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.

Relevant Past Articles:

• 10/25/22 - This Time Isn’t Different: Miners Are Biggest Risk Facing Bitcoin Market In Repeat of 2018 Cycle

• 10/6/22 - Hash Rate Hits New All-Time High: Implications For Mining Equities

• 7/26/22 - Bitcoin Hash Rate Plummets 17% From All-Time High

• 7/5/22 - Public Miners Start Selling Bitcoin Treasuries

• 6/29/22 - Mining Hash Price Bear Market

• 12/21/21 - On-Chain Mining And Public Miner Performance

In case you missed it: 

In Tuesday’s issue, This Time Isn’t Different: Miners Are Biggest Risk Facing Bitcoin Market In Repeat of 2018 Cycle, we took an in-depth look at the state of the bitcoin mining industry, highlighting the 2018 cycle comparison of stagnating price while hash rate soared.

Core Scientific Capitulation

We’ve been highlighting the case for more public miner capitulation over the last few months. Blockbuster news out today shows that Core Scientific, the largest publicly traded mining company by hash rate and miner fleet, now may face bankruptcy. The highlights from their recent SEC filing are the following: 

• Core Scientific is halting all debt service payments. 

• Bitcoin holdings are now 24; they sold 1,027 over the last month.

• Cash resources will be depleted by the end of the year or sooner. 

• Core Scientific claims Celsius owes them $5.4 million. 

A giant in the mining space, holding over 9,600 bitcoin at its peak, Core Scientific has now nearly depleted its entire treasury. Month-over-month growth in holdings is now worse than the summer capitulation and selloff we saw back in June. Yet, in June the selloff was much larger in size (6,099 bitcoin). It’s not necessarily the Core Scientific treasury we are concerned about now but rather the treasuries and holdings of all other bitcoin miners if this is a bigger warning sign for the industry.  

Core Scientific was able to drive higher bitcoin production and share of the hash rate by having the largest debt-to-equity ratio in the space at 3.5. Now that debt is coming due during the worst time to try and raise more equity, with depressed prices and lack of financial appetite in the market. 

Currently, the company’s liquidity situation is dependent on two variables: the bitcoin price going higher and electricity costs coming down. Our view is that it will be incredibly lucky for either to materialize as a stagnating bitcoin price (with a decent probability of more downside) continues and electricity prices, especially for hosting bitcoin miners, is only trending higher. Looking at Q2 earnings, Core Scientific’s cost of revenues went from 67% to 92% compared to last year. Higher power consumption costs played a significant factor.

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Bitcoin Magazine PRO hosted a Twitter Spaces with special guest James Lavish (author of The Informationist newsletter) today Oct 27. We covered the larger macroeconomic landscape, equities, bonds and of course the Core Scientific news. Click here to listen to the recording.

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In their recent Q3 report, Hash Rate Index (Luxor) quantifies bitcoin production costs across states showing that production costs are soaring across the board relative to 2021. One of the significant factors is the rising power costs: in the most outlier states costs to produce 1 bitcoin are over double what they were last year. There are many ways that miners can hedge against rising power costs but that’s not always the case for individual players. 

Source: Hash Rate Index Q3 Report 

In Tuesday’s piece, we hinted at the coverage of specific names, and as promised, we will dig into this a bit today. 

The first order of business is to revisit our basic metric for evaluating the bitcoin mining investing cycle. 

When is the optimal time to invest in publicly traded bitcoin miners? 

An extremely simply framework for investors is: 

Hash price bull market = Bitcoin miners outperform bitcoin

Hash price bear market = Bitcoin miners underperform bitcoin

Hash price divides miner revenue by hash rate (daily miner revenue per 1 TH/s, as first coined by the team at Luxor).

On a long enough time frame, as hash rate continues to rise in a brutally capitalistic fashion, mining equities are trending lower against bitcoin. Shown below is a chart of mining equities denominated in bitcoin terms since 2018.

Across a shorter time frame, miners can perform exceptionally well in bitcoin terms — with this holding especially true in hash price bull markets, when the price of bitcoin appreciates by more than the hash rate. In this market scenario, miners are (digital) gold mines.

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).