, as can be negotiated in Texas, would have never needed to turn off the machine, even when the price of BTC dropped to ~$4k in mid-2020. Meanwhile, those mining in residential settings, where average US power rates are >12c/kWh, would have had a few opportunities to run the miner profitably, since 2018. We find the difference in returns from 5c/kWh and 2c/kWh as particularly insightful as it represents the typical difference between building your own infrastructure and paying power directly vs working with a hosting company to house your mining fleet. Hosting fees are generally charged as a spread over the hosting provider's direct power costs. Exhibit 14 - Mining Margins: Cheap Power = More Periods of Profitability Mining Margin = (Revenue - Power Costs) / Revenue Assume margin of 0% when unprofitable b/c miner will be turned off 100% ...When BTC falls, only those with cheap power remain 80% profitable 60% 40% When BTC price is high, 20% it's easy to be profitable... 0% 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 1Q22 2Q22 3Q22 Bitmain S9 @ 12c kWh Bitmain S9 @ 5c kWh Bitmain S9 @ 2c kWh . Source: asicminervalue.com, Jefferies Exhibit 15 - ASIC Miner: Revenue vs Power Costs Exhibit 16 - Cumulative Earnings @ Different Power Costs - Cheap Power is Key $900 Bitmain S9 $800 $2,500 Assumptions Th/s: 11.5 Bitmain S9 $700 * BTC sold for $USD in period it was mined Watts: 1,127 Only Miners With the Th/s: 11.5 $2,000 * Miner turned off when revenue < power cost $600 Cheapest Power Rates Watts: 1,127 $500 Remain Profitable $1,500 Cost of S9 @ March 31, 2018: $1,129 $400 $300 $1,000 $200 $100 $500 $0 2Q18 4Q18 1Q19 3Q19 1Q20 3Q20 1Q21 3Q21 1Q18 3Q18 2Q19 4Q19 2Q20 4Q20 2Q21 4Q21 $0 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 Quarterly Revenue Power Cost @ 12c kWh Power Cost @ 5c kWh Power Cost @ 2c kWh . Bitmain S9 @ 12c kWh Bitmain S9 @ 5c kWh Bitmain S9 @ 2c kWh Source: asicminervalue.com, Jefferies . Source: asicminervalue.com, Hashrate Index, Jefferies October 18, 2021 11 Please see important disclosure information on pages 19 - 24 of this report. EQUITY RESEARCH Global | Cryptocurrency Mining Is Mining or Buy & Hold More Profitable? A question that we often hear is: why would I invest in a BTC mining company and not just buy BTC itself? It's a fair question, but upon exploration of the topic, we have observed that mining generally results in higher returns on multi-year periods of time. As explored in the previous section, if a miner has access to cheap power rates, then returns are even greater. In the following charts, we analyzed the theoretical profits on two of the most popular Bitmain ASIC miners: Antminer S9 (released in 2016) and Antminer S19 Pro (released in 2020). The S9 has had a particularly strong success story. If a person bought an S9 at the end of 2017 at the market spot price of $1,130, and then "hodl'd" (crypto slang for holding BTC) all of the BTC that they mined, they would have realized a more than 1,700% return on their investment, compared to an approximate 300% return for buying and holding BTC from the same day. Using a more recent miner, if the S19 Pro was purchase at the end of 1Q20, when the market spot price was $2,410, a mine & hold strategy would return 1,083% vs a buy BTC & hold strategy that would return 764%. However, with rise in BTC price over 2021, the spot price of a new S19 Pro today is around $10,000, so repeating that ROI over the next 18 months will certainly require material upside to the price of BTC. Exhibit 17 - Return on Investment Scenarios: Mining and Holding Exhibit 18 - Return on Investment Scenarios: Mining and Holding BTC Outperforms BTC Outperforms 2000% 1200% Bitmain S9 1790% Bitmain S19 Pro 1083% 1500% Purchase Price: $1,130 on 31 Dec '17 1000% Purchase Price: $2,410 on 31 Mar '20 800% Cost/yr @ 5c KWh: $1,120 1000% Cost/yr @ 5c KWh: $484 764% Th/s: 11.5 600% Th/s: 110 545% 500% Watts: 1,127 307% 400% Watts: 3,250 191% 0% 200% -500% 0% Sep-20 Jul-21 Jun-20 Jul-20 Oct-20 Jan-21 Sep-21 Apr-21 Jun-21 Oct-21 Aug-20 Nov-20 Mar-21 Nov-21 Dec-20 Dec-21 May-21 Aug-21 Feb-21 Dec-17 Mar-18 Sep-18 Dec-18 Mar-19 Dec-19 Sep-19 Mar-20 Sep-20 Dec-20 Mar-21 Dec-21 Sep-21 Jun-18 Jun-19 Jun-20 Jun-21 Mine + Sell BTC Buy + Hodl BTC Mine + Hodl BTC Mine + Sell BTC Buy + Hodl BTC Mine + Hodl BTC . . Source: Blockchain.com, Hashrate Index, Jefferies Source: Blockchain.com, Hashrate Index, Jefferies Exhibit 19 - Quarterly Profitability (Revenue - Power Costs) of Exhibit 20 - Mining Margin of S9 (2016) vs S19 (2020) Over Time; Miners Over Time The S9 Was Profitable for About Three Years... And Then Became Profitable Again in 2021 $3,500 300,000,000 $3,000 250,000,000 100% $2,500 200,000,000 50% $2,000 $1,500 150,000,000 0% $1,000 100,000,000 $500 Mining Margin = (Revenue - Power & 50,000,000 (50%) $0 Hosting Costs) / Revenue ($500) 0 (100%) 4Q21E 2Q22E 4Q22E 2Q16 4Q16 2Q17 4Q17 2Q18 4Q18 2Q19 4Q19 2Q20 4Q20 2Q21 Sep-17 Sep-18 Sep-19 Sep-20 Sep-21 Dec-17 Dec-18 Dec-19 Mar-20 Dec-20 Dec-21 Mar-17 Mar-18 Mar-19 Mar-21 Jun-18 Jun-17 Jun-19 Jun-20 Jun-21 Network Hash Rate (TH/s) Bitmain Antminer S9 (11.5Th) Bitmain Antminer S9 (11.5Th) Bitmain Antminer S19 Pro (110Th) Bitmain Antminer S17 (56Th) Bitmain Antminer S19 Pro (110Th) . . Source: Blockchain.com, Jefferies Source: asicminervalue.com, Jefferies October 18, 2021 12 Please see important disclosure information on pages 19 - 24 of this report. EQUITY RESEARCH Global | Cryptocurrency Mining Sensitivity Analysis: BTC Price and Network Hash Rate The relationship between the price of Bitcoin and the network hash rate is key to understanding how it impacts mining revenue. Moves in the price of BTC are very often correlated to an increase in the network hash rate. However, that isn't always the case. Earlier this year, the unique situation of China banning crypto-mining drove the price of BTC down from about $55k to the low-$30k range. However, for those outside of China, the drop in the price of BTC was more than offset by a 40% reduction in the network hash rate, which increased market share for the remaining miners by nearly 70%. Further, the network hash rate is still ~20% below its peak of 180EH/s, in May 2021, but the price of BTC has nearly recovered to its April 2021 peak of ~$63k. In the chart below, we demonstrate what the potential annual mining revenue of a 1 EH/s fleet is based on changes in the network hash rate and the price of BTC. Ideally, a miner wants to see the price of BTC rise faster than the network has rate. While we are unlikely to see a repeat of 2021 near-perfect market dynamics (for non-Chinese miners), we do expect that the ongoing global chip shortage will keep the network hash rate from growing too rapidly. Exhibit 21 - Annual Revenue of a 1 EH/s Mining Fleet at Different Network Hash Rates and BTC Prices $BTC Price $500,000,000 Annual Revenue per $450,000,000 $175,000 1 EH/s of Power $400,000,000 $350,000,000 $125,000 $300,000,000 $250,000,000 $200,000,000 $75,000 $150,000,000 $100,000,000 $50,000,000 $25,000 $0 2021 ($47k) 300EH/s 275EH/s 250EH/s 225EH/s 200EH/s 175EH/s 150EH/s 125EH/s . Network Hash Rate (EH/s) Source: bloackchain.com, Jefferies October 18, 2021 13 Please see important disclosure information on pages 19 - 24 of this report. EQUITY RESEARCH Global | Cryptocurrency Mining Mining Coins: Different Coins = Different Mining Protocols There are currently two primary blockchain protocols used in the crypto universe. The first, and by far the most widely used, is Proof-of-Work. Both Bitcoin and Ethereum currently use Proof-of-Work. The Proof-of-Work protocol is designed so that the more work a miner does on the blockchain in comparison to other miners (the more hash rate you contribute), the more crypto the miner is rewarded. The process of completing computational work on the blockchain is what is familiarly referred to as "mining". In a Proof-of-Work system, requiring large amounts of computational work from each miner is necessary to guarantee the security and validity of the information stored on the blockchain. In a distributed ledger system, code is committed to the ledger once a majority of miners (51%) reach consensus that the information is correct. Therefore, smaller malicious parties trying to hack the system are unable to do so because they do not contribute over half of the network hash rate (in other words, they do not have a 51% majority), and so their malicious code will not be accepted into the blockchain. The large amount of compute power required to obtain 51% control of a Proof-of-Work blockchain makes it prohibitive for bad actors to take control of the system. In addition, the large power spend results in many miners having to sell their coins in order to pay the bill, putting downward pressure on the price of the coin. The second most popular blockchain protocol is called Proof-of-Stake. Proof-of-Stake was created as an alternative to Proof-of-Work largely in response to the large amounts of power required to sustain PoW systems like Bitcoin's. Currently, only alt coins use PoS but it has recently gained attention since Ethereum announced that it plans to migrate to a PoS system in the near future (specifically, the Casper protocol). Instead of requiring all blockchain contributors to race to solve the same computational block in order to be rewarded (the energy inefficient system that PoW systems rely on), PoS systems decide which "validator" will solve a block randomly, based on the number of coins held in the contributor's wallet at the time; contributors with the highest number of coins deposited, or the largest "stake", will be selected to contribute the most blocks. The remaining validators are compensated