Hi Investors! The sentencing of Bill Hwang takes place next month, he could spend the rest of his life behind bars, but what exactly happened to one of Wall Street's fastest growing family offices? And I share some latest financial data from the Bitcoin miners.

Welcome back to another week of Market Movers, where I summarise the top headlines that attracted my attention this week to keep you up to speed with the markets and give you some light reading for the weekend.

As usual, lets start with a look at the general markets, followed by the digital asset space.

Don't forget to check out the Risk On Investor resources page for access to the growing selection of calculators, tools and video guides to help you become a better investor. There is also more content posted frequently on the YouTube channel to keep you informed and entertained - you can also read back on previous newsletters if you're a new joiner to the investor club

View the Investor Resources Page (Constantly Updated)

Subscribe to the RiskOnInvestor YouTube Channel

Read previous newsletters

See my investing framework (Constantly Updated)

Have a great weekend

Chaz (RiskOnInvestor.com)

---

Disclaimer - The opinions of the author in this newsletter should not be taken as financial advice. Any mention of investment products is not a recommendation to buy.

If you are looking for financial advice, please seek the services of an industry professional and do your own research.

Capital is at risk when investing

---

Announcement

I started this newsletter as a way to summarise some of the interesting things I've been reading and researching to help make my own investment decisions and it's grown faster than I thought!

Whilst that's great, it does feel like there is some pressure to send a newsletter every week, which I have been doing for the last year.

I don't want to sacrifice quality for quantity, so I'm going to be moving to not having a regular sending schedule. Going forward, I will simply send something when I have something interesting to share.

I appreciate all the support I've had - kind emails back to me have always been fantastic when they've come. I hope you enjoy the newsletter and look forward to sending you something thought provoking!

---

Major Market Indices

The ultimate rags to riches and back story?

You may not have heard of Sung Kook Hwang, or as he's more commonly called in English speaking circles, Bill Hwang, but his actions directly contributed towards the demise of one of Europe's biggest and oldest banks, Credit Suisse.

They say when you owe the bank $100 it's your problem, but when you owe the bank $100m, it's the banks problem. Bill pushed this to the limit and made $100m look like pocket change with banks finding themselves in the hole for an estimated $10billion at his downfall...

Bill was born in South Korea, his family moving to Las Vegas in 1982 when Bill was 18 years old, his first job was working in a McDonalds. By accounts his English wasn't the best at this time but that didn't stop his rise.

From this lowly springboard, Bill worked his way through the education system, getting a bachelors in economics before finishing with an MBA which landed him a job working as a stock salesman for South Korean firm Hyundai Securities.

After a stint at Peregrine Investments Holdings Bill caught the attention of Julian Robertson.

By this stage Julian Robertson had created one of the first hedge funds, Tiger Management, and between 1980-1998 his fund averaged an annualised returns of 31.7%. Far outstripping the S&P 500 benchmark during that period.

Julian brought Bill into the team in the 90's and he quickly became one of Robertson's prodigies.

This group of investors which worked alongside Robertson became known as the Tiger cubs, named after the hedge fund Robertson had started.

Tiger Management was wound down in 2000/2001 after Robertson successfully stayed out of the dot-com bubble, but instead was dragged down by U.S Airways which the fund had significant exposure to. When Tiger Management was wound down it distributed its holdings in the company to investors who had been in the fund.

U.S Airways filed for chapter 11 bankruptcy a year later, wiping out shareholders.

From the money that Robertson still had when the fund was wound down, he invested in many of his student's funds, including Bill's newly created 'Tiger Asia Management' which grew from it's initial $25m seed funding to managing an estimated $5b just before the financial crisis.

It is at Tiger Asia Management where Bill started to first have run-ins with the law.

• In 2009 Tiger Asia Management pleaded guilty to insider trading. The fund had to pay $6m in fines to 1,800 investors
• In 2012 Hwang pleaded guilty to wire fraud charges. Bill had to pay $16.3m in fines and then a further $44m in charged from the securities and exchange commission
• In 2014 Bill was banned from trading in Hong Kong for 4 years

These charges led to Tiger Asia Management being wound down in 2012.

