Hut 8 is in full damage control mode following a short-seller’s report that the BTC block reward miner is setting investors up for “the coming HUT Pump and Dump.”
On January 18, short-selling firm J Capital Research released a report on Hut 8 detailing “management hiding stock ownership through [an] undisclosed related party, a stock-promoter cabal, and a host of left-for-dead assets.”
J Cap claims Hut 8 shareholders are at risk of “being on the wrong side of an over-levered pump-and-dump, only to be left holding the most inefficient [BTC] miner, which is unprofitable even at a [BTC] price of over $60,000.”
The report follows Hut 8’s 2023 merger with U.S. Bitcoin Corp (USBTC), the Texas-based mining outfit. USBTC was part of the Fahrenheit group, a consortium that last year assumed control of the assets of bankrupt digital asset lender Celsius Network, including its 122,000 BTC mining units.
J Cap claims USBTC is “backed by promoters with a history of legal trouble,” including co-founder/CEO Michael Ho, a former Vancouver-based car salesman that J Cap claims has links to “Honig group stock promoters.” Barry Honig is a Florida businessman who was once the largest shareholder of BTC miner Riot Blockchain (since rebranded as Riot Platform).
In 2018, Honig was among 10 individuals charged by the U.S. Securities and Exchange Commission (SEC) over their involvement in pump-and-dump schemes that defrauded investors of over $27 million. Honig, dubbed the “primary strategist” in this group of “microcap fraudsters,” reached a settlement with the SEC in July 2019.
Honig was also a shareholder in Kairos Global Technology, an alleged BTC mining business that Riot acquired for $12 million in November 2017. Ho was president of Kairos at the time. As a previous report by another short-seller (Hindenburg Research) showed, Kairos was established in Nevada on October 19, 2017, mere weeks before Riot’s acquisition. Another Ho-led company, Prive Technologies, was set up on October 31, 2017.
In February 2018, Riot announced plans to purchase 3,800 Bitmain mining units via Kairos, which, in turn, appears to have acquired the units from Prive. Hindenburg crunched the numbers and wondered why Riot seemed to be paying $18.5 million more than these mining rigs were worth.
Last October, USBTC announced plans to spend $40 million on “AI equipment” despite having only $21.3 million cash on hand. USBTC said the gear would be used to “provide underlying AI workload support” to customers via a U.S. data center. USBTC didn’t say what this equipment was or who it was buying the gear from, leading J Cap to wonder if Hut 8 was “hiding a related-party transaction.”
J Cap further claims to have identified red flags involving Ho’s life partner, Anna Kudrjasova, whose company, Anaya Capital Corp, holds around 3.7 million USBTC shares. Unlike Ho, Kudrjasova has no lock-up restrictions on her USBTC holdings, leading J Cap to surmise that Anaya “could be a shell company set up for Michael Ho’s use” as “a conduit to dump shares quietly.”
J Cap believes Hut 8’s financial state is sufficiently dire that it will be forced to engage in significant equity issues that could further dilute shareholder value. J Cap offered its standard caveat for the findings in its report, warning that “we are biased” and stand to profit from a significant decline in Hut 8’s share price.
Mined out
There’s plenty of other seemingly salacious material in J Cap’s report, but we’ll focus on claims that Hut 8’s expanded mining operations require a BTC fiat value of nearly $62,000 just to break even. That’s partly due to Hut 8’s “bloated” general and administrative costs, excluding merger transaction costs.
Hut 8’s headcount has grown along with its footprint, but the company doesn’t expect synergies at the operating site level following the merger. USBTC hasn’t disclosed its average energy costs nor the efficiency of its mining rigs, leaving investors guessing as to these inputs.
Worse, J Cap believes the BTC network’s hash rate is currently much higher than the range detailed in Hut 8’s forecasts—lowball figures that J Cap claims were chosen “to artificially inflate [Hut 8’s] projected revenue.” With the halving of the BTC block reward imminent, the costs to mine a single BTC will rise, pushing profitability further away.
Hut 8 responds
On Wednesday, Hut 8 issued a response to the report, saying it contained “false and misleading characterizations about Hut 8’s business.” The company added that the report was “filled with inaccuracies, misrepresented data, speculative claims, and unfounded character attacks … for the sole purpose of negatively impacting Hut 8’s share price for the short seller’s own benefit.”
Hut 8 didn’t address any specific allegations made by J Capital, but Hut 8 Chairman Bill Tai said the board “maintains full confidence in the Company’s merger of equals, strategic plan, and management team.” Hut 8 CEO Jaime Leverton said the company “will not be derailed by activists who stand to profit from spreading misinformation and making defamatory character attacks.”
The day the report was issued, Leverton was scheduled to ring the Nasdaq’s opening bell, suggesting the release was a precisely timed attack. Hut 8’s shares were trading above $9 when that bell was rung but were soon struggling to stay above $6. For the time being, the price appears to have stabilized around that $6 level.
Hut 8’s pre-merger share price peaked at around $67 back in October 2021, near the peak of the last great BTC value bubble. By the following summer, the shares had fallen by 90%, then slowly began inching up on news of the USBTC merger.
The shares traded over $18 in late December when BTC was enjoying an ETF hype bubble. But a raft of business media reports on the struggles facing BTC miners ahead of this spring’s halving did a number on the shares long before J Capital stuck the knife in.
Utility or futility: choose your fighter
For years, CoinGeek has been reminding its readers that Satoshi Nakamoto, the father of Bitcoin, predicted way back in 2010 that “when the [block] reward gets too small, the transaction fee will become the main compensation for nodes. I’m sure that in 20 years, there will either be very large transaction volume or no volume.”
Satoshi designed Bitcoin to scale to accommodate a sufficient number of transactions to ensure the viability of a fee-based consensus model, saying Bitcoin “never really hits a scale ceiling.” However, the controversial changes imposed on the original Bitcoin protocol by the BTC Core developers resulted in a stunted blockchain forever mired in a state of arrested development.
These changes were intended to offload transactions onto proprietary Layer 2 ‘solutions’ such as the Lightning Network, which, even if it worked—which it doesn’t (seriously, it just doesn’t)—wasn’t going to earn miners the money they need to pay the electricity bills to keep their rigs going.
This is when the infamous ‘digital gold’ narrative took hold, based on the view—and the existential requirement—that miners could pay their bills only if the value of each BTC token exceeded $100,000 or greater. This sparked the need to lure in new retail ‘investors’ through the perpetual promise of jam tomorrow based on some fuzzy event on the horizon that inevitably proved more mirage than oasis.
The BTC ETF bust is just the most recent example of this cycle, as BTC has already surrendered all the unwarranted gains it enjoyed over the past two months. It likely has further to fall once people realize that the unforgiving mathematics of the upcoming halving could prove fatal to the digital gold model.
If you’re sick of this dead-end Beanie Baby boondoggle, why not investigate the staying power of a blockchain that prioritizes cost-effective transactions over speculative riches? A blockchain with the ability to scale to meet whatever demands are thrown at it, including unparalleled data management capabilities. In other words, a blockchain that resembles Satoshi’s vision.
Watch: The shift from Bitcoin “miners” to “transaction processors”
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