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From Bull To Bear: Recent Events Drove Me To Exit My Position In HUT 8

Mar.19, 2024 7:25 PM ET|

Hut 8 Corp.(HUT) Stock, HUT:CA Stock| [15 Comments](#comments)

Summary

– HUT 8 Corp has experienced significant developments since its merger with US Bitcoin Corp.

– The dismissal of CEO Jaime Leverton and the appointment of Asher Genoot as the new CEO raised concerns about the company’s strategic direction and governance.

– Despite the uncertainties, HUT HODLing stack of 9,000 BTC mitigates against downside risk.

– Selling Put Options provide attractive yield especially before the halving event.

A Follow Up

I am writing this as a follow-up to my previous

articleon HUT 8 Corp (NASDAQ: HUT) (TSX: HUT:CA) published on Seeking Alpha on 11 Dec 2023.

Since then, many changes have happened at HUT:

– After its merger with US Bitcoin Corp (USBTC) on 30 Nov 2023, HUT obtained the court approval for its stalking horse bid on 8 Jan 2024.

– On 11 Jan 2024, J Capital Research released a

short reportwhich stated concerns about the merger with USBTC.Shortly after that, on 2 Feb 2024, Marathon ( MARA) announced that it will stopits managed service agreement with HUT.

This probably caused the stepping downof the CEO on 7 Feb 2024.

– Nevertheless, not all the changes are negatives.HUT was still able to

obtaina credit facility from Coinbase ( COIN) on 12 Jan 2024.It was also able to sign a dealwith Ionic Digital on 1 Feb 2024, potentially bring them a revenue of US$81.5 million over 4 years.

During this period, Bitcoin (

BTC-USD) prices rose over 71% while HUT’s share price declined more than 13%.In this article, I will discuss about my action and the reasons related to that, as well as, my plan on HUT.

My Action and Reasons

In one of the comments in the previous article, on 7 Feb 2024, I had already stated that I had sold all HUT shares, with only options remaining.

This drastic action was a result of the following reasons.

CEO Was Replaced

One of the primary reasons I initially invested in HUT was their strong balance sheet, its diversified strategic approach to generate fiat revenue as well as mining and holding BTC, and expanding beyond mining by leveraging its cryptocurrency expertise.

This direction seemed to be taking shape under former CEO Jaime Leverton’s leadership.While additional details emerged casting the USBTC merger negatively, I believed the combined company retained synergistic potential.I was particularly interested in HUT becoming the “exclusive operator” of Celsius Mining’s fleet, receiving a $15 million annual management fee for five years, net of expenses.

However, Leverton’s abrupt stepping down as CEO on 7 Feb 2024 without a clear rationale prompted me to re-evaluate my position.To be frank, the short report itself did not overly concern me, but the handling of Leverton’s dismissal was, in my view, poorly managed and raised governance issues.

The BTC halving event was only two months away, historically correlated with share price increases for mining companies.The Board of Directors could have retained Leverton through that event before parting ways.Furthermore, remaining silent on reasons of changing CEO prior to such an important event triggered numerous red flags for me.As an investor, transparency is paramount.

Leverton was actively posting about HUT and her work in High-performance computing on

Xas recently as 2 Feb and 7 Feb 2024, suggesting the change in CEO caught her by surprise as well.

In my opinion, these actions led me to the conclusion that my original bullish thesis may no longer held, suggesting that I should exit my position.

The New CEO

There were two concerns I had regarding the new CEO, Asher Genoot, appointment.

Prior to the merger, Genoot was the co-founder and president of USBTC, which was in a bad shape.Upon reviewing USBTC’s

financial reports, it became evident that the company was heavily leveraged, with a debt-to-equity ratio of 6.13x.Additionally, the interest rates on these facilities ranged from 14% to 18%, leading to losses and an unsustainable capital structure.

Replacing Leverton with the same individual who was managing the financially troubled USBTC did little to assure me he could better steer HUT.Furthermore, reports (

1, 2and 3) suggested that Leverton was dismissed shortly after the short report.

But the short reportprimarily criticized USBTC as a poor acquisition and alleged its management team, including Genoot, had a track record of failed startups.Therefore, simply replacing one allegedly problematic person with another did not inspire confidence in me that HUT is in better hands.

