Tag: Hindenburgh

Bitcoin mining: Riot Platforms’ 10-K is full of tentacles

  • By Amy Castor and David Gerard

We were going to do a quick news update on the world of bitcoin mining —then we got hold of Riot’s 10-K filing for 2023. Hoo boy.

Extreme noise terror

Bitcoin mining in Arkansas is making everyone miserable. The 24/7 noise caused by cooling fans is keeping residents up at night, chasing away wildlife, and lowering property values. 

The Satoshi Action Fund, led by Dennis Porter, is making matters worse for homeowners. The advocacy group, founded by climate denier and former Trump EPA chief of staff Mandy Gunasekara, has been pushing policies that offer greater legal protections for bitcoin miners. [NYT]

In a world where scientists widely hold that the impact of climate change will range from bad to really bad, Gunasekara thinks the impact will be “mild and manageable.” She is unable to come up with any scientific evidence to support this claim. [NPR, 2023] 

In Hood County, Texas, homeowners living near a Marathon Digital mining facility are equally pissed about the noise and environmental damage wrought by crypto mines. “It’s like sitting on the runway of an airport where jets are taking off, one after another.” [Time; WFAA, archive] 

The Texas Coalition Against Crypto Mining, led by Jackie Sawicky, is now doing a weekly email newsletter: Proof Of Waste. We’ve been finding it super-useful already. [Issue 1; Issue 2; subscription form]

Bitcoin is a battery of unspecified size

Bitcoin miners really don’t want anyone to know how much power they use. February 23, was the deadline for 82 bitcoin mining companies to cough up details of their energy use to the Energy Information Administration, the statistical arm of the US Department of Energy. The results were to be made public later this year to better inform policymakers about the climate impacts of bitcoin mining.

At the last moment, Riot Platforms and their lobbying arm, Texas Blockchain Council, filed a complaint in Waco, Texas, to delay the deadline. They claimed that the survey was rushed through on an “emergency” basis without a public comment period. The court granted a temporary restraining order on the data collection until a preliminary injunction hearing could be held. [Doc 13, PDF; Semafor]

The EIA reached an agreement with Riot and the Texas Bitcoin Blockchain Council. It will publish a notice on its planned survey and begin collecting public comments over 60 days. The notice will replace the previous survey. [Agreement, PDF]

The Sierra Club filed an amicus brief. “An outcome in this proceeding that prevents EIA from collecting data for months will materially increase the risk of rolling blackouts in extreme weather events or — as in Texas during Winter Storm Uri — cost customers tens of millions of dollars in payments to cryptocurrency miners to keep their lights on.” [Press release; Amicus brief, PDF] 

As far as we presently know, bitcoin mining in the US consumes as much energy as the state of Utah.

Climate change is an emergency. In return for all the misery and destruction they bring, bitcoin miners contribute zero to their communities.   

A history of flawless repute 

Riot is the largest crypto mining company in the US with facilities in Rockdale and Corsicana, Texas. It trades publicly on the Nasdaq with the ticker symbol RIOT.

Riot used to be a failing biotech under various names — Aspen Biopharma, Venaxis, Bioptix — whose stock traded under $5. In October 2017, in the heat of a crypto bubble, CEO John O’Rourke and Florida businessman Barry Honig figured out a way to pump the stock: blockchain!

The company rebranded as Riot Blockchain and BIOP became RIOT. The stock shot up from $5 to $46 in a matter of months. Fortunately, O’Rourke and Honig were well-invested!

They picked a good time to divest, too. In December 2017, after Riot’s stock hit a high of $46.80 — coinciding with the peak of the 2017 bitcoin bubble — O’Rourke dumped 30,383 shares for over $800,000. Honig dumped 500,000 shares for an undisclosed amount. 

The SEC was not happy with companies adding “blockchain” to their names without any blockchain business. So Riot bought a two-week-old company called Karios, paying more than $11 million for mining equipment worth only $2 million. Honig just happened to be a shareholder of Karios as well.  

Riot also acquired a majority stake in a “blockchain development company” called Tess based in Ontario, Canada. Tess was a shell company associated with bitcoin phishing sites, including a fake Mt Gox website. 

