Xi Jinping and the Chinese Communist Party decided to ban crypto mining from China and send these guys overseas. There are a few reasons why they may have done this: to minimize the bitcoin (untraceable) economy, to prevent people from making money from “uncommunist” means, or — more logically — to stop them taking advantage of China’s subsidized electricity amid a self created electricity shortage.
It was inevitable in the end. China’s economy is going to lose its edge as the CCP tightens the screws on all things capitalist and either electricity prices soar or they have communist style shortages for the foreseeable future.
Crypto mining draws huge amounts of power from the grid
In case you’re not aware of it, crypto currencies and electricity are practically fungible because the overwhelming cost of currency mining is the electricity cost of running the computers. We’re not talking peanuts here. Bitcoin and other cryptocurrency mining currently use around 0.55% of global electricity production. That’s a mid-sized country such as the Netherlands.
Cryptocurrency mining uses more electricity than the Netherlands
So bitcoin left China and is naturally looking for the best place to mine. With very few large scale subsidized electricity grids available, it’s naturally being attracted to the US.
The US has enough natural gas and coal to produce cheap electricity for decades, and 55 nuclear power plants which are fully depreciated and have extremely low marginal costs.
Nuclear and coal fired power stations are ideal for crypto mining operations
It’s the nuclear power plants and (to a slightly lesser extent) coal fired power plants that are interesting here. Unlike natural gas, these can’t just fire up and down. Nuclear in particular has to produce an almost constant base load power. This usually results in very cheap off-peak electricity and significant jumps at peak time, such as the chart below from ERCOT.
This is just for booking a price a day ahead. For a long term contract located at a power plant, a bitcoin miner can would (does/can) get possibly the best prices in the world for electricity 17 hours a day. A Tesla battery pack may even be worth investing in to get 24 hour dirt cheap power.
Similarly, bitcoin operations are popping up at hydropower plants which, due to environmental regulations, are required to produce electricity 24/7. One in New York state has all but quit selling power to the grid and has simply switched to bitcoin mining.
So its good news for power companies and bad news for industrial companies relying on cheap electricity, such as smelting.
So who is going to benefit from this shift?
Exelon is the likely best beneficiary
The closest thing to a pure play is Exelon (NASDAQ:ESC) which generates 66% of its electricity from nuclear power. This also gives it a bit of a green tinge due to the resulting “low carbon footprint” that this creates. There’s not much benefit in being green, however it does reduce the likely carbon taxes that future politicians will likely levy on power plants to appease the woke mob.
Over the 21 years since 2000, Exelon’s share price has risen by a reasonable 2.5x from $21 to $51. This, in our view, is extremely low. As a utility company, it is essentially seen as a fixed income play. There are three big differences, however.
First, interest rates have fallen off a cliff since then.
In theory, Exelon’s dividend rate shouldn’t be more than twice the fed funds rate, which right now is 0.08%. Exelon’s forward dividend yield is 3%, so in theory, it should be trading at 10x what it is right now.
That’s probably not going to happen. However, given that we are going to be facing low interest rates for as long as the US can’t afford to service it’s debt (forever), we can expect to see a shift of funds into utilities to capture what yield is still available in the world.
Second, we have rising coal prices globally, rising natural gas prices, and the risk of carbon taxes. Rising coal and natural gas prices are going to force other utilities to raise their wholesale prices. This will benefit Exelon for the six hours a day it sells power at a premium.
Uranium prices have also risen, however fuel costs for nuclear power are around $3 per MWh, or less than 10% of total costs. So across the board rising fuel costs will be a huge net benefit for Exelon.
Third, the shift of crypto mining to the US is going to take up the slack of a huge bunch of off peak power.
In 2020, the US consumed 16.5% of global electricity. If ALL of the bitcoin mining moves to the US — and indication are the the lion’s share have — then this will increase us electricity demand by 3%.
With the US economy currently hamstrung by supply chain issues, along with government policy creating labor shortages and keeping businesses closed, this hasn’t been much of a shock. However, over the next six months as businesses begin to operate again, the impact on the electricity grid is going to be reflected in the markets, and we’ll likely see a pretty big leap.
Buy call options to double your money from Exelon’s price rising by 10% any time in the next six months
Right now you can buy the EXC 60 call expiring on 20 January 2023 for $1.65. For this to be profitable at expiry, the share price would have to rise by 20% from the current 51.09. However, with so much at play, we don’t expect you’ll have to wait the whole 15 months. If the share price rises above $55 at any point in the next six months, we expect you’ll more than double your money.
So BUY TO OPEN EXC230120C00060 using a limit of 1.70. Each contract of 100 options will cost around 165, so we suggest 30 contracts for between $4,950 and $5,100, depending on the price.
Then sit back and wait.
