Bitcoin mining stocks face market settlement amid widespread selling

Markets and fund managers are picking which bitcoin mining stocks they believe will survive the bear market, with healthy balance sheets and low production costs proving the difference.

Bitcoin miners remain under pressure from expensive electricity along with low cryptocurrency prices – and, in some cases, high-interest loans taken out at the top of the market last year.

Core Scientific (CORZ), which has historically had a higher hash rate than any other North American mining outfit, revealed earlier this month that it had sold $167 million in bitcoin in June, nearly three-quarters of its total holdings.

Around the same time, rival mining entity Bitfarms (BITF) sold half of its BTC for $62 million to reduce debt. Riot Blockchain (RIOT), another major player, has also been steadily liquidating its mined bitcoin throughout the year.

All these factors have weighed heavily on the share prices of bitcoin mining companies as markets fear further capitulation.

Excluding non-pure play mining companies, the 18 cryptonative stocks that make up alternative asset management firm Valkyrie’s mining ETF, WGMI (crypto-slang for “we’re gonna make it”), are down 51% on average over the past three months.

Shares in the ETF itself have fallen 42.5% – about the same as bitcoin.

The markets favor Stronghold, a vertically integrated bitcoin miner

Bit Digital, which has fully transferred its mining operations from China to the US over the past 18 months, leads the pack, having fallen just 24% since April 25.

Arcane Research analyst Jaran Mellerud told Blockworks in an email that Bit Digital has been busy moving its miners between continents. This meant that the firm could not expand its operations as aggressively as most other public miners.

“In retrospect, massively expanding operations with new machine deliveries was not a good decision as the bitcoin price has fallen,” Mellerud said.

“Bit Digital was “lucky” that the bitcoin price fell during this period, while they were unable to expand as quickly.

After Bit Digital, Stronghold and Marathon have proven to be the most resilient, losing 29% and 36% respectively from their share prices.

While Stronghold has one of the weaker balance sheets in the cohort, according to Mellerud, the company is vertically integrated, which means that it controls two of its own power plants.

Stronghold also runs its mining operations by burning waste coal, so the energy is practically free. The firm even receives government subsidies to clean up the garbage, giving them the lowest bitcoin production costs in the industry, Mellerud wrote last month.

Marathon, on the other hand, suffers from relatively high bitcoin production costs, but has an “abnormally high quick ratio” (the value of its most liquid assets divided by its liabilities) compared to its biggest competitors.

Traders reject insider trading of shares and bad balance sheets

Australian miner Mawson Infrastructure Group, a smaller stock valued at $68 million, has plunged nearly 77%.

Mawson posted a net loss of $11.3 million in the first quarter of this year, according to SEC filings, up from $38.6 million lost in 2021’s corresponding quarter. WGMI did not hold Mawson when it was launched, but it now makes up 2.71% of the fund’s portfolio.

Core Scientific, the industry’s largest public miner by hash rate, has done marginally better, down 72%. Arcane Research’s Mellerud found that Core Scientific has a high debt-to-equity ratio – with its debt precariously secured by ASIC machines.

As the mining rigs fall in value, the company must continually post higher collateral to maintain its loans, further underscoring its balance sheet — which is weaker than its peers despite stronger cash flows.

But Core Scientific’s share price has also faced downward pressure from its executives. SEC filings show that company insiders have liquidated nearly $22 million in stock since the end of May, led by Darin Feinstein, co-founder and chief executive of Vision.

Feinstein netted $18.3 million by selling 6 million shares at an average price of $3.05 – 70% below the value when it went public via a SPAC deal in January. The company’s stock price has fallen 40% since Feinstein’s sale, trading at $1.83 at last Friday’s close.

Other insider sales were classified to the SEC as “Tax Withholding” transactions, related to a type of executive compensation package known as “Restricted Stock Units” or RSUs. Feinstein’s was not.

Core Scientific awarded more than 22.5 million RSUs over the past two months to its executives (81% to CEO Michael Levitt), currently worth $41.3 million, as they incurred tax liabilities, prompting stock sales.

Core Scientific later disclosed in a press release that Feinstein had informed the company that his sale “was being sold to raise capital to cover certain taxes related to the conversion of RSUs and other liabilities.”

Executives at Argo and Riot Blockchain also received RSUs in the past three months, for which they also sold shares in “Tax Withholding” transactions, though Feinstein stands out because of the size.

Valkyrie goes back to basics

When the firm’s WGMI fund launched in February, Core Scientific was its sixth-largest holding, weighted at 4.3% — ahead of Riot Blockchain and Marathon.

Core Scientific now makes up just 0.96% of WGMI’s $3.7 million portfolio, a whopping 78 percentage point weight reduction. The stock was cut more than any other stock, followed by renewables mining play TeraWulf, which saw its weight trimmed by nearly 70 percentage points; from 3.84% to 1.17%.

“As the year has gone on, especially over the last couple of months, there’s kind of a back to basics approach here,” Bill Cannon, Valkyrie’s head of portfolio management told Blockworks. “We’re looking at adjusted balance sheets — just revenue, just net revenue.”

WGMI increased Stronghold, Marathon and Riot Blockchain shares in the past three weeks by 1.65%, 1.61% and 0.96% respectively. These shares make up between 4.24% and 5.87% of the fund’s total portfolio.

Argo Blockchain – which Arcane’s Mellerud believes is the only bitcoin miner with cash flows to fully pay off its remaining ASIC shipments this year – is WGMI’s largest holding at 13.32% weight, up from 9.81% in February.

CleanSpark ( CLSK ), which has virtually no debt on its balance sheet, comes in second at 11.37%, although WGMI has recently reduced its weighting.

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