Spa(c)rypto

Happy Sunday Folks,

My post on the $AGC Grab deal seems to have been quite timely as it grabbed a lot of attention last week with the short squeezers going right to work on it. $AGC ended the week up 9%, and from all the chatter on Twitter, it seems like the day traders are getting even more excited. It reminds me of what Billy Crudup says in The Morning Show, “chaos is new cocaine”, and I am here for it! The next few weeks should be fun!

There is another SPAC that grabbed my attention last week, as Bitcoin broke above $60K. But before we discuss it, I have a crypto confession to make. Actually it’s more of my initiation into the crypto world and I don’t feel as embarrassed telling this one because I think all of us have a “How-I-got-burned-by-crypto” story. 

The year is 2017 and I am living in Toronto. I’m dating this wonderful man, who is very smart and an early investor in something called $GBTC, the Grayscale Bitcoin Trust. He tries to tell me about it a few times and that I should consider investing in it, but I shrug it off as “nah, it’s bogus and that you’re ngmi babe”. But Bitcoin is on a tear, cracking $20K for the first time, and watching my boyfriend get richer is giving me serious FOMO and so, I decide to bite. I buy $GBTC when it’s trading at $2500/share (this is before the 91-for-1 split, so $27.47/ share on a post split basis). It quickly goes up to $2750 and just as I’m starting to feel like wagmi (we are gonna make it), it starts the parabolic reversal down to… $2500…$2000…$1000. Finally at around $900, I decide to sell and take whatever little is left and vow to never touch crypto again. The boyfriend is petrified. He’s also concerned if he’s entered the bear market along with the crypto. (Hint: maybe).

Thankfully, it’s 2021 now and I have had more time to learn about crypto than just basing it on the FOMO in the market. And my interest was particularly piqued by a name that sits at the intersection of SPACs and crypto. In July 2021, $XPDI (Power & Digital Infrastructure Corp) announced its merger with Core Scientific, which has emerged as the largest Bitcoin mining and hosting company in North America. The deal was announced at 4x 2022 revenues, valuing it at $4.3B. It includes $4B in rollover equity (at $10/share) and $345 million in SPAC financing from $XPDI. There was no PIPE and the company intends to use the cash to support growth opportunities.

The transaction is expected to close in the next few weeks, and since we continue to remain in an ongoing crypto bull market, I decided to dive deeper. The first thing that stood out to me and is really worth highlighting is that $XPDI announced the merger when Bitcoin was trading around $31K. To put it in context, the deal was based on 4x ‘22 revenues, and the ‘22 revenues of ~$1.1B were projected using $31K as the input price for Bitcoin. The Bitcoin price has since almost doubled, and that tells you how conservative the projections are. To further compare apples to apples, Core Scientific’s public competitor $MARA has also since doubled (and has half the revenues) but $XPDI hasn’t moved a zilch during that time and continues trading close to NAV.

We know the price is depressed because of the SPAC Curse but let’s talk a little about what they do. Not only they mine their own bitcoin, they are also a hosting platform, and are focused on doing so in a carbon neutral way. They currently own 311MW of power infrastructure capacity which is set to expand to 512MW by the end of 2021 and 1,031MW in 2022 from an ongoing buildout under construction. They are on track to run 74K mining machines this year, representing 6 EH/s hash rate capacity in self-mining in addition to managing 59K hosted machines for a total of 11 EH/s.

Core Scientific mined 929 bitcoins in Q2 and 1,683 during the first half of the year. At the current market price of $60K/BTC, the implied revenue here is ~$101M YTD. Further, they reported a self-mining breakeven price of $2,700/BTC or $4,600/BTC for hosted client equipment, meaning the business is already generating significant cash flows and a high gross margin. Their 2020 margin of 10% on much smaller revenues is set to climb to 50% as the capacity grows and the price of Bitcoin continues to climb.

And since hosting is an integral part of their business, the recent Chinese ban is actually a net positive for the company. On September 24th, China imposed a ban on all the crypto miners, which accounts for ~46% of the world’s total crypto mining (down from 75% in 2019). Since those idled miners need a new home, American companies like Core Scientific are the ones that’ll benefit from this new demand. And again, this is something that wasn’t a part of the revenue forecasts when the deal was announced. Given how volatile crypto is, China can un-ban its laws, the SEC can impose crazy regulations, and Bitcoin can go to $30K again. While all of those things can theoretically happen, I do feel that crypto at this point has entered the mainstream and there are more tailwinds supporting its ascent than not. And its based on that premise, I find $XPDI an interesting name, which is definitely priced at a steep discount to its peers.

They have already mined more bitcoins this year (1,683) than $RIOT at 1,167 and MARA at 846 through reported Q2 data. And using each company's announced forecasted hash rate capacity for the end of 2022, Core Scientific is expected to reach 14.8 EH/s, which is nearly twice as much as $RIOT at 7.7 EH/s and above $MARA at 10.4 EH/s. However, when they compared the last 20 day trading price for both the stocks, they found an EV/2022 Revenue multiple of 6.6x for $RIOT and 4.9x for $MARA, implying a 38% and 17% discount respectively.

As the merger date is coming closer, the SPAC warriors on twitter seem to have discovered the stock and have begun their promos. The stock has rallied a few percentage points in the last week but is still trading sub $11. The warrants on the other hand are trading at all time highs, which maybe implies that the commons aren’t far behind in catching up. I know that for all of us non-crypto native folks, it’s hard to hash out the hash rates and other jargon, but in summary, this is why I think $XPDI has potential -

1. Largest $BTC miner in North America with a clean energy infrastructure

2. Diversified business model and EBITDA positive with growing margins

3. Valued at a steep discount to peers ($MARA, $RIOT)

4. Conservative guidance (based on a $31K/Bitcoin input price)

5. Insulated from China ban, and is actually a tailwind

6. Macro tailwinds for the crypto market

I feel like WAGMI!! But either way we’ll see!

Have a great week ahead!

-Nikita