Insights

Support Bitcoin on Crack

daocat

As DAOCAT is a value investor (I know tough to imagine given all the talk about crypto) one of the names that has always been on his radar is Support.com (SPRT), for the reason that this company had more cash than its market cap, no long-term debt, and even tax loss carryforwards (kind of an asset, if monetized). The business of the company is totally boring – they provide tech personnel to even more boring tech companies but it was an interesting value play being the perennial Pound for 75 pence.

To DAOCAT’s surprise, the other week, Support did a deal in the crypto space – I suppose not shocking with all the SPAC activity and backdoor listings galore --- everyone’s rushing to get placed on NASDAQ to get a higher valuation while stimmy checks are rolling in, and being converted into stocks via Robinhood. In any event, a company called Greenidge Generation Holdings did a deal with Support where SPRT’s shareholders will get 8% of the combined entity while the company itself will become a subsidiary of Greenidge. The reason this is interesting is that Greenidge owns a power plant, and uses it to mine Bitcoin. The outcome of this Frankenstein is a company with $70m in cash out of which $33m was Support’s and hashrate of 1.1 exahash per second (“EH/s”), which is expected to grow to 2.6 EH/s in 2022.

How does this compare to other listed bitcoin miners such as Riot Blockchain (RIOT) and Marathon Digital Holdings (MARA) you may ask? Well first it’s worth it to look at how they perform versus Bitcoin itself.

Yes, that underperformer for the past year in blue is BTC itself – as you can see while BTC was a rocket ship and up nearly 900% it looks like a flat line compared to Riot and Marathon moon spaceships on crack. Again, DAOCAT is value investor, and thinks that at current valuation both MARA and RIOT are scary investments, and are largely speculative leverage plays on BTC, and aren’t without problems and red flags. One such problem for instance is that RIOT’s CEO Jason Les is a professional (former?) gambler, another is that all of these listed miners essentially buy their equipment from companies such as Bitmain (China), who for one compete in mining and two sell slightly older technology to the westerners to keep an edge, all on top of having subsidized energy from Chinese hydro dams and other low-cost energy sources.

Anyhow, back to comparison, both Riot and Marathon—they trade close to $3.75bn enterprise value, and each has 1 EH/s mining capacity which is about the same as 1.1 for Support.com. The $50m powerplant also counts for something, but is tiny compared to the crypto mining business’ real output, BTC. So, if we take these valuations for granted and multiply them by the 8% which Support will get from the deal, we get $300m, which computes to $15/share, more than 3 times current $4.26 stock closing price.

DAOCAT warns that in general, it’s a terrible idea to go long producers of anything, as overtime in any industry they compete to the point where their output is close to their margin. Even with sexy products like weed, the long-term profits will decline and become similar to tomato growers. Catch here is that this is what happens long-term, but for now, Greenidge’s mining cost of each bitcoin is an average of $2869 (less than 5% of the output), and they mined 1186 of them last year. Overall, DAOCAT thinks that both RIOT and MARA can continue to go up given that BTC is about to punch through $60K but since nothing is certain, and their valuations are way higher than SPRT a sensible strategy might be to short half a unit of each versus long one unit of Support. So why did SPRT spike to $9.45 on the deal, and then fell back? Simple – most of the investor base are value investors who want nothing to do with Bitcoin or high growth/ expensive valuation names, and simply want to buy things at a discount, also there are no research reports, or analysis and in fact the only news line items are from lawyers trying to fish for SPRT shareholders who think the deal is unfair to them at 8% of the combined entity. DAOCAT thinks that once there’s more news, and closer to the deal close in 3Q21, whether Bitcoin goes up or not, SPRT valuations should converge with those of MARA and RIOT.

It goes without saying that this is not investment advice, not Redot’s advice or opinion, and that everyone should do their own research before trading anything. Also DAOCAT might hold/buy/sell/short these securities without any prior warning or announcement.

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