dem10
Introduction
Based mostly on our coverages of Soluna Holdings (SLNH) thus far, we categorized SLNH beneath corporations with compelling tales however usually are not compelling investments. SLNH sells buyers a way to earn a return by fixing curtailed renewable vitality. SLNH solves curtailed vitality by constructing amenities round websites with curtailed vitality. That is helpful to each SLNH and the vitality supplier. SLNH would get vitality provide at decrease costs whereas the vitality supplier can guarantee demand at full capability.
In an early research, our findings recommend that the first menace to SLNH’s enterprise mannequin is the growing assets invested to unravel curtailed vitality in a transfer away from non-renewable vitality. This impression is 2-fold: much less curtailment implies much less alternative for SLNH; Much less curtailment additionally implies increased vitality costs and decrease SLNH profitability. We additionally argued that SLNH might doubtlessly have a battle of curiosity towards most people the place vitality prices might’ve been decrease or that the vitality might’ve been used for different productive functions.
In a latest coverage, we expanded our preliminary thesis and located a number of extra items of proof suggesting restricted upside:
- Over-centralization: 60% of mining operations by This autumn (90% within the longer run) can be centralized in Texas, a state identified to endure from frequent blackouts and close to blackouts.
- Mining shouldn’t be one of many lowest as claimed the place the price of income (mining, excluding depreciation) is on the industry-average stage whereas all-in enterprise value is 2x the {industry} common.
- Lack of mining capability and Bitcoin (BTC-USD) reserves to materially make the most of an upcoming Bitcoin restoration part and bull market.
- Closely burdened with 9% most well-liked dividends at $25 liquidation on 3mil excellent most well-liked shares.
In brief, we predict that the primary profit SLNH buyers can derive from a recovering Bitcoin shouldn’t be the huge upside however solely a decrease threat of insolvency. That is why we keep our verdict that there is not adequate worth proposition in investing in SLNH.
Apparently, there’s a solution to profit from SLNH’s decrease insolvency threat with out forgoing very excessive returns. And that’s by investing in SLNH Most well-liked Shares (NASDAQ:SLNHP).
DeFi-level Yield With Bitcoin-Degree Dangers
Decentralized Finance is thought to offer speculators with extraordinarily excessive yields from staking the place annual yield generally exceeds 100%. The issue with this staking is that staking yields are normally paid within the type of one other token with little or no utility. The dearth of utility implies much less demand for the token and the token value usually ultimately collapses, tanking the yield with it. In distinction, yields which might be paid in well-established cash/tokens have a lot lesser yield.
However, SLNHP is a 9% cumulative Sequence A perpetual most well-liked shares of $0.001 par worth and $25 liquidation value. The 9% dividends are paid on the $25 liquidation value which equates to $0.1875 (= $25 *9% / 12 months). These dividend payouts have continued by 2022 until September with October’s nonetheless pending.
On the time of writing, SLNPH is buying and selling at $4.08, implying a month-to-month yield of 4.6% or 71.5% annual yield compounded month-to-month. This yield is respectable and even increased than most yields at DeFi’s largest yield-farming protocols (PancakeSwap (CAKE-USD), Aave (AAVE-USD), Uniswap (UNI-USD) or pure staking at Binance (BNB-USD) and different main exchanges akin to Crypto.com (CRO-USD), KuCoin (KCS-USD), and Huobi (HT-USD).
Is that this yield too good to be true? No, this excessive yield is required because of the riskiness concerned in investing in SLNH.
From our perspective, SLNH’s main threat is insolvency. On the premise of per BTC, SLNH’s all-in enterprise expense is equal to $74,000 per BTC mined (more than 2x {industry} common). With Bitcoin buying and selling close to $20,000, SLNH is struggling $50,000 per BTC mined. SLNH hasn’t halted operation as a result of Bitcoin continues to be buying and selling above the price of income (mining, excluding depreciation). As talked about above, SLNH’s value of mining (excluding depreciation) is simply industry-average at greatest, which is $13,000 to $14,000 per BTC. Ought to Bitcoin comply with by with its last leg all the way down to $10,000 as depicted by its halving cycle, SLNH might want to halt mining operations, therefore the insolvency dangers.
