In early August, I proposed that Riot Blockchain (RIOT) was likely to appreciate in reaction to the apparent Bitcoin (BTC-USD) breakout. Since then, both Bitcoin and Riot are beating the market. I continue to anticipate a frenzied demand for both in 2021, much as did occur in 2017. Even though Riot is up around 30% in the past few months, the opportunity is still rather significant, and Riot may be cheaper now than it was in August, relative to the price of Bitcoin.
Bitcoin continues to outperform in 2020 for numerous reasons. Bitcoin’s structure halved the output earlier this year, dramatically reducing the flow of supply of newly available coins, while increasing the costs associated with mining. This ‘halvening’ of the Bitcoin block subsidy happens roundly every four years, and was in play when Bitcoin broke out in 2017.
Another apparent factor is that the COVID-19 pandemic is causing global action by governments, and has called into question many prior income streams. Such concern is likely the driving factor behind gold and silver price increases. This is probably contributing to Bitcoin’s appreciation too, and in a manner that was not a factor in 2017.
As is the case for gold miners, Bitcoin miners are likely to have leveraged moves to any significant price changes to the underlying commodities. There is a limited supply of Bitcoin miners or related equities that have a clear benefit from the possibly significant price appreciation Bitcoin may experience in 2021. There are few publicly traded Bitcoin miners and no large cap ones exist, or even mid cap ones.
If there are to be large cap Bitcoin miners in the future, Riot Blockchain (RIOT) has the potential to become the first domestic large cap Bitcoin miner. Riot Blockchain specializes in cryptocurrency mining, with a focus on Bitcoin. Riot also has investments in some private blockchain technology companies. Over the last year, Riot significantly increased its mining capacity by buying more miners.
Riot also recently entered into a colocation agreement with Coinmint to move their mining operations from Oklahoma City to Massena, NY. The company expects to improve margins by reducing energy costs. Coinmint is a digital currency data center in a former Alcoa Aluminum smelter facility in Massena, near the border with Canada. The transition probably caused various one-time expenses, but it is likely provide both better margins and a higher ESG score.
In the first half of 2020, Riot announced it would receive delivery of another 3,040 Antminers in the second half of 2020. On July 16, Riot announced it received the first 1,000 of those miners, and would have them deployed at the Massena location that week. Since August, though, the company has dramatically increased its miner acquisition rate.
In August and October, the company purchased thousands more S19 miners for delivery in 2020 and the first half of 2021. According to Riot’s last update, at full deployment, Riot expects to achieve 2.3 EH/s of total hash rate capacity, utilizing 73 megawatts of energy.
Riot projected hash growth rate: (Source: Riot Blockchain)
Also, Riot continues to maintain no long-term debt. Riot indicated that all their new miner purchases are being funded with available working capital. If Bitcoin’s recent increase stops or reverses here, Riot’s big bet on increased capacity next year is a huge mistake, but if Bitcoin does continue to appreciate throughout 2021 in a manner comparable to what occurred in 2017, Riot is securing a leveraged response to that appreciation.
Bitcoin is breaking out
Bitcoin is making another break out. Bitcoin last peaked in 2017. Many thought the speculative asset would die due to the bursting of that bubble, but Bitcoin endured. Now, once again, Bitcoin is in a strong uptrend that is following a halvening. Moreover, this time, precious metals and their miners are breaking out too.
As Bitcoin breaks out, so should Riot. If Bitcoin continues its current move, Riot will likely do so too. Riot is underperforming Bitcoin on this most recent leg up, but if Bitcoin can continue to appreciate, or even maintain its current range, Riot should inevitably follow it and break out of this recent range.
I believe that the current price of Bitcoin is sufficient for Riot to appreciate above $4, and exit its current range. Riot is likely to then be in a new range that will find $4 as support so long as Bitcoin does not decline. From there, if Bitcoin continues to rise, Riot should follow it, and the move should be leveraged.
Bitcoin is a speculative asset and any company that is focused on the accumulation of a speculative asset is itself a mere derivative of that speculation. While Bitcoin is filled with spectacular potential, there is also the possibility that it will be a spectacular failure. Any fatal defect upon Bitcoin shall be terminal to bitcoin miners like Riot.
(Source: Riot Blockchain)
The cryptocurrency industry is likely to receive continued regulatory scrutiny, and there are probably bad actors out there. I believe Riot is one of the stronger names from this perspective, at least going forward. Riot was already the subject of a SEC investigation, but Riot reported it was terminated earlier this year. That investigation should have prepared Riot for future scrutiny.
Riot also chose to dramatically increase its capacity in the first half of 2021, which is a major leap of faith here. Riot is clearly anticipating a similar increase to the price of Bitcoin over the next twelve months, but we can be wrong. This move will probably only make sense if Bitcoin can continue this recent trend. I think it will continue.
Riot is highly speculative and I would not invest more in Riot than I was comfortable losing. It is a leveraged bet upon Bitcoin that is made in the hopes it will continue the current move upwards and break out to new highs. Riot is one of few publicly traded bitcoin miners, and all of them are fairly small. Riot appears comparable to investing in a junior gold miner, which may also be a good investment over the next year, but Riot will be sensitive to Bitcoin.
There is an incredible scarcity of publicly traded Bitcoin miners, and Riot is likely the best known name to retail investors. It is also domestic. If Bitcoin can continue upwards and break out from here, I believe Riot will have a leveraged relative increase. I believe Riot shares are a good short term speculation at current levels. I also believe and that long term options (“LEAPS”) could perform exceptionally well from here.
Disclosure: I am/we are long RIOT, BTC-USD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.