CleanSpark Should Outperform If Bitcoin Prices Hit All-Time High

Summary CleanSpark should report strong Q4 results on the back of improved Bitcoin hash price. However, a historically weak hash price and ever-increasing network difficulty ahead of a halving event isn’t an ideal situation for miners. The price of Bitcoin should be set to rise based on historical patterns, although CLSK is a higher risk-reward way to play this theme. CleanSpark, Inc. ( CLSK ) has been on a wild ride since I first started covering the stock in March , up over 220% since my initial write-up when I played a "Buy" rating on the stock saying it was an interesting speculative place on Bitcoin. More recently in September , I wrote that I thought it was safer to own Bitcoin itself compared to CLSK or other miners. With the stock continuing to surge since then, let's catch up on the name. Company Profile As a reminder, CLSK is a Bitcoin miner that owns and operates its own facilities and doesn't lease out space to any other miners. It has been in the process of expanding both its Washington and Sandersville facilities in Georgia, which sit on over 16 acres. The company acquired two Bitcoin mining facilities in Dalton Georgia last June, and it also has a co-location agreement with Coinmint, whose facility in New York hosts some of its miners. CLSK doesn't hedge or regularly trade its Bitcoin, only selling it from time to time to help fund and grow its operations. Management has said it doesn't use any specific algorithms or programs to decide when to sell any Bitcoin, instead relying on analyzing forecasts and monitoring the market in real-time. Winter Rally Back in late September, I wrote that with Bitcoin projected to have a halving event around April 2024 that Bitcoin prices would have to rise to over $40,000 for Bitcoin mining to be viable. The price of Bitcoin was trading for around $27,000 at the time. Given that dynamic, I argued that owning Bitcoin at the time was the better and safer bet. The reason was that Bitcoin had to go up substantially for mining just to be viable and to keep their economics the same. Thus, by owning Bitcoin investors would win if the price did indeed go up, but if prices didn't get to these levels, smaller miners could be out of business. Fast-forward to today and Bitcoin is indeed above that $40,000 level, checking in at around $45,000, a nearly 67% gain. In my last article, I noted that miners could be a "a juiced way" to play a Bitcoin price increase, and that also proved to be the case, with CLSK up about 90% over the same period. The price of Bitcoin is still going to be the biggest driver for CLSK going forward, and there are two big events driving Bitcoin's price at the moment. The first is that the April halving event is still ahead and quickly approaching. As a reminder, when this event happens, the Bitcoin block reward will be cut in half to 3.125 Bitcoin from 6.25 Bitcoin. While Bitcoin has staged a nice rally, it is worth noting that in the past, its biggest gains have come after halving events not before them, and the cryptocurrency has reached an all-time high following its past three halving events. If history holds, Bitcoin could push to $70,000+ this year past its previous all-time high of $68,789.63. Bitcoin Price Movement Around Halving Event (CNBC) The other big event was the SEC approval of several spot-price bitcoin ETFs, which quickly launched on January 11th. The ETFs saw $4.6 billion in volume on their first day of trading. Bitcoin spot ETFs should widen the pool of investors for Bitcoin, as they can now just get Bitcoin exposure by buying the ETF through their brokerage account. Investors no longer have to go through the process of setting up a wallet to store their Bitcoin or worrying about a hot wallet getting hacked. Overall, it will legitimize Bitcoin in the eyes of some more old school investors and make them feel more comfortable buying it in a more traditional manner. However, some asset managers are not looking to offer these ETFs to their clients, including Vanguard, Merrill Lynch, Edward Jones, and Northwestern Mutual. As for CLSK, the company continues to purchase more mining equipment. Earlier this month, it announced it was buying 60,000 Bitmain S21 miners for a total of $193.2 million, or $16.10 per terahash. The deal also included a call option to purchase an additional 100,000 machines at a fixed price of $16.00 per terahash until the end of the calendar year. The initial order is expected to be delivered between April and June. The company said if it exercises the call option, that its hash rate would increase by 400% to 50 EH/s once all the machines were deployed. Getting the call option was a smart move by CLSK as it protects the company if costs rise and would allow it to add more computing power if Bitcoin prices soar. Last February , the company was able to acquire new machines at $13.25 per terahash, so prices have risen considerably over the past year. Conclusion CLSK and other miners should report strong Q4 results. Hash price, which is the revenue a miner can generate per hash rate, rose throughout the quarter to its yearly high on the year. Helped by the surge in Bitcoin prices, CLSK and other miners should turn in their best results for the year. Despite the strong performance this year for CLSK and a likely nice Q4, miners are still facing a difficult situation. While hash prices rallied in Q4, they have come off their recent highs and remain low based on a historical perspective. Meanwhile, the halving event could knock the hash price down back to its lows, barring another nice rally in Bitcoin prices. Bitcoin Hash price (Hashrate Index) The combination of a historically weak hash price and ever-increasing network difficulty ahead of a halving event isn't an ideal situation for miners. Bitcoin will once again have to stage a continued rally for a miner like CLSK to work. That can certainly happen, and history suggests it will. CLSK currently has an Enterprise Value of $1.75 billion, with an ever-rising share count as it helps fund expansion through its ATM program. The company mined 720 bitcoin in December. If CLSK mines 750 Bitcoin a month through the halving (3,000) and then averages 900 a month after adding the new computing power coming in April and taking into account the halving, it could produce about 10,200 Bitcoin in calendar year 2024. At current prices, that would be revenue of $459 million. Mining costs were $13,558 per Bitcoin for FY23, while other operating expenses were $11,215 per Bitcoin. This excludes the deprecation costs on the continued hardware it must buy, which was $17,491 per Bitcoin in FY23. That would leave CLSK with about $28 million in profit from its operations if prices were to stay where they are today. At $70,000 for Bitcoin, that profit would go to $283 million, and the valuation would be much more attractive. Given this, I continue to believe that the safer investment is in Bitcoin itself, or through one of the new ETFs, as opposed to the miners, which are facing headwinds. While history suggests Bitcoin will see continued strength after the halving, there is no guarantee this will occur. That said, if you think Bitcoin is going to go over $70,000 this year, you'll probably get a better return with a stock like CLSK. I prefer to take the safer route, but see the added juice CLSK has if Bitcoin rallies. I have a "Hold" rating on the stock.