Part 2: Public Miner Capitulation - Core Scientific On The Ropes
Miner capitulation is here. Core Scientific talks potential bankruptcy, says cash resources will be depleted by year's end. Rising electricity prices and equity share dilutions remain major risks.
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Part 2 of “Public Miner Capitulation - Core Scientific On The Ropes” published for our paid tier subscribers Thursday 10/27/22.
So let’s evaluate what miners have done especially well (or poorly) in bitcoin terms since the start of 2022 and since the July local market bottom in bitcoin.
Since the start of this year, the best performers for mining equities have been Marathon Digital (MARA), CleanSpark (CLSK) and Riot Blockchain (RIOT).
Since the summer market bottom in bitcoin, the performance leaders were MARA, RIOT, HUT and HIVE.
This relative performance can give us some insight into how the market views these various industry players. Interestingly, equity performance — whether justified or not — directly impacts the future probability of success for a company.
Various public posts about relative performance between mining equities (with CORZ being a glaring outlier) showed to be a precursor to what was to come for the stock.
The biggest risk associated with mining equities and the rising hash rate is not only if companies can survive and get to the other side; some will and some won’t. Rather, the question you need to ask yourself as an investor is whether your stake in the company will get significantly diluted along the way.
As debt financing rates are no longer optimal (compared to 2021 rates), companies will increasingly turn to share dilution to fund their operational and capital expenditures.
Shown below are two charts from Jaran Mellerud, writing for Hash Rate Index on public mining equity market share dilution.
Core is obviously an outlier in debt-to-equity ratio, but share dilution is a sneaky force that leads to long-term underperformance. Below we display the fully diluted share count for many of the leading publicly listed mining firms.
Our advice, which of course is not of the financial sort, is to stay patient when allocating to mining firms, especially in this time of distress. Many of these firms, whether due to rising network hash rate, the future Bitcoin halving coming in 2024, or share dilution, will likely underperform bitcoin itself for the time being.
We believe we are still in an environment where hash rate growth outpaces price growth until the data says otherwise. This is not an environment where mining equities thrive.
What readers should look for is the companies that do well in bitcoin terms over various short-term and long-term periods that also do not partake in large-scale share dilutions.
We will stay up to date with all the developments in the space and will be ready to inform our subscribers of these developments and insights when they arrive.
For now, we think broad-based underperformance of miners relative to bitcoin itself can be expected.
Let’s now turn our attention to the potential for a capitulation across the ASIC market, as Core Scientific, the world’s largest publicly traded mining firm by hash rate faces liquidity/solvency worries.
Even without recent developments, ASIC prices were already in fire sale-like territory and are at new all-time lows. Luxor’s Hash Rate Index shows just how depressed prices have become across machine efficiency types in the chart below. As miners have gone to the latest, more efficient rigs, that’s put further downward price pressure on older mining models. As there’s more demand for newer rigs like the S19 XP and other brand new hardware to stay competitive, selling pressure rises for older models that are unviable or unprofitable even with the cheapest energy costs. In the worst case, older machines are just given away for free.
Although Core Scientific will have many options such as debt restructuring, Chapter 11 bankruptcy or a potential merger on the table; selling off and liquidating a part of their 130,000 miner fleet may be another option. Increased selling pressure by miners will only add more strain to depressed prices. Further declines in ASIC prices also impact all miners who are collateralizing or financing their ASICs as the value of ASIC prices can drop further. Now, we await what strain this will have on hash rate over the medium term and if we’re to see a significant falloff in hash rate over the next three to six months. We do not believe this cycle ends without a 20% fall in peak-to-trough hash rate.
Final note: Bitcoin mining is a brutal business, and the current state of these conditions is the last remaining bear to slay in regards to the conclusion of this bear market cycle and the rebirth of the next bull market.
These things take plenty of time, and in the process, bitcoin as a monetary asset will harden like never before.
Mining difficulty at all-time highs.
Miner revenue per terahash at all-time lows.
Bitcoin and ASIC values falling dramatically from all-time highs.
Only the strong will survive.
This concludes Part 2 of “Public Miner Capitulation - Core Scientific On The Ropes”, published for our paid tier subscribers Thursday 10/27/22.
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