Bitcoin mining sector is 'sort of a scam': Kerrisdale Capital

Shares of Riot Platforms (RIOT) are moving lower after Kerrisdale Capital came out with a call to short the company's stock. Kerrisdale Capital CIO Sahm Adrangi joins Market Domination to explain the call.

"I think our investment thesis is that this sector is just not going to be around in five years. Bitcoin mining is one of the stupidest business models we've come across in our time short-selling," Adrangi tells Yahoo Finance. He adds that looking behind the economics of all US bitcoin miners reveals they 'don't make money," but instead issue shares to pay themselves healthy stock compensation and buy more mining hardware.

"We disagree with the characterization of the Bitcoin mining industry and of Riot, and the equally unsound conclusions reached in the Kerrisdale Capital report. We believe these errors will be demonstrated through the execution of our ambitious 2024 growth plans and resulting financial performance," a Riot spokesperson said in response to Kerrisdale's call.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This article was written by Gabriel Roy

Video transcript

And moving on, we are watching shares of Riot platforms.

Shares are down about 2% well off the lows of the session.

The move coming after short seller, Kerrisdale Capital is out with a call to guess what, short the stock and also while being Long Bitcoin.

So a Paris trade joining us now is Kerrisdale Capital founder and Cio S Andr.

And thank you for joining us here today.

Um Just tell us uh what's your thesis here, your investment thesis Long Riot and then maybe pairing that with a Bitcoin position as well or excuse me, Short Riot and then the Long Bitcoin.

Yeah, I mean, I think our investment thesis is that this sector is just not going to be around in five years.

Um Bitcoin mining is one of the stupidest business models we've come across in our time short selling over the past 15 years or running Kalle um basically barriers to entry are zero.

companies from all over the world can buy these A six from China.

Um Take them next to a a waterfall in South America and get much cheaper access to electricity um and be a lower cost producer And basically, if you look at the economics behind all the Bitcoin miners in the United States, they don't make money, they just issue shares to pay themselves, you know, healthy stock comp and buy more Asic and, you know, never really generate a return.

And the whole thing is sort of a scam and we sort of published on Riot Today plan to publish on more.

Um you know, as this whole sector ultimately goes to zero, some, I have many questions.

First of all, if it's just a com if it's just a commodity and there's nothing differentiating what makes that a scam.

I mean, some, something could be a bad, bad business model without being a scam that has, that has some connotations here that there is something illicit or illegal going on.

Sure.

It's a horrible business model.

It's not necessarily um technical, technically, um you know, a complete uh fraudulent illicit actions.

But, you know, I mean, this is just as bad of a business model as you can get and what you see with terrible business models.

I mean, I think back to cannabis companies in 2017, 2018, uh when you're the ceo of, of such a terrible business, um there's a lot of shady things that you do and uh essentially you're just sort of enrich yourself at the expense of shareholders and that's what's happening here.

I want to read a statement that came to us via riot and this is.

Uh here we go.

We disagree with the characterization of the Bitcoin mining industry and a riot and the equally unsound conclusions reached in the Kerrisdale Capital report, we believe these areas will be demonstrated through the execution of our ambitious 2024 growth plans and resulting financial performance.

Uh What do we know about these growth plans?

And then I guess, how do you balance that against the incredible shares that have been minted, diluting the shareholders to pursue its growth?

Yeah.

Isn't that absurd?

This company has diluted shareholders by 18% already year to date this year.

I mean, I'm looking forward to that growth and delusion over the course of the year.

Maybe they might be able to even get up to diluting shareholders by 50% just this year, maybe another 50% next year.

Um Since 2020 the company has, is increased its share uh share by multiples.

Um And this is just a part of the chorus across the entire industry.

I mean, when they talk about growth, they just mean spending more on Capex and buying more computers.

But you know what?

So is everyone else in the US and so is everyone across the world.

Um And so what you sort of see is that um the network cash rate just increases over time.

They each month, uh Each of these miners, including it, get less and less Bitcoins even as they're plowing all of the cash that they're raising from shareholders back into buying more computers.

It's just basically one big hamster wheel uh where they take money from investors, buy more computers and then produce less Bitcoin per share each, each uh subsequent year.

Some why if the, if the whole industry is so terrible, why?

Single out riot we got to start somewhere.

And so we started with riot.

And uh the other thing that we haven't talked about here is Bitcoin.

Mining is horrible for the environment.

I mean, China has kicked Bitcoin miners out of their country because it's such an absurd concept.

Uh You burn all of this fossil fuel to f uh to fuel speculation uh around an imaginary asset.

Uh This doesn't belong in, within us borders.

The whole industry should just get kicked out and be banished to, you know, other countries that want to deal with it.

Well, I mean, it's bad for the environment.

We all share an environment.

So, so if it's bad for the environment here, it's bad for the environment anyway, before we look out though, I do want to ask you about another short call that you had on micro strategy.

This similarly were short micro strategy.

Long Bitcoin.

Um You made that call, I believe on March 28th since then kind of flattish for both, right?

So how long do you think it's gonna take for that to play out?

And you know, if you're talking about that sort of the stuff that it's necessary to fuel Bitcoin.

Mining is such a dirty business.

Why long Bitcoin at all?

Well, I mean, I think as a trade, um, uh we want to be hedged, you know, so we're short the miners, we think they're going to zero.

Who knows what's gonna happen to Bitcoin.

Your guess is as, is as good as mine in the case of micro strategy.

Uh I think if it owns $14 billion of Bitcoin, the company should be valued at $14 billion by the market.

Um What you see is a premium that makes no sense, you know, situations where they own $15 billion of Bitcoin, but the market is valuing them at 35 billion.

I mean, uh you know, uh a bank holding $100 is valued at $100.

It shouldn't be valued at $500.

Um So that's micro strategy, in the case of the Bitcoin miners is just a terrible business.

Um And in both those cases, we own Bitcoin.

Uh just because we think that the those stocks are going to go down relative to Bitcoin.

So if, well, you know that way, we don't have a view on whether Bitcoin goes up 100% or goes down 50%.

We're hedged.

Sam.

Thanks so much.

Um Good to get your perspective on all of these different ideas.

Appreciate it.

Absolutely.

Thank you.