Summary TeraWulf opened 15% lower on Monday morning due to a broad crash in the technology sector. The decline is attributed to panic selling regarding the performance of China's DeepSeek AI, which uses less advanced computing chips. Bitcoin miners like TeraWulf saw particularly large declines due to the associated Bitcoin crash and the loss of value potential from advanced AI GPUs. TeraWulf's investments in HPC infrastructure may pay off in the long run, but it appears overvalued as a Bitcoin mining company. Individual investors have limited "cash on the sidelines," historically indicating a Bitcoin bear market, which may have been triggered by the DeepSeek panic. The Bitcoin mining company TeraWulf ( WULF ) opened around 15% lower Monday morning following the broad crash in the technology sector. This was followed by losing a third of its value by midday Monday. The market crashed as panic grew regarding the potential of China's DeepSeek AI, causing many to question the United States' dominance in the emerging industry. WULF took a significant hit, but its peers, Riot Platforms ( RIOT ), MARA Holdings ( MARA ), and Hut 8 ( HUT ), also fell between 5% and 10%. Fundamentally, because DeepSeek uses less intensive chips , the market is likely discounting the risk that the advanced chips used by Bitcoin miners are worth less. Since DeepSeek uses less energy-intensive chips more efficiently, similar technology may produce Bitcoin with lower energy costs, reducing the competitive edge of many existing Bitcoin miners. Further, Bitcoin has fallen around 9% since the sell-off began. This is likely the result of immense investor liquidity in the technology sector and related assets like cryptocurrencies. As those investors race to sell, they're selling virtually all associated assets, leading to compounding losses for the Bitcoin miners. I have had a historically bearish long-term view on Bitcoin miners like RIOT because they tend to lose money even during bull markets. They also generally face negative exposure to rising energy prices. Since they're very energy intensive, I suspect they may also face regulatory risk, as people are frustrated with the misuse of energy and utility resources. Still, TeraWulf is not Riot Platforms. It is smaller, with just over half the market capitalization. WULF has performed better over the past year, rising 340% compared to RIOT's 34%. WULF has a high short interest of 15.6%, lower than RIOT's 20% and MARA's 25% but higher than HUT 8's 11%. These high short-interest figures imply that hedge funds or retail speculators are betting against the Bitcoin mining industry. Given its newfound price discount, I believe it is an excellent time to analyze TeraWulf in the context of Bitcoin and the crypto-mining sector. TeraWulf's Profits Rise As Efficiency Improves Bitcoin mining companies have risen to the forefront of cryptocurrency market activity, since they're seen as a growth opportunity and leading examples of the focus on American data infrastructure projects. TeraWulf operates through the Lake Mariner Facility, a former coal power plant site in Western New York, reconfigured for Bitcoin mining and high-performance computing. This data center campus uses 91% zero-carbon power, primarily from hydroelectric and nuclear. The company has over 500 MW in capacity, about as much as 400 thousand homes. However, it is worth pointing out that TeraWulf is usually focused on using locally generated power, particularly power sources like Nuclear and Hydro, which often have significant excess energy during non-peak periods. Although I have some doubts regarding the "energy-sink" value theory of Bitcoin mining, it is likely the best argument in favor of their immense energy demand (utilizing excess power during non-peak periods). The company's earnings and revenue have some correlation to the price of Bitcoin, rising sharply from 2022 to last year. Its cash flows and operating income appeared to turn positive, with Bitcoin crossing above $30-$45K in early 2024. See below: Data by YCharts TeraWulf's Q3 profits tumbled because the company mined less Bitcoin, 555, vs. 980 in Q3 2023. Its power cost per BTC rose to $30K, while its SG&A rose to $16K per coin. Bitcoin was also cheaper in Q3 of 2024, hovering around $50-$60K, far below its current level of around $100K. This led to the compression of its gross margins, while its operating costs remained around 100% of its total revenues and 220% of its gross profits. See below: Data by YCharts The company is expected to post its Q4 results around the middle of March. Its Q4 guidance pointed to a $34K power cost per Bitcoin of mining, about $12M in overhead (SG&A, other OpEx, and cash interest), and a Bitcoin mining target of 465. With Bitcoin averaging around $80K over that period, we reach a revenue target of about $37.2M and $21.4M in gross profit. After its expected lower OpEx costs indicate a Q4 operating income of around $9.4M. That works out to an EPS target of about $0.025, given it should not face tax costs due to carryover. The analyst consensus Q4 EPS target is lower at -$0.03, indicating investors are not sure TeraWulf will manage lower operating costs as suggested in