solely with transaction fees. In the Ethereum Casper protocol, if a validator attempts to upload bad code to the blockchain, they will lose their stake of deposited coins when other validators vote not to add the code to the blockchain. This is an important security feature of this PoS protocol-- even if a bad actor had 51% control of the system, they would not attempt to hack it (which would be achieved by attempting to fork the blockchain or preventing transactions from occuring) because that would result in them losing access to the coins that they deposited. Despite being more energy efficient and theoretically more secure than PoW, the PoS protocol is largely unproven at scale and, as with any new technology, may see some issues as it becomes more widely adopted. Despite the compelling argument for lower energy consumption which is the largest cost for most BTC miners, most feel that it would be highly unlikely for BTC to transiton to PoS due to resistance by the the largest BTC miners who have already made immense investments in growing their mining fleets. October 18, 2021 14 Please see important disclosure information on pages 19 - 24 of this report. EQUITY RESEARCH Global | Cryptocurrency Mining Regulation and Government Acceptance Exhibit 22 - Bitcoin Hash Rate by Country 180 As cryptocurrency has risen in popularity in recent years, this industry has come under 160 increasing regulatory scrutiny across the globe. The most direct government intervention 140 120 to date was the banning of cryptocurrency mining in China in May of this year, when 100 the government also outlawed the use of all cryptocurrencies other than YuanCoin. EH/s 80 Whereas previously, many cryptocurrency miners flocked to China to take advantage of 60 the cheap electricity costs, their operations were suddenly halted and mining operations 40 20 consequently expanded in other areas of the globe like the US and Kazakhstan (see Exhibit 0 22). S-19 N-19 J-20 M-20 M-20 J-20 S-20 N-20 J-21 M-21 M-21 J-21 Russia US Canada Kazakhstan Malaysia Other governments have taken a more favorable view of cryptocurrency. For example, . Other Germany Iran Ireland China in September El Salvador became the first country to designate Bitcoin as their Source: Jefferies, Cambridge Bitcoin Electricity official currency. El Salvador's president, Nayib Bukele, believes cryptocurrency can help Consumption Index address the issue of providing access to financial services to historically under-banked populations. In the US, thus far sentiment has been mostly positive, although some are calling for increased oversight of the cryptocurrency market. Senator Warren in particular has called on the SEC to address the risks associated with high cryptocurrency volatility, to better protect investors. Meanwhile, SEC Chairman Gary Gensler has voiced support of Bitcoin/ crypto ETFs that invest in futures contracts. While for now he is only publicly supporting this narrow class of products, it could signal potentially broader support of crypto-related investments to come in the future as the risks and opportunities associated with these products are better understood. The first bitcoin futures ETF from ProShares is expected to begin trading this week (week of October 18, 2021). Certain applications of crypto and DeFi technologies have come under greater scrutiny in the US, in particular crypto lending instruments and stable coins. For example, in September the SEC threatened to sue Coinbase over a new lending product they planned to offer that would pay customers interest on their crypto deposits. Many of the issues arising revolve around the core question of whether cryptocurrencies will be treated as securities, and to what degree they will have the same regulations applied. Until this question is more directly answered by regulatory authorities, we will likely continue to see this push- and-pull between crypto companies who are trying to innovate in this new space, and the government. That being said, we believe it is unlikely that the US follows in China's footsteps with a cryptocurrency ban, but instead will opt to foster this new industry on their own turf, where they can enforce the controls they believe necessary to protect investors and also benefit from the tax revenue. October 18, 2021 15 Please see important disclosure information on pages 19 - 24 of this report. EQUITY RESEARCH Global | Cryptocurrency Mining Publicly Traded Cryptocurrency Miners Argo Blockchain (Nasdaq: ARBK | LSE: ARB, Buy): Based in London, Argo was founded in 2018 as a Mining-as-a-Service company, but quickly pivoted to mining cryptocurrencies for its own account. Argo currently operates over 21k Bitcoin mining machines for a total hash rate of ~1.075 EH/s out of its owned facilities in Quebec and vendor-hosted facilities in the US. The company is in the