With the benefit of hindsight, interviews Asher conducted after assuming the CEO role at HUT did not provide a compelling vision or strategy that will differentiate his approach.This served only to amplify my doubts that replacing Leverton was the correct decision.Therefore, this further enhanced my view that I should sell my position.

Potential Change in Strategy

The appointment of a new CEO has the potential to signal a strategic shift for the company.According to

Reddit, certain long-term HUT investors expressed dissatisfaction with the former CEO for diversifying business revenue.

These investors preferred that she concentrate on expanding the mining fleet instead.Therefore, appointing a new CEO raised the possibility that the company may pivot back towards prioritizing miner procurement simply to placate those shareholders.

However, adopting such a “follow the crowd” approach of primarily growing the mining operation would not align with my investment thesis.In my view, mindlessly accumulating more rigs does not differentiate one mining company from its peers, and there are likely better options available with superior efficiencies.

This leadership change brought uncertainty around HUT future direction that ultimately weighed into my analysis and eventual decision to exit the investment.

I May Be Wrong

Despite having already exited my position in HUT, there remains a possibility that the company could outperform my expectations.

New CEO Focus On Improving Efficiency

Some investors had grown frustrated with HUT previous mining operations due to relatively inefficient BTC production.

The company’s cost per BTC mined had consistently been on the higher side of industry metrics.The

Drumheller facilityin particular was underperforming in terms of BTC mining output and the current CEO has closed it.

As a result, relocating mining rigs to sites with more competitive electricity and operational costs seemed a prudent strategic decision.

Improving efficiencies at the facility level is important for maintaining competitiveness as BTC network difficulty increases.

Overall, making adjustments to mining infrastructure based on cost considerations and productivity analytics demonstrates a focus on maximizing shareholder value through efficient operations.This might be a start to a better HUT.

HODLing Strategy Will Benefit From Halving Event

It’s important to note that HUT has adopted a HODLing strategy whereby they have a stack of mined BTC that is held long term on its balance sheet.Even though they have been selling their BTC and reducing its stack, as of their most recent disclosure, the company’s still have over 9,000 BTC.

Should the upcoming 24 Apr 2024 halving event catalyze another bullish price response for BTC, it is reasonable to assume BTC price could surge above $100,000 per coin.If that price target is realized, the valuation of HUT’s HODL position alone would exceed US$900 million.

This compares extremely favorably to HUT’s current market cap of US$634 million.Even under a conservative post-halving BTC price scenario, the appreciated value of their reserves could significantly outweigh the firm’s current share price.

Should BTC price rise as in previous cycles, HUT’s valuation would have to undergo substantial re-rating.

My Plan

I have fully divested from my prior equity position in HUT given the leadership and strategic uncertainties.

Going forward, I intend to generate income by selling put options on HUT shares rather than directly owning the stock for now.

Selling put options allows me to benefit from volatility and time decay without taking on full downside exposure.For example, a 19 Jul 2024 put option with a US$5 strike price offered a premium of approximately US$0.80, translating to an attractive yield of 16%.

If these puts were to be assigned, it would require the share price falling another 40-60% to reach $5.However, at that price, HUT’s market cap would likely still be below the estimated value of its over 9,000 BTC holdings based on current BTC prices of around $73,000 each.This provides some downside protection should the stock continue lower in the near term.

Overall, selling put options is a means of participating in potential HUT upside while mitigating risk, given the current uncertainties facing the firm under new leadership.

I can generate yield from premiums without taking a speculative long position in the shares.

Conclusion

While significant uncertainties surround HUT given the leadership changes, the company’s substantial BTC holdings provide some downside protection.With over 9,000 BTC in reserve, it would be quite challenging for even an inept manager to mismanage the firm to the point of insolvency in the near term.

Additionally, for the existing shareholders, maintaining a long position in HUT shares heading into the upcoming BTC halving event could prove rewarding if history repeats.

Alternatively, shareholders could generate additional income by selling call options against their positions.

However, longer-term uncertainties linger regarding HUT’s strategic direction and ability to optimize operations under new management.They face an uphill battle to regain efficiency advantages in an increasingly competitive mining environment during this transitional period.