guidance. That said, investors expect more efficiency improvements this year, leading to a 2025 EPS target of $0.17, rising to $0.28 by 2026. That assumption requires it to continue to double its revenue through 2026 nearly. Is the Bitcoin Bull Market Ending? That profit growth is possible given the company's significant investments in capital and increasing utilization; however, it also likely requires Bitcoin to maintain a price above $100K. In my view, that is not certain, given I understand Bitcoin to be an asset for excess market liquidity. Historically, Bitcoin rallies when individual investors have high allocations to cash, such as in 2016, intermittently from 2019-2021, and in 2023 to early 2024. As individual investors deploy their cash, there is less money on the sidelines for Bitcoin, causing the bear market of 2018 and 2022. Today, individual investors have low cash reserves. See below: Data by YCharts The relationship is imperfect, but the peaks and troughs between cash allocations and the log-scale Bitcoin prices tend to align. I have been skeptical of the Bitcoin rally since the middle of last year when cash allocations were low. Bitcoin has continued to rise since then, particularly after its newfound steam post Trump's election and his related pro-crypto commentary. That said, investor cash allocations are very low today. Though they could go lower, I suspect, based on the market's extreme reaction to the DeepSeek issue, that this financial market segment is highly overextended. In short, I view Bitcoin as an asset that benefits from excess liquidity in financial markets. Thus, it rallies when the Federal Reserve infuses cash into the financial system and investors have higher cash available to deploy. TeraWulf and Bitcoin miners are similar, benefiting from excess electricity in the utility grid. That does not make them useless assets, but it alters their use case to be limited and highly volatile. Bitcoin is a hedge against currency devaluation, but given the sharp rise in the US dollar, I suspect financial market liquidity is declining today, reversing the trend from 2020-2021. The Bottom Line WULF faces immense volatility and short interest because its business use case is limited, just as Bitcoin's value as a store of wealth is unproven and vague. While Bitcoin has undoubtedly led to significant wealth creation, its volatility and exposure to changes in fiat currency liquidity status make its long-term use potential unclear, particularly given the immense energy costs needed for its infrastructure backbone. My contention with TeraWulf is that it can lose a lot of money if Bitcoin is not over ~$60K, and that cost seems to be rising over time. Without a much higher Bitcoin price, it isn't easy to see how TeraWulf's EPS can reach over $0.50 annually. Realistically, its long-term forward "P/E" is likely around 15-30X , but there is a reasonable risk that its value may erode if its costs continue to grow or Bitcoin reverses, as I suspect. The actual value of the company is likely in its physical assets. It owns data power assets with comparatively low-energy costs that could be valuable as high-performance computing centers. The value of those assets is unclear and more dependent on the commercial use value of AI. However, even then, WULF's book value per share of $0.95, and its price-to-book is 5.7X. In late 2023, it traded closer to its book value. See below: Data by YCharts In my opinion, TeraWulf's future, shared by its peers, may not be in crypto mining but in hosting AI and HPC services. Late last year, the company entered a strategic partnership with Core42, aimed at using its GPU clusters, useful for AI computation . Many of its assets are Bitcoin-mining-specific application-specific integrated circuits, which likely cannot directly support AI workloads since their architecture is optimized for mining. That said, the company still has a lot of the general supporting infrastructure for AI, such as low-cost power supplies, immense energy capacity, and a cooling system. Overall, I believe WULF is overvalued if we assume it remains focused on cryptocurrency mining. My view is biased by the fact that I doubt the long-term viability of Bitcoin, based on its inefficient technological framework compared to more modern cryptocurrencies like Ripple, as well as Bitcoin's exposure to individual investor liquidity, which gives me a particularly bearish bias on it today. TeraWulf provides value to electricity utilities by maintaining a more constant draw on electricity resources. It also has an excellent backbone for scaling an AI-HPC infrastructure framework, which, I believe, has a much stronger long-term use potential. That potential may be upset by the rise of Chinese alternatives like DeepSeek. That said, given its first-mover advantages, I expect that the US should remain a leader in the AI space. Overall, I am neutral on WULF and would have a bearish bias if not for its value potential as an HPC host and the possibility that it benefits from supportive government policies to win the AI/data competition with China. Still, I suspect WULF may decline over the coming months, particularly if Bitcoin crashes, as I speculate it will.