process of developing its own facility in Texas which will house the bulk of its miners beginning in mid-2022. Argo mines Bitcoin and Zcash, and it currently holds 1,836 BTC. For more information about Argo's business, see our Initiation Note. Marathon Digital Holdings (Nasdaq: MARA, NC): Based in Nevada, Marathon was founded in 2010 as Marathon Patent Group, a patent buying/selling business. In 2021, it pivoted to mining Bitcoin and changed its name. Marathon currently operates over 22,400 mining machines for a total hash rate of ~2.3 EH/s out of vendor-hosted facilities in the US. The company currently holds 7,035 BTC, though close to 5,000 of these were purchased and not self-mined. Marathon has enough mining machines on order to bring its hash rate to 13.3 EH/s by mid-2022. Riot Blockchain (Nasdaq: RIOT, NC): Based in Colorado, Riot was founded in 2000. Riot Blockchain currently operates its miners out of vendor-hosted facilities in New York. The company mines Bitcoin and Ethereum, and are also invested in Tess, Coinsquare, and Verady. Riot is in the process of expanding a recently purchased facility in Texas to host the bulk of its miners going forward. Most of the existing capacity at the site is used to host BTC miners for others, a second revenue stream. Riot currently holds 3,128 BTC. Hut 8 Mining (Nasdaq: HUT | TSX: HUT, NC): Based in Toronto and founded in 2011, Hut currently operates its mining machines out of Alberta, Canada, at a hash rate of about 1.4 EH/s. The company mines Bitcoin and Ethereum, and holds 4,724 BTC. Bitfarms (Nasdaq:BITF | TSXV: BITF, NC): Based in Toronto and founded in 2018, Bitfarms currently has a hash rate of about 1.6 EH/s and holds 2,028 BTC. The company operates 5 mining facilities for a total of 82 MW in Quebec, and expect to increase its hash rate to 3 EH/s by 1Q22. HIVE Blockchain Technologies (TSX.V:HIVE | Nasdaq:HIVE | FSE: HBF, NC): Based in Vancouver, Hive was formerly Leeta Gold Corp. until it pivoted to being a blockchain technology company in 2017. Hive currently operates its mining out of Canada, Sweden, and Iceland. The company mines Bitcoin and Ethereum. Its hash rate is currently about 1 EH/s and it holds 1,030 BTC. Cipher Mining (Nasdaq: CIFR, NC): Cipher came public through a SPAC transaction (acquired by "Good Works Acquisition Group"). The company has limited public information available about its current mining operations. The company recently announced a large purchase order for between 28-56k Bitfury mining machines that is expected to bring its hash rate to 13.8-19.2 EH/s by December 2022. The company is currently based in New York. October 18, 2021 16 Please see important disclosure information on pages 19 - 24 of this report. EQUITY RESEARCH Global | Cryptocurrency Mining Valuation of Crypto Miners Exhibit 23 - Crypto Mining Comp Sheet Priced as of 15 Oct 2021 Stock FY21 FY22 4Q21 Market FY21 Adj FY22 Adj FY21 FY22 FY22 Company Ticker Price Revenue Revenue Annualized Cap (M) EBITDA (M) EBITDA (M) Price/Rev Price/Rev EV/EBITDA (USD) (M) (M) EV/EBITDA) Argo Blockchain PLC ADR ARBK $ 16.92 811 96.1 184.4 87.9 137.4 8.4x 4.4x 8.0x 5.1x Marathon Digital Holdings Inc MARA $ 48.89 4,871 224.9 789.8 364.2 602.0 21.7x 6.2x 11.8x 7.1x Riot Blockchain Inc RIOT $ 27.85 2,672 220.0 450.4 255.6 320.1 12.1x 5.9x 8.8x 7.0x Hut 8 Mining Corp. HUT $ 12.22 1,758 125.0 301.8 117.8 199.1 14.1x 5.8x 11.9x 7.1x Bitfarms Ltd. BITF $ 5.38 904 163.8 224.2 NA NA 5.5x 4.0x NA NA HIVE Blockchain Technologies Ltd HIVE $ 3.13 1,204 NA NA NA NA NA NA NA NA Cipher Mining Inc CIFR $ 6.99 1,727 NA NA NA NA NA NA NA NA . Sum / Average 13,948 829.8 1,950.6 825.5 1,258.6 15.8x 5.8x 10.7x 6.9x Source: FactSet, Jefferies Exhibit 24 - Market Cap Exhibit 25 - Contribution of North America Mining Operators to Total Network Hash Rate $6,000 Includes announced projections from ARBK, MARA, RIOT, HUT, $5,000 BITF, and HIVE $4,000 Millions 300 $3,000 250 $2,000 200 $1,000 EH/s 150 $0 ARBK MARA RIOT HUT BITF HIVE CIFR 100 13.23% 14.50% 50 7.79% 7.64% Market Cap . 0 Source: Jefferies, FactSet Feb-22 Dec-21 Jan-22 Sep-21 Oct-21 Apr-22 May-22 Sep-22 Oct-22 Dec-22 Aug-21 Jun-22 Nov-21 Jul-22 Aug-22 Mar-22 Nov-22 NA Mining Operators Network Hash Rate . Source: Jefferies Exhibit 26 - Revenues Exhibit 27 - BTC Held (In BTC) as of September 2021 $1,000 8000 $800 7000 6000 $600 5000 Millions $400 4000 $200 3000 $0 2000 ARBK MARA RIOT HUT BITF 1000 0 FY21 Revenue FY22 Revenue . ARBK MARA RIOT HUT BITF HIVE . Source: Jefferies, FactSet Source: Jefferies Research, Press Releases and Public Filings RIOT, BITF, and HIVE totals are as of August (September numbers not yet reported). October 18, 2021 17 Please see important disclosure information on pages 19 - 24 of this report. EQUITY RESEARCH Global | Cryptocurrency Mining Exhibit 28 - BTC Holdings as % of Market Cap Exhibit 29 - Current