* Jefferies LLC / Jefferies Research Services, LLC Jonathan Petersen * Equity Analyst (212) 284-1705 jpetersen@jefferies.com ^Prior trading day closing price unless otherwise noted. Cryptocurrency Mining Cryptocurrency Mining Primer: How to Run a (Digital) Money Printing Operation October 18, 2021 Key Takeaway Cryptocurrency (e.g. Bitcoin) mining is functionally the process through which transactions are added and verified on a blockchain. Miners are rewarded with new digital coins for their efforts, which is the predominate source of mining revenue. Bitcoin (BTC) mining has grown to an expected $15B of revenue in 2021, up 3x from 2020. Our primer explores this growing market and how large-scale miners drive profitability. 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 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 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. Initiating Coverage of ARBK: In conjunction with this report, we have launched coverage of Argo Blockchain (ARBK). See our note. Exhibit 1 - Return on Investment Scenarios: Mining BTC Outperforms Buying BTC 1790% 307% 191% -500% 0% 500% 1000% 1500% 2000% Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mine + Sell BTC Buy + Hodl BTC Mine + Hodl BTC Bitmain S9 Purchase Price: $1,130 on 31 Dec '17 Cost /yr @ 5c KWh: $484 Th/s: 11.5 Watts: 1,127 Source: Blockchain.com, Hashrate Index, Jefferies Exhibit 2 - BTC Mining Profitability Formula Source: Jefferies Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 19 to 24 of this report. EQUITY RESEARCH Global | Cryptocurrency Mining This report is intended for greg.landegger@pw-inc.com. Unauthorized distribution prohibited. 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 Please see important disclosure information on pages 19 - 24 of this report. 2 EQUITY RESEARCH Global | Cryptocurrency Mining Cryptocurrency: What is it? 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 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/ or a replacement for "fiat" currencies. Today, there are over 10,000 cryptocurrencies and Bitcoin itself trades at about $60,000 per BTC and a market cap of over $1 trillion. Cryptocurrencies rely on blockchain technology, which is a distributed ledger system used to record transactions and other data, like smart contracts. Each cryptocurrency uses a unique blockchain that is programmed to have differing characteristics and rules that ultimately govern the financial incentives, potential use cases, and security of that particular blockchain. For example, some key characteristics programmed into the BTC blockchain include: 1. The total number of BTC that can ever be created is limited to 21 million. 2. The computational power needed to process a block of transactions (referred to as "Difficulty") automatically adjusts to keep the frequency at which new BTC are released into the market constant at 10 minutes; 3. After every 210,000 blocks of transactions that are processed (roughly every 4 years), the reward given to miners in the form of new BTC tokens is halved; 4. The size of a block is limited to ~2MB (originally it was 1MB) In comparison, Ethereum's blockchain uses similar technology to Bitcoin's but has no limitations on block size, and the time to process each block is only about 12 seconds versus Bitcoin's 10 minutes. This allows the ETH blockchain to quickly process larger 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 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. Exhibit 3 - Top Cryptos by Market Cap $11 $12 $13 $13 $16 $31 $33 $41 $48 $52 $69 $71 $78 $448 $1,145 SHIB ALGO BCH WBTC LTC LINK AVAX BUSD LUNA UNI DOGE USDC DOT SOL XRP USDT ADA BNB ETH BTC Billions Source: Jefferies, CoinMarketCap October 18, 2021 Please see important disclosure information on pages 19 - 24 of this report. 