O’Rourke’s stint as Riot CEO was short-lived. He stepped down in 2018, after he, Honig, and a fellow called Mark Groussman were named in a penny stock scam involving three companies. (Riot was not mentioned in the complaint.) Honig was the alleged “primary strategist.” 

In 2018, short-seller Hindenburg advised investors to steer clear of RIOT and said the company was “hurtling toward the abyss.” An investigative piece by CNBC in February 2018 saw RIOT shares drop 33%. The CNBC report is comedy gold. [Hindenburg; CNBC; YouTube]

RIOT 2023 10-K: Extreme accounting

Riot has filed its full-year financials for 2023. The company reported “all-time highs of $281 million in total revenues, 6,626 Bitcoin produced, and $71 million in power credits earned.” [Press release; 10-K]

The company had no analyst call. This is not at all usual. But it’s not illegal! 

As always, Riot made no profit. The company posted a net loss of $49.5 million in 2023. It’s hard to compare this to their net loss of $509.6 million in 2022 — a large part of that number was goodwill write-offs and bitcoin and mining rig value impairment. 

RIOT reduced its losses on the books by $184.7 million by booking the rise in bitcoin price — that is, capital gains on the bitcoins they are holding, and not any sort of actual income — as “cash on hand, earned.”

Their “selling, general and administrative expenses” — mostly payroll — for 2023 totaled $100.3 million. That’s up $32.9 million from 2022.

Riot’s entire bitcoin mining revenue in 2023 was $189 million — only 2% higher than in 2021. Of that mining revenue, $71 million is subsidies from Texas for not mining bitcoin. That’s ordinary citizens paying to keep this company afloat.

Riot changed its name from “Riot Blockchain” to “Riot Platforms” in January 2023,  hoping to diversify into anything that wasn’t bitcoin mining — such as using its supposed expertise in running large data centers. Nobody cared — almost all Riot’s revenue came from mining. Or from not mining.

Adding water to soup

Bitcoin miner accounting is very special, as we covered a couple of years ago.

The scheme is for the executives to leverage being a public company in a bubble to pay themselves money — e.g., as company shares that the C-suite prints and awards to themselves. The suckers are naïve institutional investors who want in on a bubble. The rug pull is when they go bankrupt.

Money comes into Riot from investors who should know better, and it goes out to insiders and operating expenses. This generates a small stream of income — which relies on past spending on mining rigs and the physical plant.

Riot pays its executives well beyond the company’s carrying capacity. Riot CEO Jason Les is getting $21.5 million a year, mainly in bonuses and stock. Executives awarded themselves another $213.6 million in stock and options as of January 2024 — but it’s performance-based! They’re really efficient at setting money on fire.

The company has a history of diluting stock. They’ve gone from 15 million shares in 2019 to 250 million shares in 2024. In 2023, the company netted $517.6 million from selling 45.8 million new shares. [Ycharts]

One of Riot’s big problems is that even the institutional investors who thought RIOT was a way to get bitcoin exposure have ETFs now instead.

Risk factors

Riot has been telling folks in Navarro County, where it’s building a massive one-gigawatt mining facility, that its servers will be immersion-cooled with oil to reduce noise pollution. A demonstration facility seriously impressed Navarro County commissioners with how quiet it was.

But in the 10-K, Riot admits they have no idea if immersion cooling will even work at scale: 

Immersion-cooling is an emerging technology in Bitcoin mining, which is not in widespread use, and has yet to be deployed at this scale. As such, there is a risk we may not succeed in deploying immersion cooling at such a large scale to achieve sufficient cooling performance. All Bitcoin mining infrastructure, including immersion-cooling and air-cooling, is an evolving study.

The company also admits they’re absolutely screwed without the power subsidies from the state of Texas:

… our plans and strategic initiatives for the Rockdale Facility and Corsicana Facility are based, in part, on our understanding of current environmental and energy regulations, policies, and initiatives enacted by federal and Texas regulators. If new regulations are imposed, or if existing regulations are modified, the assumptions we made underlying our plans and strategic initiatives may be inaccurate, and we may incur additional costs to adapt our planned business, if we are able to adapt at all, to such regulations.