But good 'ol Bill wasn't down for the count yet, after all, you can't let pesky regulations and laws get in the way can you?

It turns out hedge funds have quite a lot of rules and restriction because the hedge fund manager is investing on behalf of the clients, but family offices, that's a whole different ball game because you're managing your own money.

And there's one thing that it turned out that Bill loves when investing, leverage.

Bill started Archegos Capital Management with $200m of his own money and quickly got to work.

One of the big financial instruments that Bill liked to use was the total return swap.

Total return swaps allow investors to effectively rent our their shares, it works like this:

Investor A holds shares in Apple valued at $100m

Investor B approaches investor A and pays a 'rent' for the apple shares. Investor A still owns the shares but now any dividend income or capital appreciation is paid to Investor B.

This allows investor A to get a constant income from their portfolio, while investor B only has to put a small amount of money down as rent to potentially collect all the upside.

All sounds great until the price of the asset being rented goes downhill. At that point investor B would not only have to continue paying the rent but also owes Investor A whatever the loss of capital gain was.

This is exactly what happened to Bill but not before he leveraged up with loans.

Bill's approach seems simple, borrow money from a bank, then use the borrowed money to borrow shares with a total return swap deal. This is leverage from the bank and then leverage on the asset purchase.

At it's peak Archegos had $36b in direct assets and estimated $100b in total exposure, quite the rise from $200m starting capital less than 10 years earlier.

So what went wrong?

If I had to point to one thing, or one trade I would look at ViacomCBS, or more commonly now known as Paramount Global.

Bill started building a massive position in ViacomCBS and it's share price started to rise. From $13 at the lows of the pandamic sell off to hitting highs of around $100 per share in March 2021.

Bill kept buying in and near the peak his position was around $20b and he owned around 50% of the company.

Now, whilst ViacomCBS was a rapidly growing company with the advent of streaming competition, it's share price was racing ahead of it's fundamental value so the management at ViacomCBS decided it was a good opportunity to raise some cash by selling new shares at the market price. They set a target of $3b

Here's the thing, Bill was supposed to be the largest buyer of shares, and as the largest existing holder of shares it was supposed to signal to the wider markets that he had faith in what the company was doing.

But Bill didn't buy more.

Behind the scenes things were starting to look bad for Billl. He was highly leveraged into a small number of positions and notably two of his large asian investments, RLX and GSX which were suffering a collapse in share prices after the Securities and Exchange Commission (SEC) issued a proposal which spooked the markets, this meant Bill was using his cash to avoid being margin called on his positions in those companies.

Remember that Bill had borrowed a lot of money from banks to speculate? Well, those banks keep an eye on what you're doing with that money when you borrow that much, as such if the share price fell too low the banks would call in their loans and Bill would have to repay, so Bill pumped his spare cash into those loans to stave off the bank margin call.

So what happened at ViacomCBS?

That $3b raise failed. The raise resulted in $2.6b of new cash, and whilst a healthy injection of cash for the company it signalled to the market that demand wasn't as strong as it could be - that spooks investors.

The share price more than halved in 2 weeks and the banks Bill had borrowed from started calling for extra cash to cover his falling loan collateral, money Bill didn't have.

It was estimated at this point that Bill's market exposure was around $100b - far outstripping any actual cash holdings he had.

Morgan Stanley and Goldman Sachs started the sell off, dumping shares from Archegos' portfolio to cover their loans, but some banks were slow to react. Notably Credit Suisse.

Credit Suisse had a chequered reputation in the industry.

It was one of the largest and most profitable banks in the world, one of the 'too big to fails' and had brushed off the financial crisis of 2007-2008 which had damaged many of it's peers thanks to it's generally risk off approach.

This image began to be shattered after leaked documents started to reveal it allowed criminals and significant money laundering through it's services.

Archegos' loss was the first in a chain of events that saw Credit Suisse start haemorrhaging money and it's Saudi backers finally give up on the bank. Credit Suisse's problem was that unlike it's rivals which dumped shares as fast as they could, Credit Suisse tried to unwind the positions in an orderly manner to avoid spooking the markets. This meant the process took longer and ultimately cost them more.

