Riot Blockchain Inc (NASDAQ:RIOT) is a cryptocurrency mining company that uses high-powered computers to create coins like Bitcoin. Each coin is mined using a mathematical algorithm meant to require heavy usage of DRAM, CPU, or GPU power.
Whether you are a Bitcoin fan or not, is Riot Blockchain stock a Buy?
The Castle Rock, Colorado-based company’s market capitalization is heavily influenced by the currencies it is mining. As cryptocurrency interest and pricing grows, so does the RIOT’s valuation. Of course, the opposite is also true.
In the early days, crypto speculators with a computer had a passing interest in mining Bitcoin. But these days, it’s only accessible to organizations with data center-like computing power. As the underlying blockchain grows, the necessary computations to mine a Bitcoin rise astronomically.
And Bitcoin is only one of thousands of cryptos. We examine the ledger to see if Riot Blockchain will grow investor profits or leave their portfolios deep in the hole.
Riot Blockchain Is Tethered To Bitcoin Price
Bitcoin is created through a process called mining, which is a digital way of recreating the process of mining for gold. Instead of a pickaxe and shovel, miners use computer hardware to solve complicated mathematical algorithms and generate a block reward of 6.25 BTC.
As the industry grew, so did the number of cryptocurrencies, and many people created new algorithms that target different components. Bitcoin is a GPU-intensive process that requires high-end graphics cards.
You may remember Bitcoin’s first meteoric rise in 2017 correlated to a shortage of Nvidia Corporation (NASDAQ:NVDA) graphics cards. This is because people expanded mining operations at the height of the frenzy.
In response, altcoins were created that relied on a computer’s CPU and DRAM for processing. This created a lane for retail miners to compete with the big mining operations. While all this happened, Riot Blockchain stepped into the industry.
The company was originally founded in 2000 and now uses a cache of 9,540 Bitmain Antminers working on Bitcoin. It’s taking advantage of the high BTC price to expand to what it hopes will be 37,640 S19 Pro Antminers generating the famed cryptocurrency.
It has some investors wondering if Riot Blockchain truly is investing in the shovel during the gold rush.
Is Riot Blockchain Stock A Buy?
Riot Blockchain had a market capitalization of around $3.33 billion in Q1 2021 as Bitcoin reached toward a price of $50,000 each.
The company mined 222 BTC in the third quarter of 2020, slightly lower than the 227 it mined in Q2, which shows how resource-intensive the business is.
At a price of $50k per BTC, that means the company generated about $11 million in profit each quarter. And it needs to continue adding Antminer rigs to its inventory to maintain a hash rate proportional to that of Bitcoin.
Investor sentiment toward the company was bearish through 2020, but things changed when analysts upgraded the company.
At the end of the day, whether you invest in Riot Blockchain and believe in its growth is entirely dependent on the cost of Bitcoin. The company’s valuation is based more on how much of the Bitcoin it can sell at what prices, and that highlights the investment’s risk.
When Bitcoin Falls, Riot Share Price Falls
Bitcoin mining is a capital-intensive endeavor, and Riot Blockchain lost $16.6 million in the first nine months of 2020. As highlighted, Riot’s market valuation depends entirely on the price of the bitcoin it mines.
When the price of bitcoin goes down, so generally does Riot share price.
This means the cost of mining bitcoin will continue rising while the potential profits get smaller. There’s a finite amount of BTC available, and once that limit is reached, there is no more need for mining.
And this creates problems in the future it needs to account for now. The company already spent $6.1 million deploying 2,500 Antminers in a week. It’s only temporarily going to give it an advantage in mining, and that assumes other mining companies aren’t also increasing their capabilities (which they are).
This is a competitive market, and even Bitmain is a rival. That company is taking bites out of both Riot Blockchain and Nvidia’s market capitalizations by creating its own GPU-heavy mining rigs. All of this could become unnecessary technology once the bitcoin supply dwindles.
Riot Blockchain Competes With Bitcoin Miners
Riot isn’t the only bitcoin mining company – in fact, the industry grew so fast that it took down some small-town electric grids.
Some competitors include NEM.io Foundation, Tari, and HashChain. And these are just the similar companies working directly in the niche.
Some companies are using crowdsourced mining pools to accomplish the same mission. Think of it as the Reddit vs Wall Street fight where a large pool of individuals combine resources to take on a large competitor, like a DDoS attack.
The future of bitcoin is unclear, and miners like Riot could end up being trillion-dollar companies or fizzle out into nothing.
Is Riot Blockchain Stock A Buy? The Bottom Line
Riot Blockchain is a Bitcoin mining company based in Colorado. The company buys and deploys a large-scale mining operation that includes thousands of high-powered machines that net around 220 BTC each quarter.
The company is spending heavily to increase its mining capabilities, but its value will always be dependent on bitcoin.
Although Bitcoin isn’t a commodity, its miners business models are similar to commodity producers. Oil and gold mining companies are dependent on the price of their respective resources. Bitcoin miners are no different.
This makes the company a risky play. You don’t know where the price of Bitcoin will be tomorrow, but it might be a smart bet to hedge an existing portfolio with some bitcoin exposure through Riot Blockchain.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.