From the extreme bingo hall

Denton in Texas used to have Core Scientific, who went bankrupt in late 2022 to the cheers of the townsfolk — but now the city is welcoming more of these bozos. The miner, whoever it is, appears to be pitching itself to the town as a “modular data center.”  [DRC, archive; DRC, archive]

This is the latest swindle we’re seeing from miners — they pitch themselves as “high-speed computing” or “modular data centers,” as if they could use their computing power for something other than mining. They can’t. ASICs are specialized and run for about eighteen months before becoming e-waste.

Jaime Leverton, the CEO of bitcoin miner Hut 8, has stepped down after that short-seller report from J Capital we mentioned previously. Her resignation sent the stock (Nasdaq: HUT) down 8%. Leverton is succeeded by President Asher Genoot. [CoinDesk] 

Analysts for the Bitfinex crypto exchange say that miners are dumping their bitcoins ahead of the halving. We think this means the miners are desperate for cash, they don’t think the current pump in price will hold, or they’re getting ready to exit the business. [Bitfinex, archive] 

Ethiopia is suffering a plague of crypto miners, lured by cheap energy. A wave of Chinese miners brought their container data centers to the country after they were kicked out of China in 2021. Several Chinese companies have now invested in a $4.8 billion dam, which the miners would draw power from. Ethiopia has signed a preliminary agreement to establish a $250 million bitcoin mining and AI (apparently) data center, led by the Russian bitcoin miner BitCluster. While all this is going on, about 40% of Ethiopia’s population of 120 million have no electricity. [South China Morning Post, archive; Bloomberg, archive] 

We hear tell that the bitcoin mining rigs in El Salvador, which President Bukele set up outside the LaGeo plant in Berlín, Usulután, are no longer running, which is unsurprising in a country where power is 15c-20c/kWh — the container mining rig data centers have been left rusting in the sun. There are rumors that much of the setup has been stripped for scrap metal. We look forward to the rest of bitcoin mining going the same way.

Bingo masters break out

Bitcoin miners in the US don’t run on the naïve model of making bitcoins and selling them — they’re creatures of fabulously questionable financial engineering in public markets. And with leverage comes weirdness.

These companies are in an unprofitable business. The only ones making money are the executives, who treat company stock like their personal ATM. 

We expect the US miners to finally admit they’re broke at some point soon — hopefully this year. Apart from mining income halving in a couple of months, the bitcoin price can’t be pumped with billions of tethers forever — ultimately, the retail dollars just aren’t there.

Bitcoin miners could be saved with another crypto bubble.  Any moment now! We don’t think a fresh bubble will kick off this year — it would require a fresh influx of retail dollars that just aren’t in evidence — but we don’t want to bet against human foolishness.

When the companies go bankrupt, the shareholders will end up holding the bag. It’s hard to feel that sorry for them — most of these were institutional investors who really should have known better.

States like Texas will be left figuring out what to do with the mountains of e-waste they leave behind.

Posted on by Amy Castor 5

What’s backing Circle’s 25B USDC? We may never know

Jeremy Allaire is taking his Boston-based company Circle public via a SPAC. Circle is best known for its stablecoin USDC, which now has a market cap of $25.5 billion. 

In all his press interviews talking up the future potential of stablecoins — “Circle sits at the center of the next major transformation that the internet is bringing to the world,” he said in an investor website video  — there is one question Allaire consistently avoids giving a straight answer to: 

What is backing USDC? 

Based on his current scheme to take his company public, he may not have to come up with an answer anytime soon. 

What’s a SPAC?

SPAC stands for special acquisition company. 

Otherwise known as a “blank check” company, a SPAC is basically a shell set up by investors with the sole purpose of raising money through an initial public offering to eventually acquire another company  — “a company for carrying on an undertaking of great advantage, but nobody to know what it is.”*

Going public through an IPO is a rigorous process. It requires you to file a Form S-1 with the US Securities and Exchange Commission. An S-1 is a full-body exam, a cavity search, where you lay out all of the material weaknesses of your company. There is really nowhere to hide in an S-1. 

When you take your company public through a SPAC, however, the SPAC goes through the IPO process — not the company it ends up buying. And since a SPAC is just a room full of investment banks and private equity dudes, its S-1 is simple and straightforward. A SPAC has no skeletons in the closet. 

Once the SPAC submits its S-1 and raises money via an IPO, it goes out and finds a private company to buy and then merges with the company. In the merger, the private company gets the money and the SPAC holders get shares in the new combined entity.

