Core Scientific: Just Another Bitcoin Mining Stock?

Our recently launched YouTube channel has brought around a contingent of punters who are dumbstruck to find someone casting a critical eye on their “next Tesla.” Few can formulate an argument based on facts, so they opt to attack the messenger instead. One accusation is that we always assume investors are uninformed.

Since half of our audience are newbie investors, our decision to educate people on investing best practices has some thought behind it. With many institutional investors reading and paying for our content, it’s clear that even sophisticated investors appreciate a simple approach to analyzing risk. Today, we’re going to cast our critical eye towards a stock called Core Scientific (CORZ).

About Core Scientific Stock

Click for company website

Like many disruptive tech stocks debuting lately, Core Scientific became a publicly traded company by merging with a special purpose acquisition company (SPAC) called Power & Digital Infrastructure Acquisition Corp. That’s all done and dusted, and Core Scientific is now a $3.45 billion market cap company that’s attracting lots of attention from retail investors. The basic premise is that they’ll be mining bitcoin using green energy for their own account, and for others through hosting.

We’ve talked about how bitcoin mining represents company-specific risk that we believe doesn’t justify the added leverage you’re getting. It’s similar to why investing in gold miners is riskier than investing in gold. And gold miners don’t take what they pull from the ground and hoard it, therefore increasing their exposure to commodity price risks, they sell it. Most bitcoin miners increase risk by choosing to hold bitcoin on their balance sheets. Crypto miners also need to continue buying better equipment as time goes on while the rewards continue to halve every four years (the next halving is in 2024).

Infographic showing crypto mining rewards continue to halve every four years (the next halving is in 2024).

If investors want exposure to bitcoin as an alternative asset, they’re better off buying bitcoin.

What makes Core Scientific unique is their “net carbon-neutral blockchain infrastructure” which – according to their SPAC deck – derives 55-60% of electricity from noncarbon-emitting sources such as hydro, wind, solar and nuclear. They then purchase Green-e certified renewable energy credits (RECs) to offset 100% of the carbon produced from contracted “dirty” power. That may sound good on the tin, but not when you dig deeper.

The Downside to Green

Let’s start with this excerpt from an FT article yesterday about the deepening crisis with the world’s supply of aluminum (our emphasis in bold).

The energy crisis in Europe and power rationing in China, combined with strong demand underpinned by rising sales of EVs, has put the 66m tonne a year aluminium market on a path to “inventory depletion” by 2023 according to Goldman Sachs, which has set a 12-month target price of $4,000 for the metal.

Credit: Financial Times

We know what you’re thinking. Why do those bloody Brits spell and pronounce aluminum wrong? We’re not entirely sure, but when it comes to finding energy to create aluminum so that the entire global economy doesn’t come to a screeching halt, companies are going to quickly become unconcerned about whether the energy they need to survive is renewable or not. The same holds true for bitcoin miners who – if they really wanted to help the environment – would stop using so much electricity to solve difficult math problems for no good reason so that we can all enjoy the freedom and autonomy of decentralized finance.

Green energy – along with literally everything else – has become a politically charged topic in the United States. One party screams about how we’re all supposed to live a certain way to “save the planet,” and the other party condemns green energy as not being economically viable. As always, each party has their own truths and falsehoods. Today, green energy (wind and solar panels) is more than economically viable, and actually comes in cheaper than dirty energy with all subsidies removed. It’s why NextEra Energy (NEE) – the biggest renewable energy company in the world – has performed so well over the years.

Some may not like to hear this but here it goes. If you’re going to invest in a “carbon aware” bitcoin mining firm, make sure they’re not paying any more for electricity than a “dirty energy” bitcoin mining company. If they’re using dirty energy and paying carbon credits for it like Core Scientific is, their competitors who don’t tow the green line will be better investments in the long run as their costs will be lower. Of course, Core Scientific may very well be moving towards 100% renewable energy, but there’s another problem that green energy won’t solve.

First Ethereum 2.0, Then Bitcoin 2.0

Sure, cryptocurrencies like bitcoin may have also cost investors billions of dollars in scams, and may be largely responsible for the emergence of ransomware, but people who complain about these things just don’t understand the ultimate promise of Web 3.0. Have you heard about NFTs?

Joking aside, there’s a lot of uncertainty about how bitcoin will evolve over time. The people that wave placards in the streets instead of working to solve the world’s problems are always contradicting themselves. You can’t preach about how cryptocurrency will solve the world’s wealth inequalities while ignoring the electricity being used, or the problems it’s creating along the way. How long before everyone starts complaining about how bitcoin uses up too much of our precious energy resources? Those concerns are at least partially responsible for the coming Ethereum 2.0 change where they’ll move from mining to staking which consumes 99.95% less energy.

To mine a single bitcoin worth $44,255 at today’s prices, bitcoin miners need to consume somewhere around $19,500 worth of electricity. That’s according to a Forbes piece published last year which dropped some eye-opening numbers. For example, your average bitcoin transaction consumes just over $175 in electricity:

The Bitcoin mining that enables a purchase, sale or transfer, it posits, uses a slug of electricity that costs $176. That number is based on an average worldwide cost per kWh of 9.0 cents over the past 12 months.

Credit: Forbes

Once everyone gets tired of expressing their faux outrage towards Joe Rogan, they may look for other things to complain about – like how much energy bitcoin uses. Political sycophants will smell opportunity, and before you know it, they’ll be mandating bitcoin 2.0 – staking instead of mining. There’s a shortage of computer chips these days, and companies that can’t produce bitcoin mining rigs fast enough aren’t helping things.

Bitcoin is risky enough as it is. We don’t need to compound that risk by taking on additional company-specific risk and leverage. Going back to our critics on Reddit, the common thread among all the people who are paying for our service is they have meaningful money. Of our paying subscribers who are retail investors, more than 10% are doctors, and an even larger percentage are executives. These are individuals who worked their asses off to accumulate wealth, and they’re not going to piss it away on some cult stock moonshot.

Conclusion

For risk-averse investors who want to preserve their capital more than grow it, buying some bitcoin – and maybe some ether down the road – are nice safe ways to get some exposure. If bitcoin implodes, you lost your bitcoin. But even if you’re holding a sufficiently diversified portfolio of bitcoin mining stocks, if bitcoin implodes, you’re wiped out. No diversification benefits.

Bitcoin is a volatile asset and weathering that volatility is a whole lot tougher when you have a giant energy-hungry server farm that needs bitcoin to stay above a certain price or it starts bleeding cash.

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