3 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 Please see important disclosure information on pages 19 - 24 of this report. 4 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 Source: Jefferies Exhibit 5 - Projections of Major Mining Metrics BTC Price ($USD) YoY Growth Network Hash Rate (TH/s) YoY Growth Total Mining Rewards + Fees ($USD) YoY Growth 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 October 18, 2021 Please see important disclosure information on pages 19 - 24 of this report. 5 EQUITY RESEARCH Global | Cryptocurrency Mining Miner Hash Rate: Beginning from the top left of the formula, the higher a mining operation's hash rate in comparison to the network hash rate, the higher its revenues will be. To calculate a mining operation's hash rate, you have to understand both (1) the number of miners in the fleet, and (2) the hash rate of each miner. The largest public BTC mining operations like MARA and RIOT currently have over 20,000 miners in their respective fleets, with plans to increase this number to upwards of 100,000 over the next year. Each individual miner in a fleet contributes to the overall hash rate of that mining operation. Currently, the highest end machines contribute ~110 TH/s and older machines contribute in the 10-50 TH/s range. Summing the total of the hash rates of each machine gives you the total hash rate of the mining operation. However, depending on the age of the machines and the facilities/ 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. The total hash rate of a fleet of miners is calculated as: # of ASIC miners multiplied by the average hash-power per ASIC miner Exhibit 6 - EH/s Forecasting 0 5 10 15 20 Jul-21 Oct-21 Feb-22 May-22 Aug-22 Dec-22 Mar-23 EH/s ARBK MARA RIOT BITF Source: Jefferies, Company Reports Network Hash Rate: As previously described, a mining company's revenues are earned in proportion to their total hash rate divided by the network's total hash rate. The network hash rate increases as more mining machines are brought onto the network and decreases as they are taken 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 The total network hash rate is calculated as: total # of ASIC miners operating at any given time multiplied by the average hash-power per ASIC miner in operation. October 18, 2021 Please see important disclosure information on pages 19 - 24 of this report. 6 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% $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 0 50,000,000 100,000,000 150,000,000 200,000,000 250,000,000 300,000,000 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Network Hash Rate BTC Price ($USD) China Bans Mining 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 Please see important disclosure information on pages 19 - 24 of this report. 7 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 of Gold Scenarios Constants Total BTC Float 18,749,000 Gold Market Cap (Billions) $11,859 Scenario 1: BTC Worth 10% Gold Market Share BTC Price $63,249 Upside +4% BTC Market Cap (Billions) $1,186 BTC Share of Store of Value Commodities 10.0% Scenario 2: BTC Worth 25% Gold Market Share BTC Price $158,122 Upside +159% BTC Market Cap (Billions) $2,965 BTC Share of Store of Value Commodities 25.0% Scenario 3: BTC Worth 50% Gold Market Share BTC Price $316,244 Upside +418% BTC Market Cap (Billions) $5,929 BTC Share of Store of Value Commodities 50.0% Scenario 4: BTC Worth 100% Gold Market Share BTC Price $632,489 Upside +937% BTC Market Cap (Billions) $11,859 BTC Share of Store of Value Commodities 100.0% Scenario 5: BTC Worth 150% Gold Market Share BTC Price $948,733 Upside +1455% BTC Market Cap (Billions) $17,788 BTC Share of Store of Value Commodities 150.0% Source: