The bitcoin mining sector is in the middle of a wave of M&A, the report said.
Architect Partners said miners want to secure large data center capacity with access to low cost power and capital.
The effect of miner concentration is yet to be seen, the note said.
“The strategic driver is to secure large and scalable data center capacity with access to low cost power and capital, all made easier as a company gets larger,” managing partner Eric Risley and analyst Arjun Mehra wrote.
Bitfarms’ (BITF) planned acquisition of Stronghold Digital Mining (SDIG) is evidence of this recent M&A trend.
The deal is noteworthy as Bitfarms was subject to an unsolicited takeover offer from rival miner Riot Platforms (RIOT) in May, and Riot has since bought 19% of Bitfarms’ stock in the open market, agitated to replace management, and fought a proxy battle to replace two board members, the report said.
“Sometimes the best defense is offense,” the authors wrote, adding that Bitfarms has subsequently announced the acquisition of Stronghold together with management and board changes.
Still, hostile M&A can be tricky, the report cautioned, and such deals are unusual in technology and financial services business which rely on the talent of people. “However, bitcoin mining is very different where physical facilities with access to electricity and widely available computing equipment are the core assets.”
Architect Partners said the current consolidation phase is ironic as the bitcoin creator Satoshi Nakamoto’s original vision was that anyone could set up a computer to mine the cryptocurrency, that everyone could run the network, and that no one would control a large amount of the hashrate. Hashrate is a proxy for competition in the industry and mining difficulty.
The effects of concentration in the mining sector are yet to be seen, but some like Jack Dorsey and the Block (SQ), the company he founded, are attempting to reverse this trend by “building semiconductors and systems to support a return to mining decentralization,” the report added.