TeraWulf: The Competition Just Got More Intense

Summary Transaction fees from mining skyrocketed in November and December, which equates to more revenue for miners. However, even with these fees, TeraWulf's BTC per EH/s fell in Q4. Eleven spot Bitcoin ETFs have been approved for US-listing, which could theoretically draw capital from the far more speculative mining stocks. It has been about four months since I last covered TeraWulf (WULF) for Seeking Alpha. At the time of that piece, WULF shares had corrected over 50% from a price of about $4 in July down to under $2. Here was one of my main takeaways from my closing summary when I noted my long WULF position: In my view, and I think this view is shared broadly throughout the industry, the halving is likely going to put the weak dogs out of their misery. Given what I view as strong execution of a corporate strategy and a focus on mining efficiency, I believe TeraWulf is positioned well to be one of the survivors post-halving. Most of what I said in that article still applies today, but there are now new things to consider as quite a bit has changed over the last several months. First, transaction fees from mining skyrocketed in November and December; which is a more mining-specific detail but it's an important one. Additionally, we now have eleven spot Bitcoin ( BTC-USD ) ETFs approved for US-listing by the Securities and Exchange Commission. This is a monumental moment for the cryptocurrency industry broadly and I anticipate inflows for these funds will be strong between now and the end of the year. We'll explore the ETF angle briefly in a later section of this article. First, the fees and what this means for miners. Transaction Fees Bitcoin's block reward halving has been well-covered at this point. Anyone who doesn't understand the fast approaching April headwind shouldn't be dabbling in miner shares. What can potentially change things for miners fundamentally is an increase in transaction fees as a share of the total block reward. Miner Revenue Breakout (IntoTheBlock) For most of Bitcoin's history, the block reward received by miners has generally been almost entirely derived from new coin emissions. During 2023, emissions made up approximately 2 to 3% of total block rewards in most months. The months of May, November, and December helped bring the total year percentage to 6.5%. The problem with the emission-centric model is coin issuance is cut in half every four years by design. Data by YCharts With the assumption that hashrate and coin price will be equal following the halving, miner revenue is essentially cut in half overnight, even though expenses stay the same. This is obviously a huge problem. Furthermore, the hashrate has continued to surge higher which weeds out smaller, less profitable mining outfits and has led to more centralization of hash: Bitcoin Hash Distribution (Blockchair) The issue there is largely beyond the scope of this article but the main point is transaction fees, although problematic in other ways, would theoretically help to alleviate the miner revenue problem for all miners. This brings us to TeraWulf. My View on TeraWulf Though I still hold shares and think WULF remains an interesting speculation, I'm less excited about this stock since my last publication covering the company. First the good: Q4-22 Q1-23 Q2-23 Q3-23 TTM Cost of Revenues $5,300,000 $5,000,000 $5,100,000 $8,300,000 $23,700,000 Total Opex $17,700,000 $15,800,000 $16,200,000 $20,000,000 $69,700,000 BTC Mined 387 533 909 989 2,800 Breakeven Price $59,432 $39,024 $23,432 $28,615 $33,144 Source: Operational data from TeraWulf, Financial data from Seeking Alpha, author's calculations I've shared this table in the past on Seeking Alpha, however, it has been somewhat polarizing when I do. It's a very simple estimate that aims to show what a company's true break-even price is when factoring in cost of revenue and total opex. It doesn't include things like interest expense or investment income because the goal is to find a metric that compares operational efficiencies outside of other industry specific metrics like BTC per EH/s. Even though we can clearly observe a sequential increase in the breakeven price in Q3 from $23.4k to $28.6k, Q3 was a solid quarter for WULF from a production cost standpoint. The breakeven price was still below $30k and it remains near the top of the industry in this metric on a trailing twelve-month basis. That said, it will be interesting to see what Q4 looks like because WULF's average BTC per EH/s between October and November was not as strong as industry leaders: Bitcoin Miners (Company Filings, Author's Chart) For the full quarter, WULF's average BTC per EH/s came in at just 63.9. While this is far better than the poor figures seen from Hut 8 ( HUT ) and Riot Platforms ( RIOT ), it comes at just 7th place and well behind industry leader Marathon Digital ( MARA ). For context, WULF's Q3 average BTC per EH/s was 68.7. While it isn't the only company to see this figure decline in spite of higher transaction fees, MARA was able to increase this figure quarter over quarter. None of this means WULF is a sell from where I sit. I still think TeraWulf may outperform the broader market this year simply on the back of higher BTC prices. But for a pure play public Bitcoin mining company, WULF may not be the best pick in the industry given these recent EH/s results and the relatively high debt to equity position compared to sector peers. Sorted by Debt to Equity (Seeking Alpha) And again, public miners as an investment idea are somewhat dubious without Bitcoin transaction fees remaining elevated in perpetuity. Coupled with the ETF elephant in the room, miners may experience short term softness after what has been a sizeable rally from October through early January. ETFs and Capital Flows This is purely hypothetical at this point and it's too early to tell if there will be any ramifications for the miners specifically, but the launch of Bitcoin ETFs could theoretically have an impact on demand for mining shares as well. I have long cautioned that miner stocks are better speculative instruments than long term investments. However, the lack of spot ETFs has likely pushed Bitcoin investment capital into equities and miners have likely been a beneficiary of that. BTC investors who want exposure in IRAs have turned to OTC market Grayscale funds that deviate wildly from net asset value, crypto-adjacent names like Coinbase ( COIN ), and companies that hold significant portions of BTC on their balance sheets like MicroStrategy ( MSTR ) and Bitcoin miners. Now that spot ETFs have arrived in the United States, the investment capital edge that miners have benefited from goes away since the BTC speculator capital can just go to spot ETFs instead. Valuation Data by YCharts Purely from a book valuation standpoint, at 3.2, WULF is on the higher end of the P/B ratio compared to most of the other mid to large producers in the space. The notable outlier here is actually MARA which has an enormous BTC stack and an absolutely commanding lead in monthly production. Summary In my September article, I disclosed starting a position at $1.72 per share. Following that initial lot, I averaged down a handful of times and have been able to successfully sell some of those shares on rips up near and above $2. I'm currently back down to my introductory position and plan to hang on to those shares through the halving. Miners have sold off significantly since the spot Bitcoin ETFs were approved on January 10th and this pullback from $3 in WULF has been very necessary. WULF vs 200dma (TradingView) Again, I still own some WULF. But I've picked my spots in taking profit in recent weeks after what has been a massive run over these last three months. In the event that the stock suffers further weakness back down to the $1.50 area, I will likely add to my WULF holdings. But please keep in mind that without transaction fees remaining elevated, the economics of Bitcoin mining are difficult and potentially lead to consolidation. That could theoretically make WULF a target or merger candidate post-halving, but that's purely speculation on my part. With hash up and the block reward emission down later this year, the market needs much higher BTC prices to make these companies viable.