Summary CleanSpark is losing money at the current Bitcoin price. Even if you expect the price of Bitcoin to rise, I believe you'd be better off just owning Bitcoin directly. CleanSpark's direct mining costs are in the middle of the pack, meaning they don't have a competitive advantage. Executive Summary This past July I wrote an article on Seeking Alpha explaining my strong-sell thesis on Riot Platforms ( RIOT ). I received some pushback from bullish investors who said a traditional valuation framework isn’t appropriate for Bitcoin mining companies because you also have to consider the price appreciation of Bitcoin ( BTC-USD ) itself. This is a fair point. I personally have no view on where the price of Bitcoin will go. But it’s safe to assume that substantially all shareholders of Bitcoin mining companies are also bullish on the underlying commodity. Any analysis that doesn’t consider this is incomplete. So in this article I’ll look at another Bitcoin miner, CleanSpark, Inc. ( CLSK ) using a different framework. The framework is; if you are bullish on the price of Bitcoin, would you be better off buying shares in CleanSpark or just buying Bitcoin itself? I believe that in an almost any scenario, investors would be better off just buying Bitcoin. Bitcoin Miner Valuation Framework There are three sources of value for a Bitcoin mining company. First is the cash and Bitcoins they hold on their balance sheet today. Second is their current deployed hash rate. And finally, is their ability to grow their hash rate. We’ll start with the third component first. Growing your hash rate costs money. In a perfectly competitive market, the present value of future growth will exactly equal the upfront cost of investment. To earn a return on assets above your cost of capital, you need to have some form of competitive advantage. Even if the price of Bitcoin increases significantly in the future, this will cause the entire industry to increase its hash rate, which will increase the difficulty rate and compete away the benefit. Bitcoin mining is a commodity industry. The only way to have an advantage is to have lower electricity costs than your competitors. We can measure this by looking at the direct cost per Bitcoin mined, which mostly consists of electricity. Of the 5 largest Bitcoin miners listed on major US exchanges, CleanSpark’s direct costs per Bitcoin mined is in the middle of the pack. Direct cost per Bitcoin mined comparison (Company filings, compiled by author) Thus, I don’t think we should give CleanSpark credit for future growth opportunities. We’ll just look at what they currently have on their balance sheet. As of August 9th 2023 CleanSpark has ~$90 million of cash, ~1,200 Bitcoins, and ~9 EH/s of deployed hash rate . They have a fully funded plan to bring their deployed hash rate up to 16 EH/s. Fully funded means they do not anticipate needing to tap the debt or equity markets again. But they will have to draw down on their existing cash reserves and probably sell some of their Bitcoins to fund the expansion. But even if they had 16 EH/s of deployed hash rate today at no additional cost, I still think CleanSpark would be overvalued. How Much is 16 EH/s Worth Today? As new hash rate is deployed across the industry, the difficulty rate increases and thus, the Bitcoins mined per EH/s decreases. CleanSpark discloses how many Bitcoins they mine each month, as well as their deployed hash rate. In January 2022 they mined 145 Bitcoins per deployed EH/s. By July 2023 this had declined to 64 Bitcoins per EH/s. This is a 4% compound monthly rate of decline. For the rest of this article, I will assume mining efficiency continues to decline at a rate of 4% per month. CleanSpark mining efficiency (CleanSpark Inc., compiled by author) We must also consider the Bitcoin halving event, which is expected to happen towards the end of April 2024 . This will cut the Bitcoins mined per EH/s in half overnight. In Q2 2023 CleanSpark spent about $3.1 million per EH/s on direct operating costs. As the difficulty rate increases, eventually the cost of electricity will exceed the mining revenue and CleanSpark will need to replace its miners with newer, more efficient models. To calculate the value of 16 EH/s of deployed hash rate, we need to calculate the cumulative gross profit up until it is no longer profitable to operate. This will depend on the price of Bitcoin. I will analyze three different scenarios. Bitcoin at $26,000 which is the current price as I write this article, Bitcoin at $50,000, and Bitcoin at $100,000. If the Bitcoin price is $26,000, you can profitably operate until the halving event, which will yield ~$56 million of cumulative gross profit. Bitcoin $26k scenario (Author's assumptions & calculations) If the Bitcoin price is $50,000, you can profitably operate until May 2024, which will yield ~$260 million of cumulative gross profit. Bitcoin $50k scenario (Author's assumptions & calculations) If the Bitcoin price is $100,000, you can profitably operate until September of 2025, which will yield ~$814 million of cumulative gross profit. Bitcoin $100k scenario (Author's assumptions & calculations) We also have to consider that CleanSpark has ~$6 million per month of corporate overhead. I multiply this by how many months they operate in each of the scenarios. They had ~1,200 Bitcoins on their balance sheet as of August 9th 2023. The value of those Bitcoins is obviously different in each of the three scenarios. They have $90 million of cash. They have real estate assets worth ~$98 million. I don’t give them credit for the value of the Bitcoin miners because those will need to be replaced at the end of the period. They have ~$18 million of debt. Adding all of these together, I calculate the net value for each of the three scenarios. They currently have a fully diluted market cap of ~$694 million after you consider the ~21 million of new shares they issued between the end of the second quarter and August 8th. This is shown in the subsequent events section of their 10Q. In the Bitcoin $26k scenario, the net value is 72% less than their current market cap. In the $50k scenario, it's 39% lower. In the $100k scenario, the net value is 36% higher than the current market cap. But if you believe Bitcoin will hit $100k, you’d be better off just buying Bitcoin directly and bag a 285% gain. Returns in each scenario (Author's assumptions & calculations) Verdict Unless CleanSpark can find some way to dramatically reduce its electricity costs, I don’t see any scenario in which you would be better off owning CleanSpark than just owning Bitcoin directly.
