Riot Blockchain (NASDAQ: RIOT) Stock the Other Bitcoin Play

Cryptocurrency mining company Riot Blockchain, Inc. NASDAQ: RIOT stock has rallied with the meteoric rise of Bitcoin (BTC). The Company’s primary business is to mine Bitcoins, just like it’s peer Marathon Patent Group NASDAQ: MARA. Buy as many mining rigs also known as miners to mine around the clock. If Bitcoin was gold, then these two companies could be viewed as junior miners. As they continue to bulk up with more miners, the potential output improves as long as Bitcoin prices continue to surge. The expenses associated with mining cryptocurrencies lies not only with purchasing the miners with the most advanced GPUs, but also the massive amounts of electricity needed to operate these specialized computer servers. High risk-tolerant investors and nimble traders that believe Bitcoin will continue to rise can monitor opportunistic pullback price levels to take speculative positions and trades.

Bitcoin Mining

Riot had 7,040 miners deployed as of November 2020.The Company ordered additional next-gen S19 Pro Antminers to be delivered for a total fleet of 20,140 miners by June 2021. The Company estimates total operation hash rate capacity of 2.007 EH/s with the efficiency of 32.65 (+/- 5%) joules per terahash (J/TH) consuming 64 megawatts (MW) of electricity. The hash rate represents the number of times the network attempts to “solve” the complex mathematical puzzle per second in an attempt to successfully hash blocks of verified transactions before being added to the blockchain. The 2.007 EH/s represents 2.007 quintillion attempts per second. While the initial impression of just buying more miners to bolster the hash rate would proportionately improve output is a not true representation.

Increasing Costs and Difficulties with Mining

As more miners are deployed globally, the difficulty rises proportionately. Bitcoin is structured to adjust the difficulty every 2,016 blocks. Block halving cuts the creation of new Bitcoins in half and the payout for successfully mining a block. For example, in 2009, miners were rewards with 50 Bitcoins for a successfully mining a single block. That has since dropped to 6.25 Bitcoins and will continue to be cut in half every 210,000 blocks, approximately every four years. This tends to spike prices as the rate of new Bitcoin supply drops in half. As of Jan. 9, 2021, there were approximately 18.596 million Bitcoins in circulation. The total Bitcoin supply is capped at 21 million, which may occur around year 2040. Therefore, having next-gen miners ordered and set to arrive months to a year later ensures the costs for mining rises due to the increased complexity of the equations which will require higher hash rates. The more mining rigs being employed, the more difficult it gets to mine blocks. The global arms race for growing and deploying new fleets of miners contributes to proportionately raise the difficulty, expenses and payout from mining. Rising Bitcoin prices can justify the effort, but if prices collapse, the costs outweigh the rewards with time.

Q3 2020 Earnings and Update

On Nov. 9, 2020, Riot released its third-quarter earnings report for the quarter ending in September 2020. The Company saw total revenues of $2.4 million with operating losses of (-$0.04) EPS, beating expectations by $0.04. On Dec. 4, 2020, the Company filed for a $200 million mixed securities shelf offering for working capital to fund purchases of more miners.

Regulatory Risks

More regulatory scrutiny can be expected with cryptocurrencies with governments around the world. However, the incoming Treasury Secretary Janet Yellen has appeared to be open and accommodative to the cryptocurrency markets. Riot also cleared a two year SEC investigation on Jan. 30, 2020, which was originally started in April 2018. The SEC concluded its investigation with no enforcement action. 

Pegged to Bitcoin Prices

Since Riot stock has moved historically with the price of Bitcoin, speculative investors have been piling into the shares on the rise of Bitcoin. While there has been a disconnect between reality of fundamentals and expected profitability, Riot stock tends to move in parallel with Bitcoin prices. Bitcoin saw its price break through and hold the $20,000 level for the first time causing prices to jump 40% in December 2020. Bitcoin prices aren’t pegged to many instruments, but the scarcity factor combined with FOMO is driving prices. The institutional stampede was triggered by investments from public companies like PayPal NASDAQ: PYPL and MicroStrategy NASDAQ: MSTR investing $1 billion in Bitcoin. The lack of pattern day trading (PDT) rule restriction and 24/7 around the clock trading enables Robinhood traders full access. However, some brokers are raising account minimums for new crypto traders to slow down the surge of newbies. This is uncharted territory and only high-risk speculators and nimble traders should monitor opportunistic pullback levels on Riot Blockchain for exposure.

 RIOT Opportunistic Pullback Levels

Using the rifle charts on the weekly and daily time frames enables a more precise near-term view of the price action playing field for RIOT stock. Keep in mind that RIOT correlation with the price of Bitcoin can diverge, so it’s critical not to chase prices. This is an extremely risky stock with thin fundamentals so only the nimblest traders or high-risk tolerant speculators should even consider trading. The weekly rifle chart is uptrending with the weekly 5-period moving average (MA) near the $15.69 Fibonacci (fib) level.   The stock has popped so fast that the MAs are just trying to catch. The weekly upper BBs were surpassed at $22.48. The daily market structure low (MSL) triggered above $9.89. The daily rifle chart has also spiked through its upper BBs at $26.88, but be aware if shares fall below, then a reversion sell-off is highly likely with a market structure high (MSH) trigger forming. RIOT shares were trading in the single digits in mid-December, so a deep reversion is highly possible especially if Bitcoin prices fall or RIOT decouples with it. The opportunistic pullback levels are at the $15.69 fib, $13.97 fib, $12.80 fib, $11.56 fib and the $9.15 fib. It’s prudent to monitor prices of Bitcoin and peer MARA when trading RIOT.