Credit Suisse did this because it didn't realise how bad the situation was. Most of the banks didn't know what exposure Bill had at other banks, so didn't understand the full scale of the issue.

Swiss authorities then effectively forced UBS to take over Credit Suisse, albeit on very good terms for UBS, ending almost 170 years of an independent Credit Suisse.

Credit Suisse wasn't the only bank impacted, in total it's estimated that the banks lost $10b in total with Credit Suisse losing about half of that.

And what of Bill Hwang?

It is estimated that Bill had peaked at around $30b in personal wealth, and unlike many other billionaires who have money tied up in very illiquid things such as property, land and other investments. Most of Bill's fortune was liquid. Likely making him one of the richest people in the world in spending power.

All of this vanished in approximately 48 hours as Archegos imploded.

During his meteoric rise Bill had been very outspoken about his Christian faith, and donated almost $500m to the Grace and Mercy foundation, drove a modest car and lived in a very modest house.

In April 2022 Bill and some of his colleagues were arrested by the FBI and charged with racketeering, conspiracy, securities fraud and wire fraud.

Hwang and his colleagues pleaded innocent to the 11 charges but a court later found them guilty in 10 of the 11 offences brought against them.

The hearing for the conviction happens next month and the offenses he was found guilty of carry a maximum prison sentence of 200 years. Experts think the sentence will likely be 20 years, in which case 60 year old Hwang may well spend the rest of his life behind bars.

---

(Affiliate link) - If you sign up to Trading 212 and deposit at least £1 to qualify for a free share we will both receive a free share of the same value, up to £100 (free share value is random), this helps support this newsletter at no cost to you - if you don't like Trading212 you can sell your free share and withdraw the money. Win-win for all parties, your support is appreciated - Sign up here​

---

Digital Assets

Bitcoin Miner Updates

It's been a while since I last did a Bitcoin miner update. Since I last gave an overview they've all released new earnings reports which I've been through and collected up.

The situation looks mixed to say the least, and interestingly some of the miners have ventured into the high performance compute (HPC) space which muddies the water a little with direct comparisons.

Why I like Bitcoin miners as a proxy for Bitcoin

There are two reasons I like Bitcoin miners, the first is just a simple tax reason, I can hold Bitcoin miners in a tax advantaged account such as ISA or SIPP and therefore have no capital gains tax to pay.

Secondly, and perhaps more importantly, they have the potential to provide a leveraged return on Bitcoin.

Bitcoin miners earn their revenue in Bitcoin and they do so with fairly rigid overheads, the price of their electricity and hardware doesn't change much, but the price of Bitcoin does.

So if Bitcoin price increases, so does revenue in dollar terms but not in Bitcoin terms.

And as we price companies on multiples of revenue, if we are pricing a company at 5x future earnings we have the potential to see amplified moves, both up and down for the miners.

The big players

When I last looked at the miners there were 3 big players in terms of market capitalisation, Marathon Digital, Cleanspark and RIOT Platforms.

The picture has changed somewhat, the 'middle of the pack' miners have closed in on Cleanspark and RIOT, who have both struggled to get their hashrate growing, Cleanspark saw massive growth early in the year and that growth has now slowed down which has seen investor enthusiasm subside and RIOT has seem very slow growth and will need significant growth towards the end of the year to hit it's hashrate targets

Special mention should go to WULF, IREN and CORZ.

WULF is a little bit of a mystery to me. By most of my metrics it doesn't stand out for any particular reason, but it has had a fantastic year so far, growing hashrate by about 30%. I think the real driver behind it's growth has been it's AI adjacent business arms which have caught the AI boom tailwind (the same for IREN and CORZ)

IREN has massive growth plans by the end of the year and is a company I like. The reason I like IREN is that it's very clear with information releases exactly what it's aiming for and the management team have a fantastic skillset for running large data centres. I'm always impressed when listening to them in interviews.

CORZ was in real trouble not that long ago, heavy debt and the company was forced to restructure as a part of bankruptcy proceedings. Since then, the rise of Bitcoin price has allowed it to start paying down it's debt faster than many expected and it has also struck some very impressive deals with AI companies to deliver infrastructure. Like WULF and IREN this has seen CORZ capture the tail end of the AI boom.

