Hut 8: My Top Pick For Capturing The Imminent Bitcoin Bull Run
Summary Bitcoin prices are expected to rise in 2024 due to factors such as the 4th halving event, regulatory transparency for BTC ETFs, and the dwindling supply of BTC. Bitcoin typically embarks on a long-term bull cycle 6 to 12 months after each halving event, with some forecasts predicting prices climbing to over $100,000 by late 2024. Hut 8 Corp. presents a compelling investment opportunity with its balanced business model, material bitcoin exposure, and diversification into other revenue streams. The Investment Thesis In 2024, many uncertainties lie ahead as the United States presidential election process unfolds and the potential for economic recession or slowdown looms. The outcomes of both the election and the economy are far from certain. However, one factor that I anticipate with confidence is the rise of Bitcoin ( BTC-USD ) prices. Although nationwide and worldwide conditions outside of the cryptocurrency sector may become volatile or turbulent, the underlying value of BTC will prove to be resilient. Over time, as institutional adoption of BTC continues increasing and its perception shifts from a niche asset to a recognized store of value, I expect market demand and valuation will ascend accordingly. Amidst pervasive ambiguity in other market, the growth trajectory of BTC will provide an oasis of certainty in 2024. Three Pillars of Support in 2024 There are three foundational factors underpinning my belief that BTC prices will rise meaningfully in 2024: The 4th BTC halving event is scheduled for 17 April 2024. This will reduce the block reward from 6.25 BTC to 3.175 BTC, decreasing new BTC supply entering circulation. In 2024, we may see regulatory transparency regarding BTC exchange-traded funds (ETFs), with over 10 potential ETF filings . This could pave the way for increased institutional investment into BTC. Over 92.8% of BTC has already been mined , with approximately 1.5 million BTC remaining. This exponential dwindling of future supply lends scarcity value. According to basic economic principles of demand and supply dynamics, a notable cut to new supply coupled with incremental demand growth should inherently increase market pricing. Furthermore, as valuations rise post-halving, this fosters a positive feedback loop - higher prices incentivize additional mining to take advantage of network transaction fees, driving further demand for existing circulating coin and putting upward pressure on prices. While immediate post-halving effects may be muted, history demonstrates BTC typically embarks on a long-term bull cycle 6 to 12 months after each halving event. Several analysts forecast prices climbing to over $100,000 or higher by late 2024. For investors seeking exposure, companies most directly leveraged to BTC's success include miners, whose top-line revenues and margins expand dramatically in an appreciating market, as well as cryptocurrency exchanges benefiting from trading volume growth. Of these, I view miners as the purest play, with earnings essentially acting as a proxy for BTC's price performance. Their shares could outperform meaningfully should an expected resurgence in the crypto sector take hold. Evaluating the Risk While BTC mining companies stand to benefit immensely from rising prices in 2024, there are some notable challenges to consider. BTC mining is a highly capital-intensive endeavor that requires significant investment in GPUs to increase hash rate and maximize coin production. However, with each halving event, rewards are cut substantially, meaning miners must exponentially grow their hashing power just to maintain pre-halving output levels. These further drives up electricity costs and maintenance expenses. Additionally, the environmental impact of large-scale BTC mining has garnered significant scrutiny . As the global hash rate climbs, energy consumption also grows exponentially. Some estimates indicate BTC mining currently uses around 150 terawatt-hours of electricity annually - more than many medium-sized countries. Critics argue this threatens decarbonization efforts and climate targets. Transitioning existing operations to renewable energy also presents cost and logistical hurdles. Regulators have taken notice - China previously dominated due to inexpensive coal but has since banned mining over environmental concerns. Other jurisdictions may follow suit without meaningful progress on sustainability. While miners are exploring renewable solutions like solar, scaling green energy infrastructure requires extensive long-term investment. Technical debates also question BTC's ability to properly incentivize sustainability at its current scale. Overall, responsibly managing this growing environmental footprint remains a paramount long-term risk if regulatory restrictions are to be avoided. Mitigation For these reasons, in my opinion miners should diversify beyond solely focusing on BTC extraction. Relying exclusively on a single volatile asset class is risky, as proven during the steep crypto market declines when prices plunged to just slightly above US$16k, rendering mining unprofitable and even causing some firms to become insolvent. During such periods dubbed "crypto winters", miners were often forced to liquidate their holdings just to stay afloat. A better strategy is for companies to develop diverse revenue streams in fiat currencies to weather downturns. Additionally, HODLing some portion of mined BTC according to a set strategy, rather than constant selling, allows benefits from upside appreciation potential. Those able to retain holdings have an opportunity to leverage them for loans or sell during future bull markets. In summary, the ideal miner exposure for investors like myself seeking BTC upside is one with a balanced model featuring both fiat income diversification and a BTC HODLing policy. This mitigates risk while maintaining linkage to BTC price performance over the long term. My Ideal Miner Hut 8 Corp. ( HUT ) presents a compelling investment opportunity premised on a balanced business model and material BTC exposure. Recently merging with US Bitcoin Corp, HUT has strategically expanded beyond sole reliance on mining operations for its revenue with numerous opportunity to earn fiat income. The acquisition of TeraGo's five data center facilities in Toronto in early 2022 introduced a profitable high-performance computing segment into its portfolio. Post-merger, HUT will enter the burgeoning management services division, catering to crypto miners such as Marathon Digital ( MARA ), Foundry, Sphere 3D ( ANY ), Decimal Group, and TeslaWatt. Both segments contributes a steady flow of fiat income to HUT. HUT Dec 2023 Presentation HUT has experienced significant growth in its mining hashrate, effectively tripling it to reach 7.5 exahashes per second (EH/s). While this expansion is noteworthy, HUT's anticipated year-end 2023 rate remains relatively average compared to its peers, such as