Summary With the halving for Bitcoin approaching, miners such as CleanSpark will need to see a big increase in Bitcoin prices to be able to mine at breakeven levels. CleanSpark is trying to improve its hashrate, become more efficient, and gain scale ahead of this event. Given the level of price where Bitcoin has to go for miners to breakeven with the halving, I think an investment in Bitcoin itself is now the much better play. Back in early March , I placed a “Buy” rating on CleanSpark ( CLSK ), saying the company should greatly benefit from lower natural gas prices and the purchase of discounted mining equipment. With the stock up over 50% since then, let’s take a closer look at the name. Company Profile As a quick reminder, CLSK is a Bitcoin miner. The company got into the Bitcoin mining arena through the acquisition of ATL in December 2020, and has since picked up more data center and mining equipment since. The company owns and operates its facilities, and doesn’t lease any space to anyone else. Its main campus is located on over 16 acres in Georgia. It also has some miners in New York from a co-location agreement it has with Coinmint. The company doesn’t participate in regular Bitcoin trading, nor does it hedge its holdings. It does, however, sell the Bitcoin it mines to help support its operations and fund growth. Management does not use any specific formula or program to determine when to sell any Bitcoin. Looking For Efficiency Gains Currently, CLSK is in a race to increase efficiency and improve its hashrate. As a reminder, in simplistic terms, for Bitcoin mining the hashrate is a measure of how quickly a set of computers can guess a random code to obtain a Bitcoin. More computing power gives crypto-miners the ability to make more guesses per second, enabling them to earn more Bitcoin. However, as more Bitcoins are mined, the codes become more difficult, requiring more computing power to maintain the same hashrate. CLK has been aggressively adding to its computing power ahead of the block reward being cut in half to 3.125 Bitcoin from 6.25 Bitcoin, which is expected to happen in April of next year. It’s in rapid growth mode to add computing power, increase efficiency, and gain scale before this event. On its Q2 earnings call , CEO Zachary Bradford said: “At CleanSpark, we are positioning our self to take full advantage of the halving by ensuring that we are among the most efficient miners in the industry. Right now, our fleet average is 31 watts per terahash. As the XPs we ordered last month are delivered and come online, we expect our fleet-wide efficiency to accelerate, landing us at or below 26 watts per terahash on a fleet average. As I mentioned, efficiency will be one of the most important metrics for analyzing miner health, as we near Bitcoin halving. Let me take a moment to share with you how we are preparing ourselves to capitalize on the events surrounding halving, preparing maybe two passive award." In fact, we are training for halving, as with any big race, the real work starts months and months before the meeting the starting line.“ As I discussed in my original write-up, CLSK was taking advantage of a distressed mining equipment market earlier this year to purchase new mining equipment at a discount. On its May earnings call, the company had future orders set for 20,000 Bitmain S19 J Pro pluses and 45,000 XPs. The company said it called the bottom on prices for XPs, and that it was the lowest price for XPs on record. It said it should get a great ROI on the investment, and that it has now largely locked in most of its expansion CapEx. The company is in the process of expanding both its Washington and Sandersville facilities. The Washington expansion is expected to go live soon in Mid-June. The Sandersville expansion is expected to make it one of the largest Bitcoin mining data centers in the country, and the company is hoping it gets completed in October. The company has already has 99% of the machines for the expansions under contract or in transit. Lower energy costs was another area I discussed as a potential tailwind for CLSK. On that front, the company did see its energy costs go down -16% sequentially in Q2. However, costs were still higher year over year, and the company should have ability to see even lower prices given the drop in natural gas prices. This was one area, though, I was hoping would have been better. Of course the price of Bitcoin will play a big role in how CLSK performs as well. It mined less Bitcoin in Q2 versus a year ago, but it generated 14% more revenue due to higher Bitcoin prices. How Bitcoin prices react in anticipation of the “halvening” will play a large role in how CLSK performs. With a mining cost of $11,700 per Bitcoin in Q2 and over $9,500 per Bitcoin in other expenses not including D&A, mining at current prices after the halving isn’t very attractive. Even if CLSK becomes more efficient, you’d still need prices of well over $40,000 to make it worthwhile. Conclusion With CLSK up over 50% since my initial write-up, I think the smart move is to take profits. Given the level of price where Bitcoin has to go for miners to breakeven with the halving, I think an investment in Bitcoin itself is now the much better play at this time. Bitcoin is just under $26,000, so it would have to move over 50% for many miners to just be able to breakeven, and that excludes D&A, so it should really be an even higher bar. And given that CLSK doesn’t hold much Bitcoin, it won’t benefit as much from the move. In addition, the company is still likely going to be diluting shareholders through its ATM program, so now seems like the right time to exit. Interestingly, much of Bitcoin's gains from past halving events have come after the event, more so than in anticipation of the event. Cointelegraph CNBC I’m going to take my rating on CLSK from “Buy” to “Neutral,” and would funnel any profits into Bitcoin itself.
