Hindenburg Analysis and Culper Analysis launched scathing reviews on Friday on SOS Ltd (NYSE:SOS), a Chinese language cryptocurrency mining firm. Each brief sellers claimed that the SOS share was a “Pump and empty” system that used faux addresses and doctored images of crypto miners to create an phantasm of success.
SOS inventory initially sank 25% that day. However like Bitcoin (CCC:BTC) going again over the weekend, SOS bounced again even stronger than earlier than, to the delight of shareholders. Quick sellers, in the meantime, suffered staggering losses. With an SOS backup over $ 6, what ought to common buyers do?
The reply is easy: keep a zero place in SOS and discover one other firm to purchase or promote brief. Whereas SOS Ltd could seem to be a tempting goal to play, its faltering enterprise may recuperate if Bitcoin costs rise. In the event you determine to brief promote SOS shares, remember to shut your danger by shopping for Bitcoin name choices. SOS could have deceived buyers, however its shareholders may nonetheless have the ultimate say.
SOS Inventory: a salesman’s dream
The Bitcoin mining business has created many priceless investments, together with a few of my private favorites. However the rush for wealth has additionally allowed marginal companies to sneak in. These much less respected firms could look worthwhile on paper, however many are feeding off the investor frenzy, passing off rising crypto costs as revenue whereas dropping cash on fundamental mining operations.
In 2020, the SEC billed 20 executives and buyers of Riot blockchain (NASDAQ:RIOT) for market manipulation. Though RIOT’s inventory has since recovered, it casts a protracted shadow over the Bitcoin mining business.
SOS may have taken this fraud to a fair larger degree.
Two respected brief promoting corporations Hindenburg and Culper Analysis took a more in-depth have a look at SOS Ltd on Friday and hated what they discovered.
Paperwork filed by the corporate with the SEC, for instance, listed a lodge room as the corporate’s headquarters. Its SEC filings additionally made it appear to be the corporate was shopping for mining rigs from a bogus shell firm.
However the icing on the cake was the damning pictures that SOS had posted on their “mining rigs”. Culper’s eagle-eyed researchers shortly observed that SOS ” miners’ weren’t the A10 Execs the corporate claimed to be the proprietor. As a substitute, these have been images of the A1066 miners from Avalon. Hindenburg went even additional and located the authentic pictures of the SOS web site belonged to a reputable rival RHY.
It would not be the primary time brief sellers have accused a Chinese language firm of those sins. Earlier this month, EHang, a standalone aviation firm, noticed its shares drop 60% when investigators overheard the corporate itemizing faux workplace addresses and check websites.
Don’t bypass SOS but
Traders ought to, nonetheless, train warning. Bitcoin mining firms have extremely excessive working leverage, a measure of the worth sensitivity of earnings. The overhead prices of those companies – which embody equipment and sufficient electrical energy to energy all Argentina – implies that even small will increase in Bitcoin costs can drive up earnings. An even bigger crypto bump, in the meantime, may see new billionaires getting hit.
SOS, in the meantime, remains to be a relative minnow within the blockchain mining business. Its $ 800 million market cap is lower than 1 / 4 of its Riot Blockchain rivals and Marathon Patent Group (NASDAQ:MARA). Its 15,645 miners on order, in the meantime, are anticipated to offer the corporate simply over half of Riot’s. 1.06 exhash per second (EH / s) extraction fee.
In different phrases, SOS inventory is affordable. On the idea of the manufacturing capability worth alone, the stock may improve 2.0-2.5 instances because of a valuation hole.
That makes bypassing SOS a dumb race. If Bitcoin rises to $ 75,000, SOS inventory may see a 5x to 10x return, forcing most naked shorts out of positions. Put choices are costly too, with bonuses for January 2022 approaching two-thirds of the full worth of the inventory.
Find out how to play SOS Inventory?
These trying to benefit from the SOS motion nonetheless have restricted choices.
The chance of brief positions – assuming you may nonetheless discover shares at an inexpensive worth – may very well be offset by out-of-the-money name choices on Bitcoin. This could the entire sudden cushion the rise in crypto costs dragging SOS with it.
Lengthy-short methods may additionally work, however this assumes that valuation gaps is not going to shut. UK primarily based Argo block chain (OTCMKTS:ARBKF) is a less expensive choice, nevertheless it’s nonetheless dearer than untested SOS.
Lastly, buyers may ignore SOS and purchase extra sturdy cryptocurrency firms as an alternative. Pay Pal (NASDAQ:PYPL) and Sq. (NYSE:SQ) each seem poised to revenue from the adoption of Bitcoin, whereas Coinbase may grow to be the following Fb (NASDAQ:FB), in line with bull market commentators.
Both approach, one factor is for certain. Till SOS Ltd can clear its identify, it’s higher if buyers shun this doubtful firm, not stroll.
As of the publication date, Tom Yeung doesn’t maintain (neither instantly nor not directly) any place within the securities talked about on this article.
Tom Yeung, CFA, is a Registered Funding Advisor whose mission is to carry simplicity to the world of investing.