Summary Riot Platforms has experienced a significant rebound in its stock, with a 119.5% increase since the last article. The company has managed to maintain somewhat stable mining production despite facing various challenges. Despite the recent surge in Bitcoin prices, short-term risks for Riot Blockchain still tilt downward. Riot Platforms ( RIOT ) has been going through its fair share of knocks recently due to the crypto bear market, but there are signs that its fortunes are changing. When I wrote this article, Bitcoin (BTC-USD) mining companies were very much in the mud due to the rapid shift to unprofitability brought about by the Bitcoin selloff that brought the reward associated with earning a token close to the direct costs associated with mining one for most major mining companies and way under the usual $30,000 mark for profitability for most miners. Since then, cryptocurrencies have rebounded sharply, and Bitcoin is now hovering around the $30,000 mark. Riot Platforms has benefited greatly from this move, and the stock is up 119.5% since my last article. Today, we will discuss what investors can expect going forward from Riot and see if this is still a good level to start the position. Production update Throughout the recent crypto bear market, we have seen a plethora of production disruptions brought about by various reasons. Apart from the Texas winter storms, Riot Platforms has been one of the more stable names in the space. This is due to its relatively strong balance sheet, the company's prudent approach to balancing liquidity, and the need to increase its mining fleet. We have seen the other side of this story in companies like Core Scientific (CORZ) that may have suffered due to management's decision to grow their fleet too quickly. This prudent approach made Riot a great choice for any investor looking for a Bitcoin mining company that would most likely weather the bear market. In times of hardship, mining companies tend to throttle production or sell tokens to maintain liquidity. We can see below that Riot has managed to keep mining productions more or less stable recently, but they have not been immune to the pressure to sell. We can see that over the past few months, the company has been selling most of what it has been mining, which isn't great. Month Bitcoins Produced Bitcoins Sold Net Proceeds Self-mined Bitcoins Held Deployed Miners Hash Rate Capacity December 659 600 ~$10.2M ~6,952 16,128 9.7 EH/s January 740 700 ~$13.7M ~6,978 82,656 9.3 EH/s February 675 600 Not given 7,058 87,264 9.8 EH/s March 695 675 ~$16.7M 7,072 94,176 10.5 EH/s Author's Estimates The recent move in Bitcoin prices has greatly improved the valuation of the company's treasury and added a layer of feasibility to mining operations that has been missing over the past few months. It is important to remember that Riot Platforms has had direct costs hovering around the $10,000 mark for some time, which means that there is a contribution to other operating costs for each token mined and sold above this level. Theoretically, as the company scales its operation, it should become more profitable as more tokens are produced to spread around the firm's fixed cost, holding constant difficulty rates. A New Look on the Inflation Story The Federal Reserve has made notable progress in its fight to tame inflation, which will be very welcome for cryptocurrencies. Bitcoin was (arguably) an unintended casualty of the Federal Reserve's fight to tame out-of-control prices. This led many to criticize Bitcoin's role as a hedge against inflation. This dynamic and the general fear of a crippling recession brought the token down to historic lows. We are now seeing some buying action in the space due to speculation that the Federal Reserve may pause soon and declare victory in the inflation battle. Data by YCharts I believe the celebrations may be premature, as inflation is still elevated following one of the fastest hikes in history. The Federal Reserve is likely to keep rates elevated for some time unless the economy really begins to roll over, as a return to surging inflation would be extremely unwelcome. Another topic that has been hot on the lips of crypto investors is the joint effort by BRICS nations to reduce global reliance on the US dollar. Many believe this may open the door to a central bank digital currency, which has been discussed at length in the media. It is difficult to see the US dollar losing its status as a reserve currency in the near term since there is no great unifying factor for BRICS nations apart from fear of US sanctions. There is also the fact that China has so far sweetened the deal for many of these nations, and it is difficult to see this kind of relationship happening in perpetuity. In any case, the argument put forward by the US dollar bears is that as the world rejects the currency, more and more US dollars will make it back into the domestic economy, which will cause hyperinflation. As of today, we have not seen a decrease in appetite for the US dollar so much as the willingness to transact in alternatives. It is also difficult to imagine these nations agreeing on a shared currency for an extended period of time, as each of them will want to print money as needed, and one could easily see conflicts arising from the fluctuations that would do to a relatively illiquid secondary reserve currency. But no one really knows how this story ends. If the US dollar faces a currency crisis, then it is likely that speculators will pour cash into Bitcoin and other tokens for perceived safety from the impending hyperinflation. If that were to happen, Bitcoin could ironically work out as an inflation hedge. Valuation and Forward-looking Commentary As we can see below, the company is trading at historic lows from a valuation perspective, but there is a good reason for that. Despite the recent move in Bitcoin prices, short-term risks are still asymmetrically downward. Data by YCharts We have also seen some truly horrific EPS numbers come out from the company relative to expectations. Seeking Alpha Unless Bitcoin continues its move higher, we will likely see further challenges down the line. But the biggest issue with the purchase here is the starting point. You see, Bitcoin miners tend to provide superior returns after big selloffs in the crypto space when compared to the Bitcoin token. For crypto bulls, this means that buying the ugly with these miners can lead to outsized returns. I made this point clear in my past articles, but the main issue is the starting price is much higher now, and it is perhaps better to purchase the token when the market is trending upward if you missed the move. Data by YCharts The negative variance makes sense when you consider that the mining companies often rely on dilution and external financing to fund operations when prices are unfavorable. While the supply of Bitcoin is being diluted constantly, the risk of a secondary offering still outweighs this effect, especially considering the implications increasing difficulty rates have on production costs for miners. The Takeaway To sum up, the Federal Reserve's recent strides in controlling inflation, along with ongoing debates about the potential diminishing role of the US dollar as a global reserve currency, have sparked renewed enthusiasm for digital currencies such as Bitcoin. Although Bitcoin mining stocks may yield higher returns following considerable market selloffs, today's elevated entry prices could make investing directly in the digital currency more appealing during periods of positive market movement. I rate Riot Platforms stock as a Hold.
