From an obscure concept to one of the biggest stories — perhaps the biggest story — in finance today, Bitcoin (CCC:BTC-USD) has captured the collective imagination as few assets have. And on paper, that bodes well for Riot Blockchain (NASDAQ:RIOT), a cryptocurrency mining firm that aims to become one of the largest and lowest-cost producers of BTC in North America. But it might as well be RIOT stock that’s the true star of this show.
Yes, Bitcoin triple from $20,000 to almost $60,000 — all in a matter of weeks. Blink your eyes and you risked missing an opportunity to buy at a lower price as BTC rocketed up the charts. But percentage wise, the king of cryptocurrencies has seen better. Between mid-December of last year till Feb. 21 of this year, Bitcoin delivered close to a 3X performance.
However, that’s nothing compared to RIOT stock. During the same time frame, shares went up more than sixfold. And over the trailing year, the crypto miner delivered stakeholders nearly 4,800% returns. My only regret with Riot Blockchain is that I should have invested my money there. While I’ll never criticize Bitcoin, its trailing-year 383% performance is tame by comparison.
Despite its enormous upswing, there’s an argument to be made that RIOT stock can move even higher. In prior Bitcoin runups, early adopters primarily moved the cryptocurrency complex. Today, well-heeled investors and mainstream corporates — most notably Tesla (NASDAQ:TSLA) — have piled into BTC and presumably other major crypto coin alternatives or altcoins.
Finally, the virtual currency complex has the legitimacy that early proponents were always seeking. And that makes RIOT stock all the more compelling. Fundamentally, the crypto-mining business is incredibly risky because you must expend substantial energy for the hope, not guarantee, of acquiring blockchain reward tokens for your effort.
But with the big boys entering the space, that should help buttress the digital market … right?
Alphas May Produce Beta for RIOT Stock
Certainly, alpha dogs piling into any sector is good for that market or industry’s early adopters. Frankly, they have the funds and influence to cause massive price swings. However, this process also works both ways, which is why I’m concerned about RIOT stock.
This has nothing to do with me being bearish about Riot Blockchain’s business model. Longer term, RIOT stock could indeed be a buy. But I’d much rather wait for a reasonable price than to wade in at these elevated levels (at time of writing, the shares were trading hands at just under $65).
While we can’t say for certain which major institutions bought Bitcoin at what prices, we do know that these financial apex predators came into the game late. Further, we also know that these folks hate losing money.
So when they see red ink splashing across their trading desk, their first instinct isn’t to go into “diamond hands” mode. Indeed, that’s probably what these major players tell other folks to do so that they can’t dump out at favorable prices.
Moreover, large players in Bitcoin can quickly turn a blessing into a curse. For instance, Tesla’s Elon Musk a few weeks ago helped spark the gargantuan Bitcoin rally to near $60,000. But recently, Musk lost his status as the world’s richest person when TSLA shed nearly 9% on the Feb. 22 session.
Which provokes the question: What happens when companies like Tesla, which have significant amounts of Bitcoin in their corporate holdings, incur severe market losses? On top of that, what if those companies suffer fundamental setbacks, such as revenue erosion or unexpectedly larger expenses?
Personally, I don’t see these institutions diamond-handling their portfolio down from $50,000 to $40,000 to $30,000 or whatever is the case. Instead, they’ll sell to get something on their pricey investment.
And when institutions sell, the volatility can get real ugly, real quick.
Read the Room
While I’ve been writing these words, I’ve been watching with fascination the Bitcoin price steadily lose key round-number thresholds.
For full disclosure, I’ve was selling Bitcoin and many other cryptocurrencies when BTC was around $54,000. The failure to reach $60,000 was telling. Since then, it’s been nothing but a sea of red ink and a few trades of bullish desperation.
While I’m a long-term BTC bull, I’m also a realist. My theory is that when the major players see how close Bitcoin is to dropping to and below their entry points, they’re going to dump out. Remember, back in late 2017, BTC was on the brink of $20,000.
At its low point afterwards, the crypto coin dropped to around $3,500. Folks, that’s more than an 80% implosion in roughly 18 months. Those are scary stats — and there’s no way major institutions are going to risk that calamity.
If you want my take on RIOT stock, I’d say sell it. Sell into strength or sell it into weakness. Just get out of it (for now) because the current ugliness in the crypto space will ripple into the mining arena at breakneck speed.
On the date of publication, Josh Enomoto held a long position in BTC.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.