While BTC upcoming halving presents a potential short-term tailwind, ongoing concerns regarding leadership and execution leave me inclined to maintain a NEUTRAL outlook without a direct long equity stake for the time being.

Generating option premiums represents my preferred approach.

This article was written by

Analyst’s Disclosure: I/we have a beneficial short position in the shares of HUT either through stock ownership, options, or other derivatives.I wrote this article myself, and it expresses my own opinions.I am not receiving compensation for it (other than from Seeking Alpha).I have no business relationship with any company whose stock is mentioned in this article.

I sold put options on HUT.

I sold put options on HUT.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results.No recommendation or advice is being given as to whether any investment is suitable for a particular investor.

Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole.Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank.Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (15)

Add your comment…

bandys

08 Apr.2024, 10:28 AM

Seeing $

BTCreaching 72K and how HUT is still muddling around I have now no doubt that there is something seriously wrong with this company.I think this is a company with corruption that will come out at some point.I have been selling covered calls with the hope that my stocks get called away.

Liked By Analyst

TUB Investing

09 Apr.2024, 12:08 PM

Analyst’s Reply

@bandysI have cleared all my options.

Cattle man

28 Mar.2024, 10:40 AM

Well will you look at that

Liked By Analyst

TUB Investing

29 Mar.2024, 3:36 AM

Analyst’s Reply

@Cattle manI might have missed the gain.It’s fine.

I still have the options.Cattle man

26 Mar.2024, 12:16 PM

Looks like short squeeze in effect now.

Liked By Analyst

TUB Investing

26 Mar.2024, 12:50 PM

Analyst’s Reply

@Cattle manSeem so.

Congratulations! Cattle man

24 Mar.2024, 8:13 AM

One thing I know for sure all the lawsuit hype that The short sellers have been pushing has just expired.Earnings are coming and hut has been very quiet.I suspect something big is coming at least a big surprise to the upside also with bitcoin literally doing nothing but going up the shorts are gonna find a way to get out any chance they get Just remember if you’re a hut investor remember what happened couple months back with the stock literally went up over a dollar on nothing so if this thing moves it’s going to move in a big way.Literally a guaranteed profit no matter what they report as bitcoin is without a doubt is going up.

Liked By Analyst

TUB Investing

24 Mar.2024, 9:04 AM

Analyst’s Reply

@Cattle manthanks.

Then my options will also gain.bandys

08 Apr.

2024, 10:30 AM

@Cattle manEarnings have come and gone.Did you get what you were looking for? I just managed to get some juicy premiums on my covered call.

B

Blue Goose

20 Mar.2024, 7:54 PM

The price of Bitcoin is what it’s all about, and the for Bitcoin to go up, governments must continue to deficit spend.

I see that happening and to top it off, Jay P just signaled easy money today which is why this space took a big jump today.

Lots of liquidity confirmed.

I see that happening and to top it off, Jay P just signaled easy money today which is why this space took a big jump today.

Lots of liquidity confirmed.

Liked By Analyst

TUB Investing

21 Mar.2024, 1:42 AM

Analyst’s Reply

@Blue GooseYes, I agree.But I prefer using options to make the gain.Cattle man

19 Mar.2024, 7:39 PM

Hut is an easy double up.9,000 Bitcoin is all you need to know.

Anyone shorting is taking an unnecessary risk and for what ? The short position risk is incredible.

Liked By Analyst

TUB Investing

19 Mar.2024, 9:19 PM

Analyst’s Reply

@Cattle manI agree with your view.But technically they are still selling their bitcoins, so in the long run it’s still uncertain.Nevertheless, do note that I sold put options.

It’s not necessary a short position.

B

Blue Goose

20 Mar.2024, 7:54 PM

@TUB InvestingYou’re missing the big picture.

Liked By Analyst

TUB Investing

21 Mar.2024, 1:41 AM

Analyst’s Reply

@Blue GooseI might be.But I don’t feel good holding shares of HUT.Having said that, the shares has jumped quite a bit since this article is out.

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About HUT Stock

|Symbol||Last Price||% Chg|

|7.24||-|

|7.35||1.52%|

Market Cap

$646.08M

PE (TTM)

35.09

Yield (TTM)

–

Rev Growth (YoY)

7.00%

Prev.

Close

$7.24

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