Bitcoin Halving 2020: Publicly traded mining operations very vulnerable

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Publicly traded Bitcoin mining companies are starting to come into the spotlight on the eve of the 2020 BTC halving. I decided to took a deeper dive into what it would take for firms such as Hive, Hut 8, Riot Blockchain and Canaan to stay operational after the block reward diminishing subsidy gets cut in half over the weekend. Shareholders of these publicly traded companies have one last day of trading to decide if they want to continue to hold shares in these companies, or get out before the slaughter in the Bitcoin mining sector occurs.

The halving event happens every four years on average (or 210,000 blocks) where the current fixed block reward subsidy is reduced by 50%. On May 12, 2020, the 12.5 BTC block reward subsidy will be reduced to 6.25, effectively cutting the profits of BTC mining operations by half. The biggest questions that traders are asking is will the lack of supply coming into the market post halving be enough of a reduction to move the price higher? Is this a “buy the rumour, sell the news” type of event that will see a big sell off next week? And if so, when is the best time to sell and take profits off the table?

Publicly traded Bitcoin mining firms face significant pressure

Unlike private operators, publicly traded Bitcoin mining companies have previously been able to take on massive debt loads and sell off equity to accumulate capital to operate. None of the publicly traded companies are turning a profit, most are poorly run operations that have painted an overly optimistic picture to the investment community based on future BTC price speculation to the upside in order to fund their day to day operations.

The valuations of all of these companies are not true representations of how their business is currently performing. Instead they are largely speculating. They rely solely on future BTC price increases to outperform and I would argue to actually break even. The BTC currently held in their treasuries do not necessarily hold any intrinsic value either so it is hard to look at this asset in order to justify large price rises moving forward.

Buyers beware, don’t be fooled by the hype

The past does not act as an accurate indicator of any future events, and any business model built on the basis of what happened in previous Bitcoin halving events from 2012 and 2016 is a recipe for disaster for the management teams but more importantly to the shareholders of these publicly traded companies. Being reliant on opaque external factors is not a sustainable business model. Unfortunately, the Bitcoin halving hype machine has been in overdrive within the investment and financial community over the last several weeks trying to sell the old narrative in this new era.

There are four companies that I will be covered today that I believe are overpriced at their current stock prices and after the BTC halving will drop in value, and some will possibly go completely out of business.

	HIVE	HUT8	RIOT	CANAAN
Stock price	C$0.24 (US$0.17)	C$0.90 (US$0.65)	C$1.02 (US$0.73)	US$5.80
Market cap	C$78.9M (US$56.64M)	C$81.4M (US$58.43M)	C$60.2M (US$43.21M)	US$733M
Share short position*	371,549	17,702	198,526	51,592
Net Revenue – FY 2019	C$31.8M (US$22.81M)	C$82M (US$58.81M)	US$6.07M	US$204.3M
Coins mined in FY 2019	1,751 BTC 82,000 ETH	8,618 BTC	944 BTC	N/A
Mining cost of BTC (pre-halving)	5,136	$3,950	TBC	N/A

*As of April 17, 2020

Key highlights:

Hive Blockchain Technologies Ltd. (TSX.V: HIVE) (OTCQX: HVBTF)

Hive is a block rewards mining operator that has been listed publicly listed since 2017. They own GPU and ASIC based mining facilities in Iceland, Norway, Sweden and Canada. Hive is mining both Bitcoin and Ethereum, but in recent times have switched their focus towards Ethereum.

Based on my research, BTC will need to stay above US$5,136 in order for them to stay profitable before the halving, and US$8,346 after the halving to remain profitable. There is even bigger question mark as Ethereum pivots towards a Proof-of-Stake model on what this will mean for how they conduct future block reward mining operations and what this means for the future value of their digital assets, with them already having incurred a total loss of US$98.72 million for the year 2019.

Hut 8 Mining Corp. (TSX: HUT) (OTCQX: HUTMF)

HUT 8 is a Bitcoin mining company with facilities in Canada. The company had an annual revenue in 2019 of C$82.0 million (66% increase from previous year) on mining of 8,618 BTC. According to the price of the costs to run their operation, the current cost to process a bitcoin is currently around $3,950 per BTC without factoring in the costs such as depreciation, expenses, and net finance expenses.