EV/Exahash Comparison ($M) Current Enterprise Value Compared to Reported Projections of EH/ 20.0% s Power for FY21 and FY22 15.0% $1,500 10.0% $1,000 5.0% 0.0% $500 ARBK MARA RIOT HUT BITF HIVE $0 BTC % of Market Cap ARBK MARA RIOT HUT BITF HIVE . Source: Jefferies FY21 FY22 . RIOT, BITF, and HIVE BTC Held totals are as of August (September Source: Jefferies, FactSet, Company Reports numbers not yet reported). Exhibit 30 - EV/EBITDA Multiples Exhibit 31 - BTC Mined Per Month 12.0x 500 10.0x 400 8.0x 300 6.0x 200 4.0x 100 2.0x 0 0.0x ARBK MARA RIOT HUT 4Q21 Annualized FY22 ARBK MARA RIOT BITF . Source: FactSet, Jefferies . Source: Jefferies, Company Reports Exhibit 32 - EH/s Forecasting 20 15 EH/s 10 5 0 Jul-21 Oct-21 Feb-22 May-22 Aug-22 Dec-22 Mar-23 ARBK MARA RIOT BITF . Source: Jefferies, Company Reports October 18, 2021 18 Please see important disclosure information on pages 19 - 24 of this report. EQUITY RESEARCH Global | Cryptocurrency Mining Company Valuation/Risks Argo Blockchain plc Our PT is DCF-derived. Key risks include: (1) Bitcoin decreasing in value; (2) Network hash rate increasing rapidly; (3) Inability to procure new mining machines at favorable prices. Analyst Certification: I, Jonathan Petersen, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receives compensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgement. Investment Recommendation Record (Article 3(1)e and Article 7 of MAR) Recommendation Completion October 18, 2021 , 00:07 ET. Recommendation Distributed October 18, 2021 , 00:07 ET. Company Specific Disclosures Jefferies Group LLC makes a market in the securities or ADRs of Argo Blockchain plc. Jefferies Group LLC, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from Argo Blockchain plc within the next three months. Within the past 12 months, Jefferies Group LLC, its affiliates or subsidiaries has received compensation from investment banking services from Argo Blockchain plc. Within the past twelve months, Argo Blockchain plc has been a client of Jefferies LLC and investment banking services are being or have been provided. Jefferies Group LLC, its affiliates or subsidiaries has acted as a manager or co-manager in the underwriting or placement of securities for Argo Blockchain plc or one of its affiliates within the past twelve months. Explanation of Jefferies Ratings Buy - Describes securities that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period. Hold - Describes securities that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period. Underperform - Describes securities that we expect to provide a total return (price appreciation plus yield) of minus 10% or less within a 12-month period. The expected total return (price appreciation plus yield) for Buy rated securities with an average security price consistently below $10 is 20% or more within a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperform rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% or less within a 12-month period. NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies. CS - Coverage Suspended. Jefferies has suspended coverage of this company. NC - Not covered. Jefferies does not cover this company. Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securities regulations prohibit certain types of communications, including investment recommendations. Monitor - Describes securities whose company fundamentals and financials are being monitored, and for which no financial projections or opinions on the investment merits of the company are provided. October 18, 2021 19 Please see important disclosure information on pages 19 - 24 of this report. EQUITY RESEARCH Global | Cryptocurrency Mining Valuation Methodology Jefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected total return over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of market risk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF, P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns, and return on equity (ROE) over the next 12 months. Jefferies Franchise Picks Jefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selection is based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/reward ratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the number can vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason for inclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it triggers a stop loss. Stocks having 120 day volatility in the bottom quartile of S&P stocks will continue to have a 15% stop loss, and the remainder will have a 20% stop. Franchise Picks are not intended to represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment style such as growth or value. Risks which may impede the achievement of our Price Target This report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, the financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance of the financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, and income from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financial and political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates may adversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities such as ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk. Other Companies Mentioned in This Report • Argo Blockchain plc (ARBK: $16.92, BUY) Rating and Price Target History for: Argo Blockchain plc (ARBK) as of 10-14-2021 16 14 12 10 8 6 4 2 0 Jan 19 Apr 19 Jul 19 Oct 19 Jan 20 Apr 20 Jul 20 Oct 20 Jan 21 Apr 21 Jul 21 Oct 21 Notes: Each box in the Rating and Price Target History chart above represents actions over the past three years in which an analyst initiated on a company, made a change to a rating or price target of a company or discontinued coverage of a company. Legend: I: Initiating Coverage D: Dropped Coverage October 18, 2021 20 Please see important disclosure information on pages 19 - 24 of this report. EQUITY RESEARCH Global | Cryptocurrency Mining B: Buy H: Hold UP: Underperform Distribution of Ratings Distribution of Ratings IB Serv./Past12 Mos. JIL Mkt Serv./Past12 Mos. Count Percent Count Percent Count Percent BUY 1888 63.74% 162 8.58% 25 1.32% HOLD 942 31.80% 28 2.97% 7 0.74% UNDERPERFORM 132 4.46% 1 0.76% 0 0.00% October 18, 2021 21 Please see important disclosure information on pages 19 - 24 of this report. EQUITY RESEARCH Global | Cryptocurrency Mining Other Important Disclosures Jefferies does business and seeks to do business with companies covered in its research reports, and expects to receive or intends to seek compensation for investment banking services among other activities from such companies. As a result, investors should be aware that Jefferies may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Jefferies Equity Research refers to research reports produced by analysts employed by one of the following Jefferies Group LLC ("Jefferies") group companies: United States: Jefferies LLC which is an SEC registered broker-dealer and a member of FINRA (and distributed by Jefferies Research Services, LLC, an SEC registered Investment Adviser, to clients paying separately for such research). United Kingdom: Jefferies International Limited, which is authorized and regulated by the Financial Conduct Authority; registered in England and Wales No. 1978621; registered office: 100 Bishopsgate, London EC2N 4JL; telephone +44 (0)20 7029 8000; facsimile +44 (0)20 7029 8010. Hong Kong: Jefferies Hong Kong Limited, which is licensed by the Securities and Futures Commission of Hong Kong with CE number ATS546; located at Suite 2201, 22nd Floor, Cheung Kong Center, 2 Queen's Road Central, Hong Kong. Singapore: Jefferies Singapore Limited, which is licensed by the Monetary Authority of Singapore; located at 80 Raffles Place #15-20, UOB Plaza 2, Singapore 048624, telephone: +65 6551 3950. Japan: Jefferies (Japan) Limited, Tokyo Branch, which is a securities company registered by the Financial Services Agency of Japan and is a member of the Japan Securities Dealers Association; located at Tokyo Midtown Hibiya 30F Hibiya Mitsui Tower, 1-1-2 Yurakucho, Chiyoda-ku, Tokyo 100-0006; telephone +813 5251 6100; facsimile +813 5251 6101. India: Jefferies India Private Limited (CIN - U74140MH2007PTC200509), licensed by the Securities and Exchange Board of India for: Stock Broker (NSE & BSE) INZ000243033, Research Analyst INH000000701 and Merchant Banker INM000011443, located at 42/43, 2 North Avenue, Maker Maxity, Bandra-Kurla Complex, Bandra (East), Mumbai 400 051, India; Tel +91 22 4356 6000. Australia: Jefferies (Australia) Securities Pty Limited (ACN 610 977 074), which holds an Australian financial services license (AFSL 487263) and is located at Level 22, 60 Martin Place, Sydney NSW 2000; telephone +61 2 9364 2800. This report was prepared by personnel who are associated with Jefferies (Jefferies International Limited, Jefferies Hong Kong Limited, Jefferies Singapore Limited, Jefferies (Japan) Limited, Tokyo Branch, Jefferies India Private Limited), Jefferies (Australia) Pty Ltd; or by personnel who are associated with both Jefferies LLC and Jefferies Research Services LLC ("JRS"). Jefferies LLC is a US registered broker-dealer and is affiliated with JRS, which is a US registered investment adviser. JRS does not create tailored or personalized research and all research provided by JRS is impersonal. If you are paying separately for this research, it is being provided to you by JRS. Otherwise, it is being provided by Jefferies LLC. Jefferies LLC, JRS, and their affiliates are collectively referred to below as "Jefferies". Jefferies may seek to do business with companies covered in this research report. As a result, investors should be aware that Jefferies may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only