CleanSpark Is Our Top Bitcoin Mining Stock Pick (NASDAQ:CLSK)

Bitcoin has been the best-performing asset class by a wide margin over the past decade. Critics like to focus on the large-scale revisions that occur regularly in this field. However, Bitcoin’s average annual return is Since 2014, it has been 60%. By comparison, gold’s average annual growth rate is 5%, the S&P 500’s 9%, and the Nasdaq 100’s 16%.

These huge drawdowns have proven to be great buying opportunities over the past 14 years since the launch of Bitcoin, and this trend looks set to continue, with a major correction in 2022 followed by a major correction in 2023. Prices have increased 60% since the beginning of the year.

Bitcoin mining stocks offer investors leveraged gains during bull cycles, but also leverage losses during bear cycles. I believe we are still in the early stages. A major bull market cycle is upon us for the crypto sector, so this could be a great time to buy crypto mining stocks at a discount.

There are several important events coming up for Bitcoin, but one of the most important is the April 2024 halving, an event that will cut its supply in half. This will reduce Bitcoin’s inflation rate from 3.6% to 1.8%. Prices have historically risen in the months leading up to a halving, and then risen sharply in the months following.

Another major near-term catalyst is the likely approval of the first spot Bitcoin ETF in the United States. The SEC has previously rejected applications by smaller companies, but now the world’s largest asset management company has applied to list a Spot Bitcoin ETF.

These include BlackRock, Fidelity, Invesco Galaxy, Franklin Templeton, WisdomTree, VanEck, GlobalX, ARK Invest, Valkyrie, and Bitwise. Collectively, these managers are estimated to hold approximately $18 trillion in assets under management (AUM). If these managers invested just 1% of the assets they manage in Bitcoin, he would have $180 billion of new capital flowing into an asset with a market capitalization of just $500 billion.

SEC approval of spot ETFs could lead to $300 billion inflows into Bitcoin.

– Mark Yusko, CEO of Morgan Creek Capital

This estimate does not include the multiplier effect of other financial institutions that ultimately receive approval to begin investing. And it’s worth noting that the Spot Bitcoin ETF will be significantly different from the current iteration, as it will create real demand for scarce Bitcoin in the market. This surge in demand is expected to occur as the proportion of Bitcoin held by long-term holders continues to increase and the amount available for trading on exchanges continues to decline. This could cause prices to rise significantly, with prices still trading 60% below late 2021 highs.

The next SEC ruling on the BlackRock Spot Bitcoin ETF will be on October 17th. Although there is a possibility that the decision will be postponed again, experts believe that the chances of approval will increase.

Bitcoin mining offers leveraged returns

Crypto mining is the process used by blockchain networks to complete transactions. It is called mining because new coins can also be put into circulation. Crypto mining requires large amounts of computing power with specialized machines specifically designed to solve complex problems. These application-specific integrated circuit “ASIC” miners are a flagship investment and major capital investment for crypto mining companies.

Crypto miners ensure that each transaction is legitimate, ensuring the validation and security of the blockchain network. This mining process allows Bitcoin and other cryptocurrencies to function in a decentralized manner, without the oversight of third parties such as banks. BlackRock, the world’s largest asset manager, is acquiring crypto miners ahead of the approval of its Bitcoin Spot ETF and the upcoming Bitcoin halving in April 2024. they are now second largest shareholder It ranks 4 out of the top 5 crypto miners.

However, investment giant BlackRock is not alone. Vanguardmanages $7.7 trillion in assets and has also accumulated over $600 million in stakes in top Bitcoin miners. Although this has mainly come indirectly through index funds, it is still significant due to the sheer size of its investments. And Fidelity was an early investor in crypto miners, purchasing a 7.4% stake in Marathon Digital (MARA) for $20 million in July 2021.

Cryptocurrency companies also received good news this month.

The Financial Accounting Standards Board (FASB) approved the change to fair value accounting. Companies record cryptocurrencies at the prices they paid in the past and review their holdings for impairment on a quarterly basis. Even if the price of a virtual currency temporarily declines during the reporting period, the holdings will be considered impaired and the value cannot be adjusted upward even if the price recovers.

The new accounting rules are an improvement over current methods, as they allow businesses to instantly record profits and losses and classify cryptoassets like Bitcoin and Ethereum as financial assets. This rule is scheduled to take effect in 2025.

Cryptocurrency miners have declined significantly from their 2021 highs. During the period when Bitcoin plummeted from $69,000 to $15,000 (78%), most crypto miners lost more than 90%. Then, when Bitcoin doubled from $15,000 last November to more than $30,000 in July this year, most crypto miners realized four to five times their profits. During this period, upside leverage was significantly higher than downside leverage, providing an attractive risk/reward setup for investors.

Cryptocurrency prices have fallen back from recent highs, with Bitcoin down about 12% from its July high and crypto miners correcting by about 50% from its 2023 high. I believe this drop presents an excellent buying opportunity, as there are several bullish catalysts ahead for the crypto sector.