The merging process requires considerably less due diligence than a traditional IPO, which is why the space is full of frauds and get-rich-quick schemes. Not all SPACs are frauds, of course, but it’s a clever way to lever up and then sell the debt to the public via shares. 

Because many of the companies taken public this way have little to show in terms of a business plan, SPACs have resulted in a slew of shareholder lawsuits. The most glaring example is electric truck startup Nikola. Three months after the company went public with a $3.3 billion valuation via a SPAC, short-seller Hindenburg Research revealed it was an intricate fraud. (The truck was rolling downhill!) Nikola’s stock collapsed, its CEO ended up stepping down, and a series of class actions followed.

“SPACs are oven-ready deals you should leave on the shelf,” an FT headline read in December. Then-SEC Chairman Jay Clayton voiced similar concerns last year. 

“I’m still keeping my mind open to the fact that there could be a good SPAC out there,” Hindenburg founder Nate Anderson told the FT. “I just haven’t seen it yet.”

Details of Circle’s SPAC

Circle is merging with Concord Acquisition Group (NYSE: CND), a SPAC sponsored by investment firm Atlas Merchant Capital. The transaction is expected to close in the fourth quarter, according to the press release.

When the transaction closes, a new company will acquire both Concord and Circle and become publicly traded on the NYSE under the ticker symbol “CRCL” — and CND will disappear. 

Concord raised $276 million in its December IPO. Here’s Concord’s S-1. It’s short, only a few pages. Compare that to the 200-page S-1 of Coinbase, the US crypto exchange that went public via direct listing in April — quite a difference.

Investors have committed another $415 million in PIPE financing to sweeten the Circle deal. PIPE, or private investment in a public equity deal, is a way to raise capital from a select group of investors who receive shares at a discount to the public market price.

Circle also raised $440 million in a May funding round. That leaves Allaire’s company — valued at $4.5 billion in this deal — with $1.1 billion in gross proceeds upon the close of the transaction. 

Circle’s finances

What do we know about Circle’s finances? Specifically, the assets behind its stablecoin? Not a lot, really.

Concord Acquisition filed an 8-K with the SEC announcing the upcoming merger. The form links to several documents. Of those, the only financial information on Circle is an investor presentation and Circle’s financial statements from December 31, 2020 and 2019. 

Here’s the thing — six months ago, Circle was in an entirely different situation than it is now. In December 2020, USDC had a $4 billion market cap. Its market cap grew to six times that in the first half of this year. Six times! Yet somehow, Circle appears to be going public without submitting its financials for Q1.

This is curious given that Q1 was a prosperous period for most crypto companies. Between January and March, $6 billion USDC were created. In that same timeframe, the price of bitcoin climbed from $29,000 to 59,000. So why would Circle leave out its March 31, 2021, financials?

This doesn’t mean that we’ll never see them. Circle could post its Q1 financials before the merger goes through.

Also, Concord still needs to file a Form S-4. An S-4 is required in a de-SPAC transaction (closing of the SPAC merger) where the SPAC’s shares are exchanged for the target’s shares.  

I wrote to Concord and Circle asking them these three questions:

  • When do you plan to file your S-4 in regard to your Circle transaction?
  • Do you plan to file the breakdown of the collateral backing the Circle stablecoin?
  • Do you have a target for your SPAC combination? If so, what is the date?

Circle and Concord answered none of the questions. Instead, they sent me back a list of 2020 and 2021 press quotes from Allaire and a link to their press release. You can see their response here.

What we know

Circle, founded in October 2013, first announced USDC in September 2018. The stablecoin is managed by a consortium called Centre — here’s their original white paper. Circle was the first member of the consortium. Coinbase joined in October 2018, and so far, there are no other members. 

Circle bought crypto exchange Poloniex in February 2018 for about $400 million with big plans to turn it into a regulated exchange. The experiment failed, and Circle ended up selling Polo less than 18 months later at a $156 million loss. 

Sean Neville, Circle’s co-founder, stepped down shortly after, without giving any clear reason for his departure. 

In December 2019, right about the time Neville left, Circle spun off its Circle Trade over-the-counter desk to focus exclusively on stablecoins. USDC issuance was slow and steady at first and then took off like a rocket in late 2020. 