one of many factors in making their investment decisions. Specific conflict of interest and other disclosures that are required by FINRA and other rules are set forth in this disclosure section. *** If you are receiving this report from a non-US Jefferies entity, please note the following: Unless prohibited by the provisions of Regulation S of the U.S. Securities Act of 1933, as amended, this material is distributed in the United States by Jefferies LLC, which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6 under the US Securities Exchange Act of 1934, as amended. Transactions by or on behalf of any US person may only be effected through Jefferies LLC. In the United Kingdom and European Economic Area this report is issued and/or approved for distribution by Jefferies International Limited ("JIL”) and is intended for use only by persons who have, or have been assessed as having, suitable professional experience and expertise, or by persons to whom it can be otherwise lawfully distributed. JIL allows its analysts to undertake private consultancy work. JIL’s conflicts management policy sets out the arrangements JIL employs to manage any potential conflicts of interest that may arise as a result of such consultancy work. Jefferies LLC, JIL and their affiliates, may make a market or provide liquidity in the financial instruments referred to in this report; and where they do make a market, such activity is disclosed specifically in this report under “company specific disclosures”. For Canadian investors, this material is intended for use only by professional or institutional investors. None of the investments or investment services mentioned or described herein is available to other persons or to anyone in Canada who is not a "Designated October 18, 2021 22 Please see important disclosure information on pages 19 - 24 of this report. EQUITY RESEARCH Global | Cryptocurrency Mining Institution" as defined by the Securities Act (Ontario). In Singapore, Jefferies Singapore Limited (“JSL”) is regulated by the Monetary Authority of Singapore. For investors in the Republic of Singapore, this material is provided by JSL pursuant to Regulation 32C of the Financial Advisers Regulations. The material contained in this document is intended solely for accredited, expert or institutional investors, as defined under the Securities and Futures Act (Cap. 289 of Singapore). If there are any matters arising from, or in connection with this material, please contact JSL, located at 80 Raffles Place #15-20, UOB Plaza 2, Singapore 048624, telephone: +65 6551 3950. In Japan, this material is issued and distributed by Jefferies (Japan) Limited to institutional investors only. In Hong Kong, this report is issued and approved by Jefferies Hong Kong Limited and is intended for use only by professional investors as defined in the Hong Kong Securities and Futures Ordinance and its subsidiary legislation. In the Republic of China (Taiwan), this report should not be distributed. The research in relation to this report is conducted outside the People’s Republic of China (“PRC”). This report does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC. PRC investors shall have the relevant qualifications to invest in such securities and shall be responsible for obtaining all relevant approvals, licenses, verifications and/or registrations from the relevant governmental authorities themselves. In India, this report is made available by Jefferies India Private Limited. In Australia, this report is issued and/or approved for distribution by, or on behalf of, Jefferies (Australia) Securities Pty Ltd. It is directed solely at wholesale clients within the meaning of the Corporations Act 2001 of Australia (the “Corporations Act”), in connection with their consideration of any investment or investment service that is the subject of this report. This report may contain general financial product advice. Where this report refers to a particular financial product, you should obtain a copy of the relevant product disclosure statement or offer document before making any decision in relation to the product. Recipients of this document in any other jurisdictions should inform themselves about and observe any applicable legal requirements in relation to the receipt of this document. This report is not an offer or solicitation of an offer to buy or sell any security or derivative instrument, or to make any investment. Any opinion or estimate constitutes the preparer's best judgment as of the date of preparation, and is subject to change without notice. Jefferies assumes no obligation to maintain or update this report based on subsequent information and events. Jefferies, and their respective officers, directors, and employees, may have long or short positions in, or may buy or sell any of the securities, derivative