Riot Blockchain Inc. (NASDAQ:RIOT) stock investment is a bet that the Castle Rock, Colo. company can mine Bitcoin (CCC:BTC-USD) more efficiently than its competition. An investment in the RIOT stock is also a bet that Bitcoin has staying power, and will continue its upward trajectory.
Riot Blockchain mines Bitcoin, so a critical question is how much Bitcoin can it mine? Fortunately, investors can answer this question with relative ease.
A recent press release laid out the company’s mining capability expansion plans in detail:
“Riot’s scheduled deployment of miners under contract to date, has our operational hash rate capacity expanding to 1.3 EH in Q1 – 2021; 2.4 EH in Q2 – 2021; 2.8 EH in Q3 -2021 and 3.8 EH in Q4 – 2021.”
Riot Blockchain doesn’t clearly lay out the costs and revenues it expects from its Bitcoin mining operations based on these projected exahash rates, but we can understand its operations to a degree. Ultimately investors want clearly defined numbers. One company in the space that does a good job of this is Bitfarms (OTCMKTS:BFARF)
A recent press release from the company indicates very clearly that the company produces nine Bitcoin daily, $450,000 in daily production value, and a cost to mine Bitcoin of $7,000/Bitcoin.
Through the first nine months of 2020 Riot Blockchain mined 222 Bitcoins. The company recorded cryptocurrency mining revenue of $2.4 million and $1.3 million in cost of revenue during that period. The average price of Bitcoin during that period was $10,823. We don’t know what price the company sold at, but there was a positive margin.
I think it is safe to assume that those numbers will improve based on Bitcoin’s rising price and Riot Blockchain’s rising mining capacity.
Does it make sense though to invest in a Bitcoin miner rather than simply investing in Bitcoin itself?
A Closer Look at RIOT Stock
Just as a gold mining operation is bound by the value of the gold it mines, so too is Riot Blockchain. This implies that RIOT shares are bound to the price of Bitcoin.
However, that doesn’t mean that the two should necessarily walk in lockstep. To prove this to yourself, simply check the price movement of Bitcoin over a given period, the last month for example, to that of RIOT stock. They aren’t the same.
My point here is this: eschew any advice that roughly indicates RIOT shares will mirror Bitcoin shares. There are many more factors to consider.
The question here is analogous to asking whether to buy gold or buy gold miners when establishing a gold position.
The benefit of the gold miner, which should hold true for Riot Blockchain as a Bitcoin miner, is that it’s leveraged. The debt and financial leverage that mining operations have give them short term advantages.
So, when gold prices rise, gold mining stocks tend to rise faster than the commodity underpinning them due to leverage.
You might be reading this thinking, “Great! Riot Blockchain can potentially provide even greater reward than Bitcoin by the above logic.” But greater reward is always countered by greater risk. That is an immutable law of finance and economics. A few of the risks inherent to Riot Blockchain are mining failure, management risks, and financing issues.
The company may not be able to mine enough Bitcoin to justify its operations. Or perhaps another competitor will be able to do so in a more efficient manner. Perhaps management will prove inept.
If financing dries up, companies often have to issue more shares to raise capital. In that case, dilution becomes a concern. This is a real concern because traditional lenders including banks are not lining up to finance risky cryptomining operations.
In the long term, Bitcoin should be a better investment than Bitcoin mining operations including Riot Blockchain.
Bitcoin mining operations are certain to see lots of interest. I would stick with Bitcoin though rather than the companies mining it. Bitcoin is already inherently volatile enough.
Mining operations can compound the volatility underlying the commodity they seek. Of course, they can compound the returns as well. I’d stick with Bitcoin in any case, and avoid RIOT stock.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.