Due to this fact, SLNHP is not at all a protected funding, simply Bitcoin-level protected (which is dangerous by common definition). However when it comes to cryptocurrency and DeFi yield farming, Bitcoin is the most secure. SLNHP’s dividend yield with Bitcoin-level security may be very respectable. We understand SLNPH to be the most secure as a result of we perceived Bitcoin to be the most secure cryptocurrency. Bitcoin is the primary and has been across the longest.
Furthermore, buyers can lock on this stage of yield perpetually so long as Bitcoin trades simply above SLNH’s breakeven value per BTC. Bitcoin does not even have to “go to the moon”. Based mostly on our long-standing Bitcoin thesis [1][2], we (base case) anticipate Bitcoin to hit $10,000 by November earlier than spending the next 2 years (2023-2024) reclaiming its $70,000 all-time highs and ultimately $115,000 in the course of the subsequent 1-year bull market (2025). At $115,000 per BTC by 2025, Bitcoin will return 575% in 3 years or 158% yearly. Throughout the identical interval, SLNHP will yield 134% yearly compounded month-to-month (= [1.046^36 -1] / 3 years), similar to our 3-year Bitcoin base case even with none capital features. If SLNHP have been to reclaim its liquidation value, SLNPH would return a further 525% (=$25/$4-1) over nonetheless lengthy it takes.
There are additionally different drivers for reducing SLNHP’s threat.
By way of money stream, SLNH continues to be working money stream positively regardless of being unprofitable. Within the case of dividend misses, SLNPH is cumulative, which means all beforehand unpaid (missed) month-to-month dividends are accrued and have to be paid again in full sooner or later.
Below the worst-case state of affairs (chapter), most well-liked shareholders have precedence over frequent shareholders upon asset liquidations. This is essential as a result of SLNH’s ebook worth could also be overestimated (valuation of intangible property, asset liquidation liquidity, underestimation of asset deprecation, and many others.). SLNH is now buying and selling at a 0.15 Value-to-E-book (‘PB’) ratio, which supplies a very good margin of security beneath a worst-case state of affairs. To be much more conservative, we’ll scale back mounted asset values (PP&E and Prepaids) by 50% (to replicate liquidation liquidity challenges and threat of underestimating depreciation) and exclude non-tangible property (which contributed 28% of whole property and is likely to be realizable as money). These conservative measures convey up the PB ratio to 1.5 (=$18.32mil Market Cap / [$4.63mil cash + $87mil PP&E * 50% + $10.7mil Prepaid * 50% – $41.4mil Total Liability]). This suggests precedence over property throughout liquidation is essential.
Below the best-case state of affairs, SLNHP shareholders might be able to transform SLNHP to SLNH shares sooner or later. We expect that that is one of the best of each worlds.
Fig 1. SLNH is working money stream constructive (YCharts)
Conclusion: Yield Or Name Choices?
Is there a greater dividend revenue alternative within the crypto house? We echo SLNH’s statement:
To our data, Soluna is the one public firm within the sector to have paid its buyers dividends as now we have performed for the popular inventory (SLNHP). Some buyers have inquired if they might take all or a portion of their month-to-month money dividend in Soluna frequent inventory. If we have been to think about this it might be on the investor’s discretion as of the report date
Though we draw back from investing in SLNH, we discover SLNPH’s threat stage and yield respectable sufficient to get us invested. Based mostly on the thesis specified by this text, we have transformed a part of our Bitcoin holdings into SLNHP. The dividend payouts can be used to purchase long-dated name choices (read here to find out why – trace: 13.6x anticipated return with restricted draw back ought to Bitcoin hit $115,000 in 3 years).
