My 2020 Speculations

Investing is an important part of every man’s journey to self mastery.

Speculation is different from investing.

Speculation presents the opportunity for massive gains.

Or complete loss of capital.

So with that being said here is my disclaimer: This is not investment advice. You should always do your own research and seek counsel from a professional advisor before making investment decisions. 

Today I want to present to you two speculative ideas that I am currently participating in.

Shilling if you will (the size of my audience has zero chance of swaying markets in any direction).

Idea #1: HUT 8 Mining

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HUT 8 Mining, Alberta based Bitcoin Mining company

Hut 8 (HUTMF) is an OTC stock currently priced at a $1.16.

The current market capitalization is hovering at $105 million.

What does HUT 8 Mining do?

HUT 8 is a Bitcoin mining company.

It is very straight forward….HUT 8 mines bitcoin with their various data centers and if the price of bitcoin increases the company has the chance to make large profit.

HUT 8 Fundamentals 

  • Bitfury agreement which provides HUTMF w/ cheap electricity….this agreement is long-term. Bitfury is a blockchain technology firm worth over $1 billion. Bitfury owns almost 50% of HUT 8 Mining.
  • Bitfury produces blockchain hardware, software, and asic chips that are critical to the mining process. Do you really think these products won’t be made available to a company they have almost half a stake in…..
  • HUT 8 is based in Alberta, Canada…. this provides cool weather year round which allows for operational efficiencies associated w/ overheating of mining equipment.
  • HUT 8 has already proven that they can weather a bear market (2018)
  • “The Company entered into definitive agreements with the City of Medicine Hat (“CMH”) for the supply of electric energy, and the lease of land upon which Hut 8 is constructed its mining facilities. For electricity, an Electricity Supply Agreement (”ESA”) was executed, whereby CMH will provide electric energy capacity of approximately 67 MW to the new Hut 8 facilities”
  • HUT produces Bitcoin at a cost of production 42% below industry standard.

 

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Comparison of Cash Flow for HUT 8 from 2019 (right) vs 2020 (left). It appears that HUT 8  carries a high amount of debt relative to cash (risk).

That last bullet point is significant. All of these competitive advantage and we just recently celebrated the third Bitcoin halving….which resulted in an increase to BTC’s cost of production (forcing miners to seek liquidation at higher prices).

Risk Tolerance for this Idea: Highly Speculative

Potential upside (in my opinion): $10+

Potential downside: $0

My prediction: Common sense says that HUT 8’s performance will depend on how high bitcoin price moves in the coming years. If Bitcoin performs I expect HUT 8 to fly....on the other hand if Bitcoin remains stagnant HUT 8 will struggle. My average entry price for this speculation was under $1.

Link to HUT 8 financial report for 2020: https://hut8mining.com/wp-content/uploads/2020/05/Hut-8-FS-Q1-2020-Final.pdf

Idea #2: GDXJ Call Options 

GDXJ is an ETF that provides global coverage for junior gold miners.

A call option is a financial instrument you buy when you expect the price of a stock to go up.

A call option grants you the right to purchase a stock at the contracts strike price at a later date.

My contracts have a strike price of $47 and are due to expire in August.

GDXJ current price: $44.71

If the price of GDXJ in August is below $47 my contract will expire worthless.

However….

If the price of GDXJ rises above $47….

I will be in profit.

As of writing this…I am currently out of the money.

The logic on this speculation: 

As of May 16th: “the US money supply has grown by approximately 23% over the last 65 days, or about a 90% annualized rate.”

Screen Shot 2020-05-28 at 1.46.40 PM

The supply of gold reserves isn’t getting any bigger.

The dollar value of gold should increase relative to USD as central banks continue to devalue their currencies into oblivion.

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Gold Miners (GDXJ) are at 25 year low relative to gold.

 

Not only are the gold mining companies at a relatively low value to Gold….but they have enough assets to service their debt (current ratio of gold mining companies is twice that of S&P 500).

Risk Tolerance: Speculative

Potential Upside: $50+

Potential downside: mid $30’s (aka options expire worthless) 

A dynamic that plays into both these speculations is that as a commodity price rises….these mining companies have fixed costs that remain relatively stable.

This means that as the price of the underlying commodity (bitcoin or gold) rises….the increase in profits can be exponential.

If you have never traded options I recommend you hold off….the more prudent path would be to simply purchase a small amount of the GDXJ ETF.

I never buy put options (as there is unlimited downside risk).

Again: This is not investment advice. You should always do your own due diligence before investing and seek counsel from a professional financial advisor.

I thought I’d share these with you guys as I am currently participating in both of these ideas.

Both plays are risky, but present the opportunity for major upside rewards.

Talk to you guys soon.

Sources:

https://seekingalpha.com/article/4350563-sizing-up-gdxj-for-long-play

https://finviz.com/quote.ashx?t=gdxj

https://www.zerohedge.com/markets/heres-5-reasons-why-gold-miners-have-massive-outperformance-tank

https://hut8mining.com/investors/reporting#top

 

 

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