Jared Watson's avatar
$18m follower assets
The Safest Play in Crypto: Stronghold Digital Mining
$SDIG is one I've been eyeing for a while, and at ~100m market cap, I think it's sneakily one of the safest floor plays in the market right now.

To provide a quick background, Stronghold Digital Mining is a vertically integrated Bitcoin mining company, meaning that it owns the power generation assets in addition to the data centers. But wait, there's more. Stronghold's power generation assets are coal refuse plants (same renewable tier as hydroelectric), meaning that they earn renewable energy credits while generating their electricity.

You may be thinking that renewable power is great, but it makes sense that $SDIG has dropped in line with all of the other Bitcoin mining companies, since they're dependent on the rapidly declining Bitcoin price for profitability.

But that's where the vertical integration comes into play. Power prices have been surging, so Stronghold has actually been profitably selling their electricity to the grid, and can continue to do so as long as Bitcoin remains deflated.

My opinion, shared by Stronghold's management, is that this unique ability to be profitable independent of Bitcoin price will allow $SDIG to become the "aggressors" if the crypto markets continue to crash.

In their May earnings call, CEO Gregory Beard said "So I think by being opportunistic, that would be – I would call opportunism is a synonym for being our front foot and having the potential to be more aggressive, and so, hey, if the market gets tougher, we know that just the design of our peers is such that they're probably – they can't really survive an extended downturn in this market, whereas because we have optionality between Bitcoin and power, we can and that will inevitably lead to opportunities coming our way, if the markets suffer."

TLDR: The market isn't appreciating both the earnings floor provided by renewable power generation or the upside from Bitcoin price and potential collapse of competitors.
Conor Mac's avatar
Interesting thesis, thanks for sharing. Is 5% a typical starter position size for you?
Jared Watson's avatar
@investmenttalk I do like to scale into positions, but it varies. 5% is a result of my conviction relative to other positions and the fact that it's a small/micro cap.
Ob2's avatar
write up
Jared Watson's avatar
@tgsm I saw your question before it disappeared so I’ll take a stab at it, hopefully you’re still interested in the answer.

At the end of the last quarter $SDIG had about $61mm in liquidity after issuing some short-term notes at a decent rate and selling off extra miners.

They noted in their last call that they expect to be self funded moving forward, highlighted by the fact that without even mining a single Bitcoin over the next year, Stronghold expects to be able to generate $35-$65mm in EBITDA based on forward power prices. With 25% more in EBITDA if Bitcoin is at $25k.
Ob2's avatar
@wjared ah yes I didn't realize it disappeared original question: what are your thoughts on the capital structure
Jared Watson's avatar
@tgsm based on the balance sheet I think the capital structure is solid. The only way they would need to dilute is if one of their two power plants, Scrubgrass and Panther Creek, break down for a significant period of time.