By agreeing to backstop leases at a New York data center campus run by TeraWulf (WULF 2.46%), Alphabet (GOOG -0.67%) (GOOGL -0.69%) picked up some stock warrants that could translate into a meaningful equity stake in a company that mines Bitcoin (BTC -1.60%).
The internet search giant is not buying coins directly, and it isn't buying a mining company outright. But the economic exposure here is still real enough to matter for investors, so let's investigate what happened in more detail.
Image source: Getty Images.
Don't expect the balance sheet to change much
In short, Alphabet's Google agreed to support long-term lease obligations tied to a build-out at TeraWulf's Lake Mariner campus near Buffalo, New York.
In return, Google received stock warrants that, if exercised, would increase its equity stake in TeraWulf to roughly 14%, building on a previous backstop that gave it warrants that could give it an 8% stake if exercised. Alphabet's cumulative backstop commitment connected to the project now totals about $3.2 billion. For a company of its enormous size, with more than $95 billion in cash and cash equivalents, and short-term investments on hand as of the most recent quarterly earnings report, such a commitment is minor, and it doesn't signal any sweeping changes in strategy.
TeraWulf is, importantly, a U.S.-based Bitcoin mining business, though it has other operating segments as well, including artificial intelligence (AI) services and data centers. Alphabet is therefore not accumulating Bitcoin on its balance sheet, nor would its warrants, if exercised, imply that it holds or plans to buy the coin. If anything, it probably sees an advantage in having the option to own a stake in a player that provides the data and computing infrastructure it needs at industrial scale, with the mining activities being incidental in the context of the overall package.
But by accepting warrants issued by a Bitcoin miner, Alphabet is nonetheless positioning itself for equity-mediated participation in Bitcoin's economics, though at a small scale relative to its main operations.
After all, the value of such mining companies is tied directly to the price of Bitcoin and how much of it they can produce given their computing power.
So if Bitcoin's price went up by a lot, it would thus increase the value of TeraWulf, which itself holds and produces the asset, thereby increasing the value of Alphabet's non-controlling stake, assuming it opts to exercise the warrants to actually gain control of its equity at some point. An added advantage of owning a stake in a mining company rather than just buying Bitcoin directly is that companies can employ leverage to bolster their returns.
What it means for Bitcoin itself
If you are a Bitcoin holder, the signal from Alphabet's acceptance of TeraWulf's warrants is modestly positive.
A megacap platform company is comfortable with indirect exposure to the asset's ups and downs via a mining operator. That can help normalize the asset class for other big businesses evaluating their own exposure paths. Alphabet wouldn't be taking any warrants from a mining company if it thought the primary asset it produces is worthless or going to zero.
At the same time, this event is not something that you should think of as a strong buy signal. Even if Alphabet exercises its warrants, it isn't about to be an important player in Bitcoin mining, nor is it likely to become one in the future.
In other words, this is another data point that large, sophisticated companies are comfortable securing equity-based exposure to the Bitcoin ecosystem even if their shareholders might balk at getting direct exposure via buying and holding the asset. There are already quite a few data points in that set, but there's always room for more confirmation of a bullish trend.
