Machine buys, deleveraging key around Bitcoin halving

A couple months out of bankruptcy, bitcoin mining giant Core Scientific remains “hyper-focused” on de-leveraging its business and scooping up machines after the Bitcoin halving.

Core Scientific CEO Adam Sullivan told Blockworks the company is gearing up its balance sheet to refresh its fleet with per-block mining rewards set to be cut in half next month.

Mining rewards are set to drop from 6.25 BTC to 3.125 BTC in late April due to a Bitcoin halving event that happens roughly every four years. The occurrence is expected to put a segment of the industry’s companies under financial stress.

At that point, Core Scientific expects to purchase machines from struggling companies in the sector unable to afford parts of their existing orders.

Read more: The next bitcoin halving is coming. Here’s what you need to know

The Texas-based company will be able to realize that vision faster if able to unlock cash tied up in convertible debt securities by reaching certain share price levels.

The company emerged out of bankruptcy in January after becoming unable to repay an equipment financing loan in late 2022. Its reorganization plan reduced Core Scientific’s net debt to $571 million by converting equipment lender and convertible note holder debt to equity.

Core Scientific’s share price was $3.39 at the time of publishing. The stock price hitting $6.81 would spur the conversion of its so-called tranche 1 warrants, unlocking $670 million in cash and eliminating the $260 million convert principal.

“All of those things would provide us an opportunity here to really outpace our competitors in a way that everyone saw us do for multiple years as we ramped up through 2022,” Sullivan told Blockworks.

Joe Flynn, an analyst at Compass Point Research & Trading, wrote in a March 13 note that Core Scientific is “well positioned going” into the halving. The company’s all-in hash cost was at roughly $0.04, which Flynn noted was on “the low-end of the public miner cost curve” and could lead to “continued strong profitability” post halving.

The company operated 222,000 bitcoin miners for self-mining and hosting — with an energized hash rate of 25.1 exahashes per second (EH/s) — as of Feb. 29.

“While we acknowledge [Core Scientific’s] hash rate growth is likely capped relative to other miners and there remain a lot of unknowns regarding their ability to deliver and/or raise cash, we continue to like [its margins post-halving and potential for operating leverage on hash price growth off a $0.06 floor during [2024’s second half],” Flynn wrote.

Keep reading for more excerpts from Blockworks’ interview with Sullivan.

Blockworks: How do you expect the upcoming Bitcoin halving to impact the mining industry this time around?

Sullivan: We’re going to see an acceleration of what we saw in 2022.

Lower market cap companies — or companies that have struggled to raise capital or don’t have a fortified balance sheet going into the halving — are going to have a very difficult time operating.

It’s very similar to what we saw in 2022. The first thing companies are going to do is sell facilities to try to raise cash.

Read more: Mining giant Marathon set to buy another site just weeks ahead of bitcoin halving

We’re actually kind of seeing that accelerate right now, and I think post-halving we’re going to see that continue.

Blockworks: What do those post-halving scenarios mean for Core Scientific’s strategy?

Sullivan: We recognize there’s going to be opportunities to upgrade machine fleets in challenging times, and so that’s why we’re putting cash on the balance sheet today.

There’s going to be a machine re-pricing prior to, or after, the halving. Right now we’re seeing machine pricing go much, much higher … but we’re not going to be in that environment post-halving.

So what we’re doing is preparing for the opportunistic purchase of machines post-halving where we know … a number of people are going to be selling off parts of their S-21 orders that they’ve made today.

This is the exact same playbook that happened in 2021. People overcommit and then they end up having to sell off parts of their orders in the following year. We fully expect that to occur again.

Blockworks: What else might Core be looking out for on the M&A front? In addition to machines, could it look to buy facilities?

Sullivan: For Core Scientific, if we’re going to be evaluating a facility, it really needs to have a strong competitive advantage that’s going to last a long time.

Because right now, our facility fleet spans and gives us the opportunities to have either very low-cost power with lower uptime, which is where we can put less efficient machines. And we also have sites that have extraordinarily high uptime and a little bit higher power costs that are still competitive in this industry where we can put new machines.

As we look forward, [we have] a much more, I would call it, pragmatic growth strategy on the infrastructure side.

We’re going to be much more opportunistic on the machine purchase side … in not only 2024, but 2025, because our opportunity to grow our exahash is really within our existing facility base.

Blockworks: What did going bankrupt teach Core Scientific about its business and impact the way it might view its future growth strategy?

Sullivan: We’re a case study, right, in bitcoin mining growth at all costs.

In 2021 we already had this scale that was pretty much uncatchable. We had the largest machine purchases in the industry. And then by the time we got to 2022, because that was driven mainly by a lot of debt capital, we had four projects going on for site development. We had large machine orders being delivered.

Between when you start putting money into the ground on infrastructure and when you start putting money into machines, there’s a delay before those start cash flowing.

You need to be prepared for high volatility moments, and frankly that was something we weren’t prepared for in 2022.

We had over $600 million in bitcoin on the balance sheet, and when bitcoin started to trade down, it put not only our income statement into a challenging environment, but our balance sheet as well.

That growth-at-all-costs mindset does have its challenges. And so when we think about our future growth, luckily we’re in a very strong position from an infrastructure perspective where we’ve already spent the money on the long-lead items.

So for us to bring any additional megawatts online, that’s counted in months, it’s not counted in years. And that’s single-digit months, which is fantastic for us as a business — being able to not only plan what infrastructure’s going to come online but match that with machine orders.

Blockworks: Core Scientific is now leasing capacity in its Austin datacenter to cloud provider CoreWeave as part of a broader shift toward hosting infrastructure related to artificial intelligence and high-performance computing (HPC). What do you expect the future of that business line to look like?

Sullivan: The long-term goal for this is to take some of the facilities that we believe might be less competitive in 2028 and start to work through the process of converting those to HPC.

Read more: Miners continue money-conscious moves ahead of the Bitcoin halving

The clients are out there. …They’ve signed contracts, whether it be with the US government or Microsoft or any of the other large providers who are also struggling to find power. And we have the ability to pull all of that forward and beat other companies by years to getting megawatts up and operational.

It will increase the margin of our mining business … and will bring forward a new stable free cash flowing business line that we think investors will find very attractive.

This interview was edited for clarity and brevity.