If Bitcoin rises 15% and returns to recent highs, this could equate to a 60% to 80% increase in the value of mining stocks (if recent trends repeat). And if Bitcoin prices can return to their late 2021 highs of around $69,000, this 155% move in Bitcoin could equate to over 600% gains in top crypto mining stocks. There is sex.

Marathon Digital reported non-GAAP direct costs per coin of approximately $18,900 for the most recent quarter. The company reported gross margin excluding D&A of 32.5% of revenue. Although most Bitcoin miners are reporting gross profits in 2023, they are still operating at a net loss. This is due to selling, general and administrative expenses, and depreciation expenses. Therefore, we include the ratio of SG&A to revenue to see how efficiently each company is run.

I estimate that the Bitcoin price would need to rise to the $35,000 to $40,000 range for the net income to become positive for most miners. The current target price for Bitcoin by the end of the year is $45,000, so it is possible that Bitcoin miners will report significant cash flow and positive net income heading into 2024.

Comparative analysis of top Bitcoin mining stocks

Given our view that crypto prices are likely to trend significantly higher over the next 12 months, and the proven leverage available from the top Bitcoin mining stocks, we provide a comparative analysis of the top miners. I decided to run it.

This analysis examines valuation, growth, profitability, operational efficiency, balance sheet health, Bitcoin mining efficiency, and how much Bitcoin each company holds on its balance sheet relative to its overall corporate value. We look at a variety of metrics to measure how well we are doing.

We assigned gold, silver, or bronze shading to highlight the best data points in each category. We gave 3 points for each gold medal, 2 points for each silver medal, and 1 point for each bronze medal to create a total score and ranking.

We added up all the points to create an overall ranking. Clean Spark (NASDAQ:CLSKAccording to the ranking, the first place was Hive Digital Technologies (HIVE), the second place was Marathon Digital Holdings, and the third place.

CleanSpark has the lowest price-to-book multiple of less than 1, the lowest debt/equity ratio at just 8%, and the highest quarterly sales growth (Y/Y), gross margin, and latest Bitcoin mined points. I came in second place. One quarter of the processing power per exahash. CleanSpark also ranked third in terms of EV/Revenue of 4.6 and three-year compound annual growth rate (CAGR) of 139%. In preparation for the next halving, I would like you to work on reducing your overhead costs and increasing your Bitcoin holdings.

CleanSpark is a leading Bitcoin mining company listed on Nasdaq and incorporated in Nevada. They own and operate five Bitcoin mining facilities in Georgia and have a miner in upstate New York.

The company has a deployment hashrate of 9.3 EH/s and is fully funded to 16 EH/s at full deployment. CleanSpark’s hashrate increased by 210% year over year. The company locates its facilities in areas where electricity costs are as low as 1.5 cents per kilowatt hour (kWh), averaging 4.1 cents per kilowatt hour (kWh). Considering the average, this is quite impressive. commercial electricity bill In the United States, it costs 12.8 cents per kilowatt hour (kWh).

By running at maximum operating power when power costs are lowest and optimizing when power costs are high, we were able to achieve the highest margins and highest realized hashrates in the industry.

– Gary A. Vecchiarelli, CFO

Not only has the company taken advantage of Bitcoin’s bear market cycle to increase its hash rate (mining capacity), but it has also used this period of price decline to aggressively increase the amount of Bitcoin it holds in its vaults. . As you can see from the graph below, from holding 100 BTC in February this year, he increased to 1,677 holdings in August, an increase of almost 17 times.

CleanSpark mined 659 Bitcoins in August, 1,624 Bitcoins during the third quarter, and 4,729 Bitcoins in 2023 YTD. Q3 revenue was $45.52 million (+46.8% year-over-year) and GAAP EPS of -$0.12, beating estimates by $0.05. The loss was primarily due to depreciation and amortization, and adjusted EBITDA, another measure of profitability, was $13.3 million in the third quarter, an increase of $8.2 million, or 160%, from the year-ago period.

risk

Mining operations require large capital expenditures on hardware and infrastructure. Bitcoin mining companies like CLSK are currently losing money and may need additional capital to dilute shareholders if crypto prices do not rise as expected.

Rising energy prices and hashrate increases can negatively impact profit margins. The higher the Bitcoin hashrate, the more computing resources are required to solve problems and mine Bitcoins. Hashrate has recently reached all-time highs and is likely to continue rising. This leads to higher overall hardware costs and lower profitability for miners.

The Bitcoin halving scheduled for April 2024 will cut block rewards in half, negatively impacting mining companies’ finances. This is because the first miner to solve the problem and earn Bitcoin will earn half of the amount they are currently earning. For the mining companies mentioned in this article to return to profitability, the price of Bitcoin would need to rise significantly.

conclusion

While I recommend keeping physical Bitcoin in cold storage as the best overall way to participate in this sector, investors may also consider investing in a Bitcoin miner. You might want to. This is because Bitcoin miners typically offer leverage gains and can provide a way to diversify your exposure to the crypto sector. .

CleanSpark is my first choice, but investors might consider owning a smaller basket that includes other top companies like HIVE Blockchain Technologies (HIVE) and Marathon Digital Holdings. All of these stocks should see significant increases in revenue, EBITDA, earnings, and valuations as Bitcoin prices rise in the coming months.