Jefferies, World Gold Council Exhibit 9 - BTC Price Based on Market Share of M3 Money Supply Scenarios M3 Money Supply Approximated by Total of USD, GBP, EUR (M3 Supply Approximated by Total of USD, GBP, and EUR) Constants M3 Money Supply (USD, Billions) $42,914 Total BTC Float 18,749,317 Scenario 1: BTC Worth 25% M3 Money Supply BTC Price $572,205 Upside +895% BTC Market Cap (USD, Billions) $10,728 BTC Share of M3 Supply (USD, GBP, EUR) 25% Scenario 2: BTC Worth 50% M3 Money Supply BTC Price $1,144,410 Upside +1889% BTC Market Cap (USD, Billions) $21,457 BTC Share of M3 Supply (USD, GBP, EUR) 50% Scenario 3: BTC Worth 75% M3 Money Supply BTC Price $1,716,615 Upside +2884% BTC Market Cap (USD, Billions) $32,185 BTC Share of M3 Supply (USD, GBP, EUR) 75% Scenario 4: BTC Worth 100% M3 Money Supply BTC Price $2,288,819 Upside +3879% BTC Market Cap (USD, Billions) $42,914 BTC Share of M3 Supply (USD, GBP, EUR) 100% Source: Jefferies, St. Louis Fed If BTC reached the value of Gold , it would trade at $632k per BTC (10x upside) If BTC reached the values of the M3 money supply in Western Countries, it would trade at > $2M per BTC (30x upside) Block Reward, Transaction Fees, and The "Halving" When the BTC blockchain was launched in 2009, the reward for solving a block was 50 BTC. Roughly every four years, that reward is cut in half and will continue to be cut until it is effectively zero in the year 2140. The last two halvings have resulted in about half a year of decreased mining rewards, but the acceleration in the price of BTC has more than offset the impact over time. Following the July 2016 halving, it took nine months for the value of mining rewards to reach pre-halving levels. After the May 2020 halving, it took six months to regain pre-halving revenue. Historically, investing in BTC in the months following The current block reward of 6.25 BTC will be cut in half every four years, with the next halving in 2024 Transaction fees are paid by those submitting transactions to the blockchain. The winner of the block gets these fees, which are typically 1-15% of the block reward October 18, 2021 Please see important disclosure information on pages 19 - 24 of this report. 8 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 $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $0 $200,000,000 $400,000,000 $600,000,000 $800,000,000 $1,000,000,000 $1,200,000,000 $1,400,000,000 $1,600,000,000 $1,800,000,000 $2,000,000,000 Transaction Fees Mining Rewards BTC Price ($USD) Halvings Source: Blockchain.com, Jefferies October 18, 2021 Please see important disclosure information on pages 19 - 24 of this report. 9 EQUITY RESEARCH Global | Cryptocurrency Mining Cost of Miners: When a miner is purchased can have a large impact on the ROI of the investment. The worst case scenario is to buy a large fleet of miners just as the price of BTC is peaking and potential mining revenues are declining. However, history suggests that those periods correct themselves through declining network hash rates and rebounding BTC prices. For example, we measured the ROIs (after power costs at 5c kWh) on Antminer S9s bought at different periods of time in 2018-2020. Given the movement in BTC price, buying an S9 in mid-2020 actually resulted in a much better ROI, over a shorter period of time, when compared to a purchase in mid-2018. Of course, it's easy to look at these things in hindsight and try to pass judgement. In reality, it is as difficult to time purchases as it is to project the future price of BTC. For the large-scale miners, there advantage with this cost is their ability to order in bulk — often tens of thousands of ASIC miners in a single order. Recently, we have seen bulk orders from the publicly-traded miners that have costs per machine that