Summary We find CleanSpark to be the most undervalued Bitcoin miner, exhibiting strong network share growth and best-in-class cost basis, making it our top pick for a potential Bitcoin bull run. Despite CLSK's efficiency and undervaluation, its current cost basis of $73k per Bitcoin necessitates Bitcoin prices above $70k for profitable mining. Our valuation model shows CLSK's Implied Bitcoin Price at $84.4k, indicating overvaluation on an absolute basis but relative undervaluation among peers. We remain invested in Bitcoin itself to avoid business risks, awaiting signs of a Bitcoin bull run before increasing exposure to miners like CLSK. Introduction Recently, we published our thesis on the 2 key confirmations required for us to tilt our crypto portfolio to become more aggressive. One of the ways to become more aggressive is to take on exposure to Bitcoin miners. In the past, we have made such maneuvers with Bitfarms ( BITF ) and CleanSpark ( CLSK ) and documented them here on Seeking Alpha in the past (refer to our profile). With this intention, we're going to publish our theses for several Bitcoin miners on our watchlist starting with CLSK. This article brings good tidings to current holders of CLSK. TLDR : our models found CLSK to be the most undervalued miner relative to its peers . For context, this is the same model that called the top of CLSK back in January and subsequently called a swing up to Iris Energy ( IREN ). But, as always, “numbers must meet stories” (a notion emphasized by Professor Aswath). So let’s dive into the latest development of CLSK’s story. Background Our previous thesis on CLSK mentioned several key points that we would like to bring into the current thesis. We view CLSK favorably as a business because it is the only company that simultaneously exhibits 2 key traits: Increasing Network Share and Sustainable Cost Basis . Our only qualm with it is its valuation back then. As they say, "good things don't come cheap". We stated that CLSK has to trade at $5.20 for us to justify the risk, while it was traded at $20.35 at publication. CLSK is now trading at $8.09 at the time of writing and is approaching the price that makes sense for us. Therefore, we're eager to examine whether our previous thesis is still intact and whether CLSK can justify a higher entry price. If yes, then we're eager to find out how CLSK will rank in our portfolio if Bitcoin starts to exhibit bullish signals . The Thesis Network Share Growth Intact Recall that one of the 2 core theses for CLSK is the network share growth. From a table, we can see that CLSK’s growth remains impressive, which warranted its most recent run-up. The amount of Bitcoins mineable is fixed and limited (164,250 Bitcoins per year, excluding additional rewards). This implies that the reward is not based on the miner’s absolute mining capacity, but on the relative capacity of all other miners combined. This implies that it is the rate of growth that matters. This is why we follow this metric very closely. Computing this metric in an easy-to-understand manner is inconvenient at the very least. Hence, we devised a new metric to accurately capture this concept. More specifically, instead of the Bitcoin network (all miners combined), we wanted to narrow the network scope to a select group of miners and identify which miners are outgrowing their peers. Fig 1 illustrates the normalized changes in network share of BITF, CLSK, Marathon Digital Holdings ( MARA ), and Riot Platforms ( RIOT ) Since 2021Q3. Fig 1. Normalized Bitcoin Network Share Changes Since 2021Q3 (BITF, CLSK, MARA, RIOT) (Author) The interpretation of the graph is simple, the values represent the cumulative changes of a miner’s network share based on its initial network share in 2021Q3. It is observable that among the 4 Bitcoin miners, CLSK is growing well, gaining 52% more network share compared to 3 years ago. As a result, we see CLSK's Bitcoin production increase steadily (the 2024Q2 dip is caused by halving). Fig 2. CLSK Historical Quarterly Bitcoin Production (Author) Just a side note: CLSK's growth is dwarfed by IREN’s 179%. Do not flood to IREN just yet, there are other considerations to be made, but that’s for another article on IREN. Fig 3. Normalized Bitcoin Network Share Changes Since 2021Q3 (BITF, CLSK, IREN, MARA, RIOT) (Author) This metric looks good and all, but it doesn’t capture future network share. For this, we’ll look at what the company guided within 1 year (by the end of 2025). The table below represents each miner’s current capacity as of the latest monthly update and their respective guidance. CLSK’s latest known capacity stands at 22.6 EH/s, which already exceeded its guidance ( 20 EH/s ) by 2024H1. Without any other near-term guidance to look to, we can only assume a longer-term growth guidance. CLSK guided a 50 EH/s if it fully exercised its full option to buy the mining rigs from Bitmain (keep in mind that no timeline was given to achieve this target). This guidance is not impressive when compared to other miners. IREN is set to increase current capacity by 88% (from 16 EH/s to 30 EH/s ) by 