At a trading range of $1.93 to $79.50, Riot Blockchain (NASDAQ:RIOT) has all the volatility suitable for an active trader. The wild swings in bitcoin and other cryptocurrencies will decide where RIOT stock heads to, next. This would suggest that traders cannot predict what the upside potential is for Riot.
Despite the uncertainties in this mining firm, what are Riot Blockchain’s prospects like, assuming that cryptocurrency prices stabilize?
First Quarter Results Failed To Lift RIOT Stock
The recent downside in bitcoin overshadowed Riot Blockchain’s first-quarter results. The company posted mining revenue growing by over eight-fold at 881.1% to $23.2 million. Margins rose sharply from 40.4% last year to 67.5%. This led to a modest 9 cent share profit or a net income of $7.5 million. Chief Executive Officer Jason Les attributed the improved figures as “a direct result of Riot’s absolute focus on Bitcoin mining and growing its mining operations.”
Shareholders should expect Riot’s positive correlation with the value of bitcoin. In Q1, the company increased total mined BTC by 62% sequentially on a quarter-over-quarter basis. It mined 491 BTC, compared to 303 BTC in Q4/2020.
Riot has a strong balance sheet. It ended the quarter with record current assets. Plus, it holds no debt. It ended the quarter with $275.6 million as of Apr. 30. At 1,771 BTC on the balance sheet that traders could hold RIOT shares instead of BTC. Instead of paying a percentage of commissions on exchanges that support BTC, investors may trade RIOT stock instead. Similarly, Marathon Digital (NASDAQ:MARA) is similarly sized to Riot in market capitalization. The difference between the two stocks is that the short interest is almost 18% with Riot, compared to 13% for Marathon.
Opportunity and Risks
Besides relying on BTC prices, Riot offers gross margin expansion as its mining efficiencies rise. For example, new generation miners deployed this year should increase efficiency. This would lower selling, general, and (“SG&A”) costs while revenue rises.
According to simplywall.st, Riot is financially healthy. Conversely, the stock does not offer much future growth potential or value at current levels. On the chart, the stock tried a few times to hold the $50 and $60 level but failed. It may find support at the 200-day moving average. Still, the unpredictability of BTC’s price suggests that this analyst is guessing at what the stock is worth. According to TipRanks, one analyst has a $30 price target. Realistically, BTC has many macro unknowns that will affect prices.
Government regulations against cryptocurrency are an ongoing risk. Regulations will slow its mass adoption. Fortunately, few countries except China showed a willingness to crack down on bitcoin mining and trading activities. China’s SOS Limited (NYSE:SOS) is most susceptible to a crackdown.
Stalling has rate growth is a potential future risk. Riot forecasted total has rate capacity at 7.7 EH per second by Q4/2022. This assumes a full deployment of around 81,146 Antminers that it acquired from Bitmain.
Tax on Bitcoin Risk
On May 20, the US Treasury wanted cryptocurrency transfers of over $10,000 to be reported to the Internal Revenue Service. BTC fell by around $3,000 to below $40,000 that day. That kind of tax burden will severely slow the continued rise in BTC from here.
Despite all the uncertainties ahead for BTC and Riot Blockchain, the stock is worthwhile speculation. Momentum may quickly reverse course at any time. Bitcoin had a long history of plunging in the double-digit percentage in the last decade. That drop followed with a remarkable rebound.
BTC could rebound again, taking RIOT shares with it. When that happens is unknown. So investors should only hold a small position in RIOT or MARA, waiting for a reversal to the upside. Should that happen, the sharp rally could lift RIOT stock closer to yearly highs.
The opposite is true.
If bitcoin’s price momentum ended permanently, then Riot Blockchain will fade to the downside. It would risk falling to the single-digit at levels not seen since last year.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.