The madness has a taken a breather in recent weeks. But crypto plays like Riot Blockchain (NASDAQ:RIOT) stock remain popular among investors. Shares in this miner of Bitcoin (CCC:BTC-USD) have produced tremendous gains since last fall when the popular cryptocurrency began its epic run to all-time highs.
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But, with BTC prices appearing to top out, the underlying factor behind this stock’s 15x-plus move since Nov. 2 may be finally running out of gas. This is bad news for Riot.
Why? As I’ve discussed when talking about another crypto mining play, Marathon Digital (NASDAQ:MARA), outsized price moves are a double-edged sword for this space.
If Bitcoin is trending higher, that means even larger gains for crypto miners, given the cost of mining remains relatively fixed even if prices go up. However, outsized gains in a crypto market means possible outsized losses in a crypto bear market.
It’s a bit too early to say we’ll see a repeat of the crash experienced in this asset class back in 2018. Yet, it’s still something to be concerned about. Sure, the smart money has moved into crypto in a big way. Inflationary fears make dollar alternatives like BTC look much more appealing.
On the other hand, as this Forbes contributor broke it down, market sentiment appears to be the primary driver for Bitcoin prices. If market participants continue to become more risk-averse, a crypto pullback could be around the corner.
And with stocks like this one an even riskier way to play the crypto trend, there’s good reason to stay away for now.
RIOT Stock Versus Its Rivals
Riot Blockchain has been in the mining game longer than rivals Marathon Digital, and red-flag laden SOS Ltd. (NYSE:SOS). However, until now this first-mover advantage hasn’t made that much of a difference.
Sales have only recently started to take off (estimated sales of $158.6 million in 2021, versus $10.4 million in 2020). And while it could soon materially increase its Bitcoin production capacity (once its new mining hardware is deployed), based on sales projections ($286.1 million), Marathon’s set to become the larger player in the space.
In short, there’s nothing that makes Riot Blockchain a stronger choice for exposure to this trend. Sure, that doesn’t completely destroy the bull case. If BTC continues to climb, names like this one will likely see additional gains. But like I mentioned above, the big concern here is the risk of lower crypto prices.
The nearly four-fold surge in BTC prices since November fueled a surge many times that for RIOT stock. But on the flip side, a double-digit correction in the underlying cryptocurrency could produce an even greater loss for investors buying this stock today.
Why Mining Stocks are Riskier Than Bitcoin
It may be less complicated to go out and buy a crypto mining stock versus buying cryptocurrency. But don’t take this greater accessibility to mean it’s your less risky option. Stocks in this sector make outsized moves relative to the underlying price of BTC. If trends reverse course, results will be outsized, but in the wrong direction.
The jury’s still out whether Bitcoin is just about to crash. Some experts in this alternative asset are starting to ring the warning bells. We may not see the dramatic downturn experienced in 2018-2019. During that timeframe, the cryptocurrency fell more than 80% from its then-all time high of $20,000. However, even a pullback of 20% to 30% could produce far greater losses for RIOT stock.
But that’s not all. Even if prices hold steady from here, there’s another factor that should make you bearish about chasing this recently hot sector. I’m talking about increasing network difficulty. Over time, it’s required greater levels of computing power to mine BTC. This means mining costs (computing hardware, electricity) will continue to rise. Also it may result in names in this sector falling short of the aggressive growth projections they’ve touted to investors.
Putting it simply, Bitcoin is risky but crypto stocks are riskier. Don’t let the ease of buying them fool you into believing it’s the opposite.
The Bottom Line
Investors in Riot Blockchain who got in when BTC was holding steady in mid-2020 have seen jaw-dropping gains over the past few months. But those who missed out shouldn’t try to make up for lost time.
Crypto may not be just about to crash. But, with many concerned prices have peaked in the near term, there’s more to suggest lower rather than higher prices for this stock over the next few months.
Add in the other factor that dampens the bull case for crypto miners (rising difficulty rates), and it’s clear the best move is to skip out on RIOT stock for now.
On the date of publication, Thomas Niel held a long position in Bitcoin.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.