It’s been an interesting few months for Core Scientific (NASDAQ:CORZ) shareholders. The stock has been a part of a broader market sell-off in the crypto mining space, but recent releases from the firm suggest that the company may be facing bankruptcy amid cash conservation efforts. The company recently disclosed that it will not be fulfilling its debt obligations on existing equipment that are due in early November. This is amid a serious shift to unprofitability for the entire sector capped by the recent bankruptcy of FTX (FTT-USD).
In the past, I have cautioned multiple times that forced selling for Bitcoin (BTC-USD) miners at disadvantageous prices was one of the strongest signs you can get that a Bitcoin miner may be facing serious liquidity issues. Core Scientific had established a strong track record of stellar production, which bolstered its treasury, but recently the company has been liquidating its holdings in a sensational fashion. Earlier this year, the company had as many as 9600 tokens in its treasury. The update in October saw the company holding only 62 Bitcoins, which suggests serious problems. Investors have picked up on these issues, and the stock has been punished proportionally.
Long-term crypto bulls will be the first to remind us that we have seen Bitcoin miners recover from similar selloffs in the past, which has long been the appeal of investments in crypto miners vs. the tokens. Crypto Miners often show negative variance compared to tokens in long-term drawdowns, which provides an opportunity for outsize percentage returns when Bitcoin returns to a bullish cycle.
I would argue that the situation here differs from what we’ve seen in the past. The first distinguishing factor is the use of debt to fund operations. Interestingly, it is not impossible to find crypto miners with little to no debt. Core was a bit different as the company used a tremendous amount of debt to avoid dilution at disadvantageous prices due to its IPO happening around the time Bitcoin prices were collapsing. This meant that the Core leadership team could not raise cash from multiple secondary offerings at great prices like some of the more established mining companies. It was understandable for management to raise debt to fund operations as the previous selloffs in Bitcoin were met by strong recoveries for the past few years. This time, it would appear as though Bitcoin’s collapse is part of a broader selloff due to increasingly hawkish central banks collectively slowing down the global economy to address rampant inflation. This is somewhat ironic because Bitcoin was pitched to many as an inflation hedge but as inflation rates increased, we can see that there was no real correlation and that the tokens were more directly correlated to the NASDAQ and the broader technology sector.
Core Scientific has announced that it may seek bankruptcy protection from its creditors in short order. The company announced in October that it expects to run out of cash before the end of the calendar year 2022 due in large part to the slump in Bitcoin prices. Apart from Bitcoin, one of the main assets that Bitcoin miners hold is their mining fleet. One could argue that apart from depreciation, the fleet would be less valuable considering the recent slump in Bitcoin prices and surging energy costs. The company also notes that it does not intend to pay interest payments on debt obligations related to their miners, which were due in late October to early November. Restructuring debt bonds is always possible, but I wouldn’t be too optimistic due to the recent Bitcoin price action. For any deal to make sense, the company will likely have to get back to earning money at some point in this crypto environment makes that extremely difficult. There is likely no way out for the firm, and we will have to wait and see if the company makes it to the other side of this debt crisis. So we are left with a company with very little prospect of profitability, a very high risk of bankruptcy, and things could actually get worse. There is really no suggestion that Bitcoin prices are set to rebound anytime soon.
Existing shareholders are also likely to carry major losses. They will sell heavily into any favorable price action in the short to medium term, and there is a real risk that the equity could go to zero.
Core Scientific has always been a speculative opportunity, but the odds are now firmly stacked against the company. Bitcoin prices have not been helpful, and the company is now openly discussing its liquidity challenges. We have seen multiple bankruptcies in the industry, and barring a miraculous Bitcoin recovery, we will likely see another one here. The company is exploring its options, and any significant debt restructuring agreement would likely catapult the stock, but at this point, that is wishful thinking. I would suggest that investors focus on other Bitcoin mining companies or invest in the token itself if they want to maintain bullish crypto exposure. I rate Core Scientific as an avoid.