Riot Blockchain’s Underlying Market Is Even More Riotous

With the cryptocurrency sector reaching absurd heights, it’s fair to have skepticism toward crypto mining firms like Riot Blockchain (NASDAQ:RIOT). At one point this year, RIOT stock was up 373% since the January opener. Since then, the momentum has been worryingly negative.

An abstract concept image for blockchain and cryptocurrencies.
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Nevertheless, I’d like to start off by giving credit where it’s due.

Riot Blockchain could very well be the smartest company in the crypto mining space. As our own Muslim Farooque pointed out recently, management relocated the firm’s mining facility from Oklahoma City, Oklahoma to Massena, New York to lower production costs.

Farooque stated:

As a result, their energy utilization is currently at 43 megawatts at this time. Additionally, the company recently announced its plans to acquire Whinstone Rockdale to free itself from the constraints levied by Coinmint with regards to power and hosting.

Obviously, it’s a great move because the cost savings makes crypto-mining operations much more economically sensible. As you probably know, average electricity costs vary considerably by state. For example, the difference in your typical utility bill between Utah and Hawaii is slightly more than 3x.

Scale that up to your everyday corporate crypto mining operation and you’re talking serious savings. In turn, this could be a fundamental catalyst for RIOT stock.

But that’s not the only reason why I appreciate the intelligence of the move. Oklahoma City features four months where the average high is 85 degrees or warmer. In contrast, Massena only has one month where the average high is above 80 degrees. Generally speaking, lower ambient temperatures are better for intensive computing processes, which is another benefit to RIOT stock.

Also, Massena features very cold temperatures, with January and February averaging 6.5 degrees. In Oklahoma City, the coldest average low is only 27 degrees.

Cost Savings May Not Be Enough for RIOT Stock

As a West Coast person, I’m not at all familiar with how miserable it gets in other parts of the U.S. But from what I can tell, Massena may be the most ideal locale for a crypto mining facility outside of say Fairbanks, Alaska.

Between December through March, the lows average about 11.5 degrees. That’s cold. I’ve traveled to places in Europe where the temps dipped down to minus-10 degrees Celsius. This translates to 14 degrees Fahrenheit. That’s terrible for humans but perfect for crypto mining.

In addition, during the cold months, you can theoretically use your mining machinery as a heater. It’s the best of both worlds: warm your facility and generate massive profitability. With such a can’t-lose proposition, why the heck is RIOT stock losing?

Over the past five days, Riot shares are down 21%, whereas the benchmark Bitcoin (CCC:BTC-USD) price is down by less than 1%. Over the trailing month, RIOT stock hemorrhaged nearly 41% of market value. Bitcoin? It’s down just 6%.

You might be tempted to view this as pure market irrationality. While it’s possible that RIOT stock could swing higher from here due to the buy-the-dips mentality, its volatility could also be a warning. You see, the profitability potential for crypto mining only applies if the price remains elevated. If we have a crash, that will create a panic in the mining sector.

And that panic is likewise a possibility, in part due to the emergence of crazy digital assets like Dogecoin (CCC:DOGE-USD). While the headlines are all about Bitcoin, Dogecoin’s percentage gains put BTC to shame. Since many Bitcoin advocates got in early, it’s possible we could see a rotation out of the flagship crypto into some of these flavors of the week.

A Sell-Off in the Making

Naturally, if the above situation plays out, we could see DOGE rising at the expense of Bitcoin. But it’s not just the crazy cryptos that you must watch out for. Note that Ethereum (CCC:ETH-USD) has also made remarkable gains. At time of writing, ETH is priced above $4,000, a blistering all-time record.

On the other hand, Bitcoin is just over $56,000, more than 10% below its all-time high. Essentially, this suggests that the gains in the crypto market are becoming less accretive. Put another way, the rotation from one crypto to another may be resulting in cannibalization. This in turn could see some major crypto coins falling significantly.

If that happens, the sharp downside moves could trigger the first tranches of stop losses that institutional investors placed on their crypto holdings. Later, more triggering of stop-loss tranches could materialize, sinking various cryptos.

While it’s an extremely negative scenario, the reality is that it’s not completely improbable. Therefore, I would be careful about getting too involved with RIOT stock. Sure, the business is intriguing and management is making some smart moves.

But the underlying crypto market has become too crazy. RIOT could become a victim.

On the date of publication, Josh Enomoto held a long position in BTC, DOGE, ETH. He did not have (either directly or indirectly) any other positions in the securities mentioned in this article.

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.

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