We are short shares of Riot Platforms, a $3bn bitcoin miner that does a far better job playing energy arbitrage games and issuing stock than generating shareholder value by mining crypto. Bitcoin mining is easily among the worst business models for a public company we have ever encountered: unpredictable revenue, capital intensive, extremely competitive, a pure commodity product, and lately drawing intense regulatory scrutiny even in crypto-friendly places like Texas where Riot has 100% of its bitcoin production. Given these drawbacks it is not surprising Riot has never produced positive cash flow or generated a decent return. What is surprising is why Riot’s shareholders accept excessive management compensation and serial dilution. Riot has issued over $507m in stock (18% dilution) through April alone, with the latest slug at prices in line with the current stock price. Shareholders should ask themselves, if management thinks it is a better trade to sell Riot shares and HODL bitcoin, why should I not do the same?

Lured by cheap energy and a lax regulatory environment, crypto miners like Riot fell in love with Texas in recent years. Now the honeymoon is over. In a pattern repeated across the globe from Kazakhstan to Kosovo, persistent concerns over the industry’s impact on the environment and other externalities have resulted in efforts to strengthen oversight and pass legislation that would limit lucrative financial incentives for miners in Texas. A clear sign of how the business environment for miners has soured in Texas occurred in March when Navarro County commissioners voted against a tax abatement for Riot’s key growth project in Corsicana. We believe Riot investors are oblivious to shifts in state and local politics and headline risk as we approach another summer which will test Texas’ fragile electric grid.

All of this comes at a time when bitcoin miners are grappling with sharp cuts to unit profitability in the aftermath of the latest block reward halving. As May production figures and 2Q results roll in, investors will be better positioned to grasp the poor all-in unit economics of an industry that never made much sense even pre-halving.

We think US crypto mining promoters tend to have a narrow view of the competitive landscape, focusing on mainly the US-listed companies when in reality all are engaged in a global race to gain share and mine bitcoin at the lowest possible cost. Not a day goes by without a new, significant mining project in South America, Middle East and Africa, while a torrent of Chinese equipment continues to flow into Russia. Competition abroad will only continue to intensify and it strains credulity that US-listed companies, with public company expenses, high labor costs, equipment tariffs, all while doling out millions in executive compensation, will be long-term low-cost producers and therefore market share winners in this extremely commodity industry.

Gone are the days when investors searching for a bitcoin proxy had to settle for a bitcoin miner. With numerous low fee bitcoin ETFs and ETPs, why own shares in a company like Riot, which has seen bitcoin holdings per share and bitcoin production per share steadily decline, versus simply owning bitcoin itself. Riot is a fundamentally poor way for investors to express a view on bitcoin and over the long-term shares have a much greater chance of being diluted into dust than outpacing gains from the new digital gold.

Read our full report here.