are at a 50% discount to the spot price that the average consumer pays. Exhibit 11 - When to Buy Matters; Antminer S9s Bought in Early-2018 Had Lower ROI vs Purchases in 2019/20 844% 422% 362% 192% 136% 0% 100% 200% 300% 400% 500% 600% 700% 800% 900% 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 2Q18 4Q18 2Q19 4Q19 2Q20 Purchase Price: $834 Purchase Price: $65 Purchase Price: $158 Purchase Price: $368 Purchase Price: $204 Bitmain S9 Cost /yr @ 5c KWh: $484 Th/s: 11.5 Watts: 1,127 ROIs Source: asicminervalue.com, Hashrate Index, Jefferies Exhibit 12 - ASIC Price per Terahash Trends With the Price of BTC $1,000 $10,000 $100,000 $0 $50 $100 $150 $200 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 The price of an ASIC miner generally moves with the price of BTC and is often measured in price per TH/s Exhibit 13 - Bitcoin Miners Miner Release Date Th/s Watts Monthly Power Cost @ 4c kWh Monthly Revenue @ $60k BTC, 150EH/s Earnings Mining Margin 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% Bitmain Antminer S9 (13.5Th) September-17 13.5 1,323 $114.31 $333 $218.51 66% Bitmain Antminer S9 (14Th) November-17 14 1,372 $118.54 $345 $226.60 66% Bitfily Snow Panther A1 January-18 49 5,400 $466.56 $1,156 $689.76 60% Ebang Ebit E10 February-18 18 1,650 $142.56 $454 $311.04 69% Canaan AvalonMiner 841 April-18 13.6 1,290 $111.46 $339 $227.52 67% Innosilicon T2 Terminator May-18 17.2 1,570 $135.65 $434 $298.37 69% 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% 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% MicroBT Whatsminer M10S September-18 55 3,500 $302.40 $1,519 $1,216.80 80% MicroBT Whatsminer M10 September-18 33 2,145 $185.33 $908 $722.30 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% 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% Bitmain Antminer S11 (20.5Th) November-18 20.5 1,530 $132.19 $547 $414.58 76% Holic H28 December-18 28 2,100 $181.44 $746 $564.48 76% Holic H22 December-18 22 1,700 $146.88 $582 $434.88 75% Innosilicon T3 43T January-19 43 2,100 $181.44 $1,243 $1,061.28 85% Innosilicon T3 39T March-19 39 2,150 $185.76 $1,106 $920.16 83% Bitmain Antminer S17 Pro (53Th) April-19 53 2,094 $180.92 $1,574 $1,393.52 89% 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% MicroBT Whatsminer M21S June-19 56 3,360 $290.30 $1,564 $1,274.11 81% StrongU STU-U8 July-19 46 2,100 $181.44 $1,342 $1,160.64 86% 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% StrongU STU-U8 Pro September-19 60 2,800 $241.92 $1,745 $1,503.36 86% Innosilicon T3+ 57T September-19 57 3,300 $285.12 $1,603 $1,317.60 82% Ebang Ebit E12+ September-19 50 2,500 $216.00 $1,440 $1,224.00 85% Ebang Ebit E12 September-19 44 2,500 $216.00 $1,241 $1,025.28 83% Canaan AvalonMiner 1066 September-19 50 3,250 $280.80 $1,375 $1,094.40 80% Canaan AvalonMiner 1047 September-19 37 2,380 $205.63 $1,020 $814.18 80% 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% Bitmain Antminer S17+ (73Th) December-19 73 2,920 $252.29 $2,165 $1,913.18 88% 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% MicroBT Whatsminer M31S April-20 76 3,220 $278.21 $2,239 $1,960.70 88% Bitmain Antminer S19 Pro (110Th) May-20 110 3,250 $280.80 $3,362 $3,081.60 92% Bitmain Antminer S19 (95Th) May-20 95 3,250 $280.80 $2,865.60 $2,584.80 90% Bitmain Antminer T19 (84Th) June-20 84 3,150 $272.16 $2,509.92 $2,237.76 89% MicroBT Whatsminer M32 July-20 62 3,348 $289.27 $1,764.17 $1,474.91 84% Canaan AvalonMiner 1166 Pro August-20 81 3,400 $293.76 $2,388.96 $2,095.20 88% Canaan AvalonMiner 1146 Pro August-20 63 3,276 $283.05 $1,803.51 $1,520.47 84% MicroBT Whatsminer M30S++ October-20 112 3,472 $299.98 $3,409.46 $3,109.48 91% MicroBT Whatsminer M30S+ October-20 100 3,400 $293.76 $3,018.24 $2,724.48 90% 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% MicroBT