As the market for alternative assets heated up earlier this year, many investors found themselves trying to differentiate between the various investment options. Although there is a lot of buzz around nonfungible tokens and meme-based cryptocurrencies, it was the rise in Bitcoin (CRYPTO:BTC) that seemed to ignite the frenzy.
With the initial public offering of Coinbase and the prevalence of cryptocurrency miners, it can be hard to determine if one will prove a better investment than the asset itself. Let’s dig into one miner, Riot Blockchain (NASDAQ:RIOT), to better understand what the pros and cons might be.
Performance and correlation
For a company that mines Bitcoin, one would expect Riot Blockchain’s stock performance to be directly tied to the digital currency. Theoretically, the earnings the company generates are simply the value of the mined coins minus all of the costs that go into setting up and running the operation. Oddly, that hasn’t always been the case.
|Period||Change in Bitcoin||Change in Riot Blockchain|
Other than the past three months, the change in Riot’s stock price seems to be about 2.75 to 1 when compared to Bitcoin. The price of Bitcoin has been weak this month, falling 14%. In the same time, shares of Riot Blockchain have collapsed 37%.
Part of the short-term disconnect may be the number of shares outstanding. The company has issued a lot of equity to fund purchases of special mining computers, called Antminers. That dilution has undermined the stock price, dividing each owner’s stake across more and more shares.
|May 2020||34.54 million||N/A|
|November 2020||50.93 million||39%|
|February 2021||78.52 million||115%|
|May 2021||84.14 million||130%|
Similar to buying stock in companies that extract commodities like gold and oil from the earth, there are risks that have nothing to do with the price of what they are mining. Dilution is one of them.
One way shareholders can stay informed is by following the company’s earnings reports and subsequent conference calls. That’s not so easy with Riot. In 2018, 2019, and 2020, management filed a notification with the Securities and Exchange Commission (SEC) stating that it would not be able to submit its full-year report in a timely manner. Management stuck to the delayed schedule in 2021, going four months and 22 days between its third- and fourth-quarter reports. It skipped the SEC notice since the agency extended deadlines due to the coronavirus. To date, management has not hosted calls or offered question-and-answer sessions. That approach is understandable when shares are primarily held by one party. However, insiders currently own only 1% of Riot Blockchain. The lack of transparency should give investors pause.