2024Q4, while RIOT guided ~5x increase (from 23.3 EH/s to 100 EH/s ) by 2027 (not including the hostile takeover of BITF). Hence, with its longer-term guidance, we wouldn't expect much network share growth. In short, all this is to say that it is reasonable to expect CLSK to maintain its network share, which implies we expect CLSK to at least sustain its Bitcoin production and protect itself against revenue erosion in the near future. Table 1. Potential Capacity Growth Potential Based on Latest Guidance and Latest Known Capacity Company BITF CLSK IREN MARA RIOT Capacity Potential Based on Latest Guidance 86% 121%* 88% 42% 76% Cost Basis: Best in Class, but still not enough The management has optimized their mining fleet well, and we can understand why the management took pride in this achievement by publishing their fleet efficiency consistently every month. Fleet efficiency matters because the halving event has doubled the cost basis to produce 1 Bitcoin by halving the reward. Fig 4. CLSK's Historical Fleet Efficiency Since July 2023 (Author, CLSK) This is good, but it's not the reason why CLSK's cost basis is the best. Other miners such as IREN also guided that their eventual fleet efficiency will drop to 15 J/Th over the long run as miners update their fleet to newer models. What sets CLSK apart is the all-in cost basis. This all-in cost basis includes operating costs (electricity) as well as business costs (SG&A, depreciation, payroll, etc). We think that every prospective investor should put heavy emphasis on the 2023Q2 cost basis because it's the first quarter that reveals the (almost) actual cost basis after the Bitcoin Halving Event. Back then, we had to make assumptions about each miner's cost basis post-halving based on 2023Q3 data, and we received a lot of heat for it because the numbers looked too unrealistic. It turns out, we were still too conservative in our estimation. The table below contains our estimation and the actual cost basis post-halving (2024Q2). We added a column to adjust for the 20 days in April before the halving event. Table 2. All-in Cost Basis Per Bitcoin Miner Estimated Cost Basis After Halving Actual Cost Basis Actual Cost Basis (Adjusted) RIOT $183,000 149,000 $167,000 MARA $78,000 $112,000 $125,000 IREN $66,000 $95,000 $106,000 BITF $89,200 $105,000 $116,000 CLSK $66,000 $73,000 $82,000 In CLSK's case, we can see that CLSK is more efficient than other miners by a mile. The synergy between a strong Bitcoin production prospect and a well-controlled cost basis cannot be understated. This synergy will eventually translate into higher profitability which translates to higher Bitcoin retention, lower shareholder dilution, and/or lower debt, all are constructive to higher valuations. Perhaps this is also the reason why CLSK is relatively the most undervalued according to our models. That being said, the $73k cost basis is still too high to produce Bitcoin profitably. Note that Bitcoin is now trading in the sub $60k price level. Given this context, It is paramount that we see 2 key confirmations that Bitcoin is going to head above $70k before having sizable exposures to miners. Valuation Our go-to model for pricing a Bitcoin miner is the sum of its liquidation value and 5x its earnings potential from Bitcoin mining. If a Bitcoin miner is not profitable, its entire valuation will fall on its liquidation value. However, this is not ideal because its capacity to produce earnings in the future (when Bitcoin rises above its cost basis) is neglected. Therefore, we reverse-engineered our pricing model and developed a metric known as the Implied Bitcoin Price ((IBP)). The IBP still operates on the same basis as our previous model, where a Bitcoin miner’s value is the sum of its liquidation value and 5x its earnings potential based on today’s market cap. The lower the IBP, the more undervalued the miner is. CLSK's current IBP stands at $84.4k means that Bitcoin has to trade at $84.4k to justify CLSK’s current price. This also implies that CLSK is overvalued on an absolute basis. By this metric, none of the Bitcoin miner's current valuations are justifiable, it’s just that CLSK is the most undervalued on a relative basis. Table 3. The Implied Bitcoin Prices Based on Current Market Cap Company BITF CLSK IREN MARA RIOT IBP on Latest Month 140,912 84,356 111,400 109,397 159,144 Verdict In this article, we showed that our thesis for CLSK remains intact. CLSK is still gaining network share, is the most efficient, and now is also the most undervalued miner in our watchlist. Therefore, CLSK will be our top pick to tilt our portfolio into (assuming the valuation dynamics do not change) if there are any signs of a Bitcoin bull run. CLSK's $84.4k IBP wouldn't be an issue because we expect Bitcoin to exceed it. We remain because there’s always a chance that this cycle will be different and Bitcoin remains depressed for a prolonged period. The implications for any Bitcoin miners would be cataclysmic, to say the least. For now, we’ll remain invested in Bitcoin itself to avoid business risks until we receive the 2 confirmations for a bull run.
