Iris Energy Limited: A Way To Play Bitcoin's Eventual Turnaround – Seeking Alpha

Man preparing mining rig

South_agency/E+ via Getty Images

South_agency/E+ via Getty Images
As the broad cryptocurrency market continues to languish with Bitcoin (BTC-USD) back below $30,000, businesses that are built around the cryptocurrency industry have suffered mightily as well. While companies like Coinbase (COIN), Galaxy Digital (OTC:OTCPK:BRPHF), and Silvergate Capital Corp. (SI) provide exposure to the cryptocurrency space through a more traditional equity vector, the companies that might have the most direct exposure to Bitcoin’s price over time are the pure-play mining operators. One of which is Iris Energy Limited (NASDAQ:IREN). While each mining operation is different, the publicly traded shares of the large operations trade largely in tandem.

Crypto Miners YTD

Crypto Miners YTD (Seeking Alpha)

Crypto Miners YTD (Seeking Alpha)
Year to date, the performance of Iris, Hut 8 Mining Corp. (HUT), Marathon Digital Holdings, Inc. (MARA), Riot Blockchain, Inc. (RIOT), and Hive Blockchain Technologies Ltd. (HIVE) are almost identical. There are two important inputs that impact the performance of these miners; Bitcoin’s price and the cost to mine. Cost to mine for the entire industry might be best represented by the Bitcoin network hash rate.
When the hashrate of the Bitcoin network is high, it’s generally more difficult for miners to get the block reward of newly minted Bitcoins. The more difficult it is to attain the block reward, the more energy it costs miners to secure the network.

Bitcoin hashrate

Bitcoin hashrate (Bitinfocharts)

Bitcoin hashrate (Bitinfocharts)
This isn’t necessarily a problem when Bitcoin’s price is rising. It’s a big problem when Bitcoin’s price is falling. When that happens, miner profitability is declining.

Bitcoin miner profitability

Bitcoin miner profitability (Bitinfocharts)

Bitcoin miner profitability (Bitinfocharts)
And when miner profitability declines, the share prices of the miners reflect that change, which is precisely why most of the publicly traded mining shares are down 75-80% from their highs. As a group, these miners are going to struggle unless Bitcoin’s price increases or the difficulty to mine comes down. Since we’re in a situation where the miners are largely performing the same regardless of other variables, it can present an opportunity to look for mining operations that might have a fundamental advantage over other miner groups.
Iris Energy is one of the smaller Bitcoin miners by market capitalization but it’s an interesting option for investors who are looking for an equity-based Bitcoin play. Iris is positioning itself as a clean Bitcoin miner. The company claims 98% of its energy comes from direct renewables and 2% from REC purchases. Iris currently has two live operations in British Columbia, Canada. There are plans for an additional location in British Columbia and a large capacity location in Texas.
Source: Iris Energy
The company owns the overwhelming majority of the real estate where it is conducting and building operations. Iris is projecting the total planned capacity to be online and energized by Q3-23. To this point, the company has met or exceeded its construction timelines. Of note, Iris is quoting $1 billion in capital expense to build out its planned data center operation and $750 million of that capex has been secured, which means there is still $250 million in funding that will still need to be secured for Iris to hit its timelines.

Hashrate Projections

Hashrate Projection (Iris Energy)

Hashrate Projection (Iris Energy)
In addition to clean energy mining, Iris is also positioning itself as a value play in the Bitcoin mining industry based off its market cap compared to its projected operational capacity. But I’ll reiterate, this is dependent on Iris securing the funding needed to continue scaling its operations. If it hits those timelines, Iris will be among the largest mining operators in the space.
Looking at the shareholder breakdown compared to peers, we see a much larger position held by insiders and a smaller institutional holding in Iris Energy.
Source: Seeking Alpha
What is notable is the recent lockup expiration of Iris insiders. Since the company IPO’d in November of 2021, there was a 6 month share lockup period for insider holders. The lockup expired on May 16th. Given that, the quoted number of insider holders is very likely to come down and the large spike in volume earlier this week may be an indication that those insiders have started selling shares already. IREN shares traded with a 10x surge in average daily volume on Monday 5/16 and a 5x volume spike continuation on Tuesday 5/17. As of writing on Wednesday morning, volume is far closer to normal averages; indicating lockup expiration selling might be mostly over.

Daily Share Volume

Daily Share Volume (author generated, Yahoo)

Daily Share Volume (author generated, Yahoo)
What I’d like to see going forward is an increase in the ownership by institutional funds. If that fund ownership figure increases more in line with peers, say 20 to 30% of ownership, that should put a solid bid under Iris Energy in the short to medium term. I think if Iris Energy can continue to execute its timeline and operational buildout, we’ll see crypto industry equity ETFs like the Grayscale Future of Finance ETF (GFOF) and the Bitwise Crypto Industry Innovators ETF (BITQ) enter into or increase Iris Energy positions. Currently, the Grayscale fund does not have exposure to IREN and the Bitwise ETF has a 2.7% weighting to IREN shares.
There are considerable risks when investing in any cryptocurrency company. The industry is still highly volatile and highly speculative. There is still a regulatory environment that digital asset investors must consider when allocating capital. In addition to that, miners specifically face jurisdiction risk. While I’m not concerned about jurisdiction for Iris Energy, it’s worth noting as a potential headwind. The company will likely be more de-risked when operations in crypto-friendly Texas come online.
Additional risks in the mining space can include the potential negative feedback loop of lower Bitcoin prices to fund operations. Miners of Bitcoin are sellers of Bitcoin. If Bitcoin demand can’t soak up that selling supply, the miners can hurt their own business model unintentionally by depressing profitability when they need to sell their Bitcoin to fund operations.
If you believe Bitcoin is going to return to recent highs, then crypto-focused equities are a great way to get exposure to that trade. I don’t generally like miner operations as long-term investments, but as trades I think they can provide some serious alpha for a bull move in crypto. If Iris Energy can get the funding needed to continue scaling its business, it’s going to be a major player in the mining space and institutions will likely put a big bid into the market.
Though I don’t think the crypto market has found its local bottom yet, I’ve taken a small long position in Iris Energy. I think it’s a really interesting option post-lockup. I view scaling into this one in 3 or 4 lots of shares and selling on a run up if/when Bitcoin breaks its bear trend. My average in IREN is currently $5.55.
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This article was written by
Disclosure: I/we have a beneficial long position in the shares of IREN, HUT, BTC-USD 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.
Additional disclosure: I’m not an investment advisor. Information purposes only. I share what I do personally and why I do it. Know your own risk tolerance and allocate your investment portfolios based on your own research and individual strategy.

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