So that's the valuations of the entire companies covered, what about the actual operations - who is doing well?

The below chart compares the production for March of this year against the latest data released for August. Why did I pick March to compare against? March was the last full month before the halvening. So any miner that is mining more than 50% of what it was achieving in March'24 has gained market share.

As we can see many of the large miners have achieved hashrate growth which has cushioned the loss of revenue from the halvening. To illustrate the growth still to come here is a chart comparing the current operating hashrate against the target hashrate by the end of the year

Take this data with a pinch of salt. It is based on operating hashrate, not total installed.

For example, Cleanspark is well known to have very good uptime, if it has a mining rig, that rig will be hashing for 95%+ of the time.

At the other end of the scale we have companies such as RIOT which has over 20EH/s installed but typically is using ~14EH/s at the moment for various reasons. In other words, it's not being very efficient with it's operations.

So what about valuations?

As Bitcoin mining is a volatile business (certainly not one I would want to work in!) I prefer to look at the book value of companies.

This is simply the sum of all assets minus the liabilities, this can then be compared against the market capitalisation to see if the market is placing a premium (which it should in my opinion) or if the business is potentially undervalued.

I break out the crypto holdings from the book value as some miners hold crypto on the balance sheet and others don't. This gives me another lens to view the company through.

Interestingly Marathon (MARA) and RIOT both look cheap by this measure with a total book value lower than the market capitalisation and makes many of the smaller miners look significantly over priced, notably Bitdeer, Terawulf and Bitfarms.

CoreScientific is a little hard to compare like this as it carries a significant amount of debt as part of it's bankruptcy so ignore CORZ in this data.

Valuation comaprisons

Since the main metric that impacts a Bitcoin miner's revenue is it's operating hashrate let's look at how the market is comparing the miners

We can also look at the current valuations against the end of year EH/s targets

By both sets of metrics, HUT and WULF look very expensive. HUT holds a significant amount of Bitcoin when compared against it's market capitalisation, so that may be why it holds some level of premium, from investors using it as a more direct proxy play, but WULF still looks VERY overvalued compared to the other miners.

Interestingly, by this metric MARA also looks fairly overvalued compared to some of it's peers. In recent months MARA has taken step to start buying bitcoin, which has increased the amount of bitcoin it holds as a percentage of it's market capitalisation, and similar to HUT made it a more attractive proposition to hold.

If we make the assumption that Bitcoin will experience price appreciation in the next 12 months, what miner am I picking?

Personally I like RIOT for these reasons:

• Already owns significant infrastructure to allow massive growth going forward
• Has a huge cash on hand to fund operations
• Holds a significant amount of Bitcoin (the second most of all the miners)
• Had an operating accident last winter which it hasn't managed to solve, but solving would create a lot of short term growth
• Potentially buying a rival (Bitfarms - RIOT currently owns 19.9%) which would open up lots of new markets and geographic diversification
• Takes part in demand response schemes in Texas which significantly lowers its energy costs

Making some assumptions on the costs of staff, depreciation, Bitcoin mined and power credits we can produce some valuation estimates based on the more concrete numbers we know.

Please bear in mind that these are fairly back of the envelope and simply using a very basic P/E ratio once all costs are collected and estimated.

Now compared to current share price we can establish potential upside

According to current estimates, RIOT has a P/E ratio of ~12.9.

Should Bitcoin experience a 'hype cycle' I would expect some expansion of this as investors scramble for exposure. Therefore, if we assumed an expansion to 15, or the Russell 2000 of ~25 and Bitcoin price of $100k could see significant upside potential.

Of course, all of this is based on the underlying assumption of growth in the valuation of Bitcoin and continued delivery of the growth plans for RIOT, which are all far from certain but worth undertaking as an exercise.

Please carry out your own research

[DISCLOSURE - Chaz holds $MSTR, $RIOT, in an ISA and $wStETH and $GALA in unsheltered positions]

---

Have a great weekend!

Chaz

P.S - Want to work with me? Reach out by replying to this email and lets chat