As Bitcoin (CCC:BTC-USD) prices have remained strong, so have the prices of crypto mining plays like SOS Ltd. (NYSE:SOS). SOS stock popped last month but now is down more than 50% off its all-time highs, and that might not even be enough.
Even after the release of two scathing short reports, shares remain far above where they were at the start of 2021. Initially, the short reports did cause SOS stock to dip, as seen from its 23% decline on Feb 26. Yet, so far this negative development has little made little impact.
Does this mean there’s nothing to worry about? That the shorts are just distorting the truth to make a bear case? Not so fast. Chalk up Mr. Market’s indifference to continued “meme stock madness.”
It’s cooled off a bit since early February, but speculative hype continues to play a role in keeping this stock at its current inflated prices.
In other words, speculators are choosing to ignore this stock’s many warning signs. Also, even if things are on the up-and-up with SOS, legitimacy doesn’t guarantee it’ll continue to be a winner.
Given that crypto mining is much harder than it looks, this company could stumble down the road. To top it all off, what if crypto prices crash from here? Similar to the situation with other mining plays, its recent outsized gains could quickly shift to outsized losses.
So, what’s the play here? Just like other names in the sector, it’s too risky to bet against it right now, but that doesn’t mean it’s a buy. Given this sector’s riskiness, and the possibility the shorts are correct in calling this company out, avoid SOS stock.
SOS Stock and Its Many Red Flags
As InvestorPlace Markets Analyst Thomas Yeung broke it down March 1, short reports from Hindenburg Research and Culper Research allege the China-based crypto miner is nothing but a house of cards. That is to say, its crypto mining operations aren’t what they claim them to be.
Hindenburg’s report, issued as a series of Tweets, points out several major discrepancies. Culper’s 19-page report goes into more detail.
One major allegation involves concerns regarding a photo of its mining rigs. Another one entails the dubiousness of its recent purchase of more crypto mining equipment.
At a time when rivals like Marathon Digital (NASDAQ:MARA) and Riot Blockchain (NASDAQ:RIOT), have waited months to get their hands on new miners, SOS supposedly got theirs in a matter of weeks. In short, Culper’s conclusion is that the company is engaging in these activities to support a “pump and dump” of SOS stock.
Despite the evidence supporting their claims, why have investors shrugged off allegations from the short-sellers? SOS’s rebuttal (via a press release) likely played a role, but “meme stock madness” and the continued enthusiasm for crypto mining stocks has likely been the larger factor.
Bitcoin’s continued strength may save the day for SOS in the near-term. Yet, that doesn’t make a great opportunity. Between the risk that Hindenburg and Culper are on the mark, and the possibility of an eventual crash in crypto mining stocks, going long today doesn’t look like the best move.
Crypto Mining Plays Remain Risky
As I discussed in a recent article on Marathon Digital, betting against this hot sector isn’t worth it until Bitcoin trends lower.
Ignoring the allegations against SOS stock, for now, let’s assume everything’s on the up-and-up with the company. Even if its mining operations are legitimate, this industry is far from being a license to print money.
The difficulty for mining BTC is set to rise over time, and with the capital-intensive nature of the business, this company could experience hiccups.
Said hiccups could come from mining less crypto than projected or, worse yet, from falling crypto prices. No matter the cause, though, the results could be detrimental to the SOS stock price.
Given the high operating leverage with crypto miners, this stock has posted outsized gains relative to the underlying performance of Bitcoin. On the flip side, a crypto crash would fuel a massive sell-off resulting in outsized losses.
Bitcoin Is a Better Option Than SOS Stock
Stocks in this sector may have outperformed the performance of Bitcoin itself, but that doesn’t mean it’s wise to dive into crypto mining stocks today. As I put it in my recent article on Marathon Digital, buying cryptos directly remains the better way to play this trend.
Bottom line: even though crypto mining stocks overall are risky SOS stock takes the cake with the aforementioned red flags, so stay away.
On the date of publication, Thomas Niel held a long position in Bitcoin.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.