Their current cash position at the end of 2019 was roughly around C$3.18 million with around C$26.5 million of debt.  These worrying figures are backed up with having to lay off 25% of their work force and early this year their CEO stepped down.  To me this signals that they are trying to massively reduce their burn rate in preparation for what is to come, a long period of being cash flow negative.

Riot Blockchain (NASDAQ: RIOT)

Riot Blockchain is a cryptocurrency mining operator based in Colorado with facilities in Oklahoma. In 2017, RIOT reached an all-time high of $46 USD and has dropped over 97% to a price of $1.14 USD today. Even with this significant drop in value, there is a 198,526-share short position, with roughly a short volume ratio anywhere between 23% to 25% of the daily market volume.

RIOT’s have suffered severe losses in the past two financial years, with a net loss of $20.3 million USD, or $(1.02) per share in 2019, compared to net loss of $60.2 million USD, or $(4.33) per share, in 2018. These losses are on the back of regulatory problems with the SEC which has caused reputational damage not to mention punitive damages that have been settled this year. Also, they recently announced in a press release on May 7^th that they acquired an additional 1,040 next generation Bitmain S19 (95 TH) Antminers but it is unclear if these Bitmain machines are part of the batch that were shipped with faulty hardware.

Canaan Creative Inc. (NASDAQ: CAN)

Canaan Creative was founded in 2013, and is a China-based computer hardware manufacturer. The company is a Bitcoin hardware manufacture and designer of ASIC microprocessor solutions.

The company decided to IPO back in November 2019, planning to raise US$400 million. It only raised a fraction of what they had hoped in US$90 million. Their stock price has plummeted an additional 64% since they went public. There is a 51,952-share short position with roughly a short volume ratio anywhere between 28% and 36% of the daily market volume.   

Canaan posted a total net revenue of US$204.3 million with a total net loss of US$148.6 million. Canaan sold computing power totalling 10.5 exahashes per second (EH/s), which accounted for approximately 20% of the Bitcoin network’s computing power growth in 2019. These financials are on the back on the scrutiny Canaan are already facing with various lawsuits from making false financial statements to violations of securities rules. It is uncertain what sort of demand for new hardware the remaining block reward miners left standing after the BTC halving event will be required. We are assuming that most of the hardware sales have already occurred in advance of the big event and those that left standing will not need to add additional gear in the near term.

What will happen post BTC halving?

As the revenue generated by these companies are all largely produced from the block reward diminishing subsidy, these poorly managed companies are entirely dependent on the BTC price rising sharply to new all-time highs to continue to operator or they will have to rattle their tin cups trying to raise money on the street to keep going. Their lack of understanding of the economics of Bitcoin has led to their bad business decisions heading into the upcoming turbulent period in the mining sector with much uncertainty on the foreseeable horizon.

Their terrible business models will be exposed in the coming months, it is not a question of “if” it is more a question of “when”. How long can they hang on? All of these businesses are executing strategies that would have benefited shareholders in the lead ups to the previous Bitcoin halving events in 2012 and 2016 when the block subsidy reward was higher. Those days are over.

As we move into a new era were other revenue streams like fees are required counteract the economics of the system (offset the diminishing block reward subsidy), these companies are still focused only on the BTC block reward mining have limited their earning potential. The BTC network can only handle a peak of 7 transaction per second, this has slowed down adoption on the protocol and will not allow for the additional transaction fee revenue streams required to make up for the 50 percent block subsidy reduction they will face. Hoping for the price of BTC to double or triple is not a sound strategy at all.

If the price of BTC does not go to a certain price, these companies will need to shut down their rigs, turn off the electricity and liquidate their assets. More importantly they will have to liquidate all of their newly earned BTC from block rewards they earn as well as sell off their BTC treasury, creating downward pricing pressure on the token which will exacerbate the situation. This will not only reduce the valuation of their stock price, but could see them run out of business.

This leads us to believe that these companies are clearly mismanaged, they don’t understand the economics of Bitcoin as designed by Satoshi, are over leveraged and therefore their stock prices are overvalued post halving. I consider these stocks to be good shorting opportunities. Let the blood bath commence.