instruments or other investments mentioned or described herein, either as agent or as principal for their own account. This material is provided solely for informational purposes and is not tailored to any recipient, and is not based on, and does not take into account, the particular investment objectives, portfolio holdings, strategy, financial situation, or needs of any recipient. As such, any advice or recommendation in this report may not be suitable for a particular recipient. Jefferies assumes recipients of this report are capable of evaluating the information contained herein and of exercising independent judgment. A recipient of this report should not make any investment decision without first considering whether any advice or recommendation in this report is suitable for the recipient based on the recipient’s particular circumstances and, if appropriate or otherwise needed, seeking professional advice, including tax advice. Jefferies does not perform any suitability or other analysis to check whether an investment decision made by the recipient based on this report is consistent with a recipient’s investment objectives, portfolio holdings, strategy, financial situation, or needs. By providing this report, neither JRS nor any other Jefferies entity accepts any authority, discretion, or control over the management of the recipient’s assets. Any action taken by the recipient of this report, based on the information in the report, is at the recipient’s sole judgment and risk. The recipient must perform his or her own independent review of any prospective investment. If the recipient uses the services of Jefferies LLC (or other affiliated broker-dealers), in connection with a purchase or sale of a security that is a subject of these materials, such broker-dealer may act as principal for its own accounts or as agent for another person. Only JRS is registered with the SEC as an investment adviser; and therefore neither Jefferies LLC nor any other Jefferies affiliate has any fiduciary duty in connection with distribution of these reports. The price and value of the investments referred to herein and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. This report may contain forward looking statements that may be affected by inaccurate assumptions or by known or unknown risks, uncertainties, and other important factors. As a result, the actual results, events, performance or achievements of the financial product may be materially different from those expressed or implied in such statements. This report has been prepared independently of any issuer of securities mentioned herein and not as agent of any issuer of securities. No Equity Research personnel have authority whatsoever to make any representations or warranty on behalf of the issuer(s). Any comments or statements made herein are those of the Jefferies entity producing this report and may differ from the views of other Jefferies entities. October 18, 2021 23 Please see important disclosure information on pages 19 - 24 of this report. EQUITY RESEARCH Global | Cryptocurrency Mining This report may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor’s. Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Jefferies does not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and is not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. Third-party content providers give no express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose or use. Neither Jefferies nor any third-party content provider shall be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use of their content, including ratings. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase, hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice. Jefferies research reports are disseminated and available electronically, and, in some cases, also in printed form. Electronic research is simultaneously made available to all clients. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Jefferies. Neither Jefferies nor any of its respective directors, officers or employees, is responsible for guaranteeing the financial success of any investment, or accepts any liability whatsoever for any direct, indirect or consequential damages or losses arising from any use of this report or its contents. Nothing herein shall be construed to waive any liability Jefferies has under applicable U.S. federal or state securities laws. For Important Disclosure information relating to JRS, please see https://adviserinfo.sec.gov/IAPD/Content/Common/ crd_iapd_Brochure.aspx?BRCHR_VRSN_ID=483878 and https://adviserinfo.sec.gov/Firm/292142 or visit our website at https:// javatar.bluematrix.com/sellside/Disclosures.action, or www.jefferies.com, or call 1.888.JEFFERIES. © 2021 Jefferies Group LLC October 18, 2021 24 Please see important disclosure information on pages 19 - 24 of this report.