MARA, Riot Blockchain ( RIOT ), and Core Scientific ( CORZQ ), who are targeting or achieving mining hashrates between 10-17 EH/s. However, the escalation of hashrate appears to be of lesser importance in HUT's future strategy. Instead, the management's focus has shifted towards diversifying revenue sources by generating fiat income. This prudent approach positions the company well for the upcoming BTC block reward halving, scheduled to take place in just five months. In terms of maintaining exposure to the potential growth of BTC price, HUT currently holds an impressive amount of over 9,366 BTC, placing it among the top 20% of global BTC holders. If BTC reaches the projected price target of $100k, the value of this stake alone would increase to $936 million, excluding the core mining operations and diversified fiat revenue streams. During the investor's call on 4 Dec 2023, management indicated that the current net worth of the company is $497 million. The diversified fiat revenue is expected to contribute 30% to the projected 2023 income, amounting to over $45 million out of the total of $152.4 million. With the aforementioned positive factors, HUT solidifies its position as a leading miners play, poised to leverage the anticipated 2024 BTC bull market. HUT Dec 2023 Presentation Other Potential Catalyst Going Into 2024 US Bitcoin Corp has recently secured a deal to acquire mining assets from the bankrupt lender, Celsius. As per the deal, the company will become the “exclusive operator” of the Celsius mining fleet and will receive a $15 million annual management fee for the mining assets, net of operating expenses, for five years. This arrangement positions HUT to garner an additional $15 million in fiat revenue annually for 5 years. On the other hand, HUT is also exploring diversification into the energy sector by placing a “ stalking horse bid ” to acquire certain assets of Validus, its former power supplier to its BTC mining facility in North Bay. If successful, this strategic bid would result in 80% ownership of a new power business and put an end to all litigation claims and counterclaims between HUT and Validus. Risk Relating to Investment Into HUT Beyond the risks associated with investing in a BTC mining firm discussed previously, a primary concern for an investment in HUT at the present juncture relates to post-merger management alignment and strategic cohesion. It is important to note that this merger combined two distinct companies, resulting in a sizeable leadership contingent comprising 5 C-level executives, 7 senior managers, and 7 Board of Directors. Potential challenges arise in unifying strategic vision and decision-making if behaviors such as clashing of ego and differing visions appears. At the extremes, irreconcilable discord could potentially lead to a disruptive breakup of the combined company. More likely, moderate dissonance might slow the pace of initiative development as competing agendas vie for prioritization. Therefore, attentiveness to cohesive team-building and unitary strategic communication will be paramount to mitigate the threats to integration and performance inherent in fusing multiple established organizational cultures under joint leadership. Successful alignment of this expanded management system remains a prominent risk factor warranting ongoing monitoring. Valuation Valuing BTC mining companies presents challenges due to historical volatility across crypto market cycles. To establish more robust valuation benchmarks, I will analyze HUT with a peer group of established miners with stable business profiles spanning multiple years - ( HIVE ), ( MARA ), ( BITF ), and ( RIOT ). Taking the median price-to-sales ((PS)) and price-to-book ((PB)) ratios across this peer cohort over time yields more representative benchmarks. Based on HUT's stated $152.4 million pro forma revenue and $497 million net worth post-merger, applying these multiples provides target valuation ranges. Using information from Macrotrend's website , the median PS ratio was 8.71x. At 8.71x HUT's $152.4 million revenue points to a market cap of $1.327 billion. Meanwhile, the median PB of 2.16x applied to its $497 million book value equates to a market cap of $1.073 billion. As revealed by Sue Ennis, the Investor Relations executive of HUT, in her X account, that HUT currently has 88 million shares outstanding post-merger, this implies a per share value between $12.19 - $15.08 currently - representing upside of 19%-47% (against $10.25 as of 12 Oct 2023). Sue Ennis X Account It is important to note this does not incorporate potential synergies from integration, additional income streams such as managing Celsius assets, or prospective energy segment revenues. Moreover, the valuation excludes the enormous appreciation possible if BTC reaches $100k, equating to $936 million in value from HUT's 9,366 BTC reserves alone. Adopting peer-derived, multi-year valuation metrics provides a foundation for HUT's potential in 2024. Upside drivers leave significant room for outperformance as the mining sector prepares to capture BTC's anticipated bull market in 2024. Closing Thoughts All evidence points to 2024 being a watershed year for BTC, as the 4th halving is programmed to constrict new supply entering circulation amid burgeoning institutional adoption propelling prices to new heights. Miners afford the most direct play on the coin's returns, though navigating industry volatility, capital intensity and sustainability necessitates balance. HUT stands out through acquisitions expanding businesses and holdings, positioning itself at the vanguard of resilient miners poised to maximally leverage the anticipated bull market. Therefore, with its diversified revenue streams buttressing pure-play exposure, HUT represents my highest conviction investment to profit from BTC forecasted price appreciation through 2024 and beyond. Finally, compared to solely holding BTC, HUT offers a preferable risk-adjusted opportunity in my view. Its diversified business model provides ongoing revenue and upside even if BTC does not move as expected post-halving or regulatory clarity is delayed. Furthermore, as per the comparison below, HUT remains comparatively undervalued versus peers that have appreciated substantially since 22 Oct 2023 (when BTC prices goes above 30k) as one of the premier miners yet to fully participate in the crypto sector's recent momentum. Yahoo Finance For prudent investors seeking leverage while balancing risks, HUT presents advantages over investing on BTC in isolation. Editor's Note : This article was submitted as part of Seeking Alpha's Top 2024 Long/Short Pick investment competition , which runs through December 31. With cash prizes, this competition -- open to all contributors -- is one you don't want to miss. If you are interested in becoming a contributor and taking part in the competition, click here to find out more and submit your article today!
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