Stablecoins issuers have the reputation of being like wildcat banks — a reference to banks in the 19th century that flaunted regulation and issued bank notes with abandon and often without any intention of redeeming them. 

Under the gold standard in operation at the time, these state banks could issue notes backed by gold and silver coins — though the quality of these reserves was often a question. State regulations did exist but wildcat banks, generally located in remote, hard to reach areas, were known for their creative workarounds.

Stablecoin companies issue virtual dollars that act a bit like real dollars, only they’re on a blockchain. USDC, which began life as an ERC-20 token on Ethereum, is currently on four blockchains with plans to expand to several more. 

USDC reached its first $1 billion market cap in July 2020. In the following 12 months, it literally created $24.5 billion worth of stablecoins — and we have no idea what is backing those.  

According to Centre’s website, USDC “is issued by regulated and licensed financial institutions that maintain full reserves of the equivalent fiat currency.” Every USDC is supposedly redeemable on a 1:1 basis for US dollars. 

USDC receives monthly attestations provided by accounting firm Grant Thornton LLC. These are not full audits — they are more like snapshots in time. 

The most recent snapshot is for April 30, 2021, when there were 14.7 billion USDC in circulation. The report doesn’t say much other than “US Dollars held in custody accounts are at least equal or greater than the USDC tokens outstanding at the Report Date and Time.”

However, another note on the report states that “US Dollars held in custody accounts are the total balances in accounts held by the Company at federally insured US depository institutions and in approved investments on behalf of the USDC holders at the Report Date.” (Emphasis mine.) 

Apparently, Circle’s boilerplate USDC reserves investment disclosure changed between Feb 28 and March 31, 2020, to add the phrase “and in approved investments.”

So, what are those approved investments? Who approves them? What percentage of assets are in that category? We don’t know, because Allaire won’t say. In an interview with Coindesk on June 30, he completely avoided the question, instead, rambling on about fiduciary responsibility, electronic stored money transmission, etc. (Doomberg transcribed the interview.)

High-interest ‘yield product’

On December 31, 2020, USDC was backed 100% by cash per its financial statements. Now Circle is promoting a high-interest “yield product.” The idea seems to be that you can lend Circle your USDC, and they will in turn lend them to degenerate gamblers who want leverage for crypto margin trading.

“Our Yield services provide a compelling and powerful way for institutions and corporations to access the yields that are coming from stablecoin and USDC-based borrowing and lending markets,” Allaire said in a conference call to investors.

These yield products offer 3% to 7% interest paid monthly, Circle claims — well above a risk-free rate of return. Yet, even Circle doesn’t appear to know how its yield services make money.  

“Our yield product service is an innovative product which is difficult to analyze vis-a-vis existing financial service laws and regulations around the world,” the firm says in its investor presentation. (Emphasis mine.)

Even more concerning, Circle’s business model appears to rest on bitcoin never collapsing in price: “Our yield product is collateralized predominantly by bitcoin and the value of that collateral is directly exposed to the high volatility of Bitcoin.” 

Allaire promotes USDC as the complete antithesis of Tether — the dubiously backed stablecoin that claims to have 50% of its $62 billion market cap in “commercial paper,” but doesn’t say anything about what that commercial paper consists of or where it is held. 

Despite efforts to distance itself from Tether, Circle is starting to look more and more like a similar scheme, only with a different critter on the wildcat banknotes. 

Will we ever get a straight answer from Allaire in regards to what’s behind USDC? Looks like we’ll have to wait till the S-4 comes out — that will be the real measure of transparency. 

In the meantime, I’m reminded of Dan Davies’ Golden Rule from his book “Lying for Money,” which includes a series of case studies on frauds.

“Anything which is growing unusually quickly needs to be checked out, and it needs to be checked out in a way that it hasn’t been checked before,” Davies writes. “Nearly all of the frauds in this book could have been stopped a lot earlier if people had been a bit more cynical about growth.”

* Charles Mackay, Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, Chapter 2. “The South-Sea Bubble.”

Feature image: Bank of Brest five dollar bill. The Bank of Brest in Michigan was one of the most infamous wildcat banks that sprang up in the freewheeling economic environment in the US during the 19th Century.

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Posted on by Amy Castor 0