Whatsminer M31S+ December-20 80 3,360 $290.30 $2,359.30 $2,068.99 88% Canaan AvalonMiner 1246 January-21 90 3,420 $295.49 $2,685.31 $2,389.82 89% Bitmain Antminer S19j Pro (100Th) June-21 100 3,050 $263.52 $3,048.48 $2,784.96 91% Bitmain Antminer S19j (90Th) June-21 90 3,250 $280.80 $2,700.00 $2,419.20 90% Bitmain Antminer S19j Pro (104Th) July-21 104 3,068 $265.08 $3,179.40 $2,914.33 92% StrongU Hornbill H8 Pro July-21 84 3,360 $290.30 $2,491.78 $2,201.47 88% Innosilicon T2 Turbo HF+ July-21 33 2,600 $224.64 $868.32 $643.68 74% 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% 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 October 18, 2021 Please see important disclosure information on pages 19 - 24 of this report. 10 EQUITY RESEARCH Global | Cryptocurrency Mining Electricity Costs The most important cost of mining is the electrical power costs. When the price of BTC is high and the network hash rate is relatively low, then just about anyone can mine 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. Electricity is the largest mining expense. Large scale miners often pay 70+% less than residential power rates. Exhibit 14 - Mining Margins: Cheap Power = More Periods of Profitability 0% 20% 40% 60% 80% 100% 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 Mining Margin = (Revenue - Power Costs) / Revenue Assume margin of 0% when unprofitable b/c miner will be turned off ...When BTC falls, only those with cheap power remain profitable When BTC price is high, it's easy to be profitable... Source: asicminervalue.com, Jefferies Exhibit 15 - ASIC Miner: Revenue vs Power Costs $0 $100 $200 $300 $400 $500 $600 $700 $800 $900 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 Quarterly Revenue Power Cost @ 12c kWh Power Cost @ 5c kWh Power Cost @ 2c kWh Bitmain S9 Th/s: 11.5 Watts: 1,127 Only Miners With the Cheapest Power Rates Remain Profitable Source: asicminervalue.com, Jefferies Exhibit 16 - Cumulative Earnings @ Different Power Costs - Cheap Power is Key $0 $500 $1,000 $1,500 $2,000 $2,500 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 Bitmain S9 @ 12c kWh Bitmain S9 @ 5c kWh Bitmain S9 @ 2c kWh Bitmain S9 Th/s: 11.5 Watts: 1,127 Cost of S9 @ March 31, 2018: $1,129 Assumptions * BTC sold for $USD in period it was mined * Miner turned off when revenue < power cost Source: asicminervalue.com, Hashrate Index, Jefferies October 18, 2021 Please see important disclosure information on pages 19 - 24 of this report. 11 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 BTC Outperforms 1790% 307% 191% -500% 0% 500% 1000% 1500% 2000% Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mine + Sell BTC Buy + Hodl BTC Mine + Hodl BTC Bitmain S9 Purchase Price: $1,130 on 31 Dec '17 Cost /yr @ 5c KWh: $484 Th/s: 11.5 Watts: 1,127 Source: Blockchain.com, Hashrate Index, Jefferies Exhibit 18 - Return on Investment Scenarios: Mining and Holding BTC Outperforms 1083% 764% 545% 0% 200% 400% 600% 800% 1000% 1200% Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Mine + Sell BTC Buy + Hodl BTC Mine + Hodl BTC Bitmain S19 Pro Purchase Price: $2,410 on 31 Mar '20 Cost /yr @ 5c KWh: $1,120 Th/s: 110 Watts: 3,250 Source: Blockchain.com, Hashrate Index, Jefferies Exhibit 19 - Quarterly Profitability (Revenue - Power Costs) of Miners Over Time 0 50,000,000 100,000,000 150,000,000 200,000,000 250,000,000 300,000,000 ($500) $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 2Q16 4Q16 2Q17 4Q17 2Q18 4Q18 2Q19 4Q19 2Q20 4Q20 2Q21 4Q21E 2Q22E 4Q22E Network Hash Rate (TH/s) Bitmain Antminer S9 (11.5Th) Bitmain Antminer S17 (56Th) Bitmain Antminer S19 Pro (110Th) Source: asicminervalue.com, Jefferies Exhibit 20 - Mining Margin of S9 (2016) vs S19 (2020) Over Time; The S9 Was Profitable for About Three