On Thursday, activist short-seller J Capital Research published its investigation into the once-multi-billion dollar Bitcoin miner Hut 8. Investors immediately offloaded shares which dropped from above $9 when the report was published to $7 by the close of trading.
Hut 8 shed hundreds of millions of dollars in market capitalization within hours of J Capital’s report. By close of trading, shares had dropped by 22% from over $9 to $7.
J Capital listed a litany of red flags, including backing by penny stock promoters, all-in mining costs of $60,000 per bitcoin, dubious executives, multiple run-ins with regulators, and the risk of dilutive financings.
The firm’s public relations department has penned a rebuttal. However, shares are still trading below Thursday’s closing price.
Why J Capital’s allegations against Hut 8 matter
Hut 8 recently merged with US Bitcoin Corp. The combined company, now named Hut 8 Corp, uplisted to NASDAQ under the ticker HUT. J Capital coincided its actual short with its research report, acknowledging its financial conflict of interest in releasing the findings. By its own, prominent admission, “We are biased… We will profit if these stocks decline.”
Before the 2023 merger, Hut 8 traded as high as $82.50 per share. At press time, it’s trading around $6.80.
Notwithstanding this financial conflict of interests, many investors still pay attention to certain shortsellers. Wall Street mostly pays attention because J Capital reports have preceded several stock declines of -90% or worse.
Previous short calls by J Capital include Bit Mining Ltd. It revealed that Bit Mining, which was apparently started as a Chinese lottery operation and pivoted into digital assets, had been losing money since 2015 and overstated its earnings. It has declined from a 2014 high of $370 to below $4 today.
J Capital also has experience in researching Bitcoin mining companies. Indeed, it called out Bit Digital’s poor track record and run-ins with law enforcement and even questioned whether its mining rigs existed at all. It made its call in 2021 when Bit Digital was trading as high as $24.30. At press time, it sits below $2.70.
J Capital uncovered legal troubles and shady execs
J Capital investigated Hut 8’s curious merger with US Bitcoin Corp and discovered its past legal troubles. For example, it highlighted a million-dollar settlement in New York for alleged securities regulation violations. Hut 8 also paid a fine for noise ordinance violations to a municipality where it operated a mining facility.
Moreover, J Capital guessed US Bitcoin Corp would probably have gone bankrupt if it hadn’t been acquired. Its researchers also questioned the acquisition of assets from a now-bankrupt company, Compute North.
Its report also criticized management. For example, US Bitcoin Corp’s co-founder and former CEO Michael Ho is Hut 8’s current CSO and director. Ho is an ex-used car salesman allegedly involved in several pump-and-dump schemes, according to J Capital.
US Bitcoin Corp’s other co-founder Asher Genoot has become President of Hut 8. J Capital says Genoot has worked at a string of failed startups.
J Capital also flagged US Bitcoin Corp’s shareholders connected to several collapsed penny stocks. These Miami and Vancouver-based promoters received Hut 8 stock at generous conversion rates through the merger. For example, J Capital cited US Bitcoin Corp’s preferential right to 0.2 HUT common share per USBTC common share and 0.6716 HUT common shares per USBTC capital stock.
J Capital believes these shareholders add little value to the post-merger company besides selling pressure. Indeed, Hut 8’s share price declined soon after it announced the merger. It then declined even further after J Capital’s report.
Down 90% from all-time highs
J Capital Research set alarm bells ringing about Hut 8 after its successful bets against other public companies.
Now that post-merger Hut 8 has granted equity to questionable investors for assets of US Bitcoin Corp, J Capital believes selling shareholders plus dilutive financings will overhang on shares for some time to come.
So far, J Capital’s predictions have been prescient with Hut 8 shares trading below $7. The company was once a multi-billion dollar bitcoin miner but today trades at a $600 million market capitalization.
Edit 10:10 UTC, Jan 24: Article updated to specify that Hut 8 traded at $82.50 per share before its merger with US Bitcoin Corp.