Bitcoin has been an extremely lucrative asset for those who invested when it first took off. Even if you had bought as late as four years ago, and simply held on, you would be looking at a very good return. However, since early 2021, bitcoin has been a lot more volatile, prone to large rises and falls.
Owing to this volatility, many people have turned to bitcoin mining – the process of using brute computer power – to unlock more bitcoins. However, even this is starting to become unprofitable, which is bad news for bitcoin miners such as Riot Platforms (Nasdaq: RIOT).
There are several big problems with bitcoin mining. In order to protect the value of bitcoin, the designers set a limit to the total number of bitcoins that can be unlocked, with the amount of effort to unlock each bitcoin increasing at regular intervals the more that bitcoin is mined.
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This means that companies engaging in bitcoin mining have to keep increasing their amount of processing power, which requires large amounts of capital investment. This, in turn, requires more and more energy, which is controversial at a time when there is a major emphasis on trying to reduce carbon emissions.
The problem with Riot Platforms
Perhaps the most pressing problem is the increasing amount of competition. As short seller Kerrisdale Capital points out, bitcoin mining is global in nature, with miners from around the world competing to mine bitcoin ever more cheaply.
Even miners in areas like Texas (where Riot is located), which is regarded as the most bitcoin-friendly part of the US thanks to relatively light regulation and cheap energy, are finding it difficult to compete with rivals from Africa and South America, which have much lower labour costs and can access cheap Chinese equipment more easily.
As a result, even as bitcoin soared, Riot has struggled to make money. It has made a loss in five of the last six years (only in 2023 did it manage to produce earnings). While it hopes to make a small profit next year, even the most optimistic estimates have it trading at 58 times 2025 earnings, the sort of valuation you would associate with a successful company, not one bleeding red ink.
The losses, combined with the constant need for capital to upgrade equipment, have forced the group to keep issuing additional shares, diluting shareholders – usually a sign of a company in trouble.
Given these fundamental problems, it is hardly surprising that Riot’s shares have done poorly recently, suggesting that they have further to fall. They are trading well below both the 50-day and 200-day moving averages and have also lagged the wider stock market; they have halved since December. I would therefore suggest that you short them at the current price of $7.20 at £200 per $1. I would put the stop loss at $12, which would give you a total downside of £960.
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