What happened

Shares of cryptocurrency-mining company Riot Blockchain (RIOT 4.01%) fell on Thursday as the price of Bitcoin (BTC -1.14%) keeps pulling back. In fact, something just happened to Bitcoin for the first time in three years and it could have investors reevaluating their assumptions about this space. As a result, Riot Blockchain was down 10% as of 3 p.m. EDT.

So what

As of this writing, the price of Bitcoin has pulled back roughly 18% from all-time highs reached earlier this month. Riot Blockchain mines Bitcoin. Therefore, traders tend to buy and sell Riot Blockchain stock based on Bitcoin's movements. With Bitcoin down today, it's logical to expect Riot Blockchain stock to fall as well.

A frustrated trader places his hands on his face with a down stock chart in the background.

Image source: Getty Images.

However, zooming out to take in the bigger picture, Riot Blockchain shareholders have a lot of optimism about the long-term price Bitcoin. Consider that even though it's now down over 50% from 52-week highs, Riot Blockchain stock still has a market capitalization over $3 billion. However, it only generated $12 million in revenue in 2020 -- that's an extreme valuation. But investors are willing to pay that price based on one assumption: The price of Bitcoin is heading much higher.

Consider that Riot Blockchain is already mining more Bitcoin than it ever has (196 Bitcoin in March), is increasing its computing power (called "hash rate") to mine even more, and holds 1,565 Bitcoins as of its latest update. If Bitcoin goes up enough, then there's a scenario where Riot Blockchain's valuation makes sense.

Stacks of physical golden coins display a symbol representing Bitcoin.

Image source: Getty Images.

Now what

Here's the potential problem Riot Blockchain investors are grappling with: Bitcoin is possibly losing its dominance. The term "Bitcoin dominance" refers to Bitcoin's share of the total cryptocurrency market. The entire cryptocurrency market is currently valued at $2.02 trillion, according to data from CoinMarketCap. Bitcoin's total market value is currently $999 billion -- less than 50% of the total market for the first time in three years.

Alt-coins like Ethereum and others have gained market share in recent days. If people are starting to replace Bitcoin with these other options, it could lead to further declines in Bitcoin's price and make the long-term outlook for Riot Blockchain's business less optimistic.

So is it time to hit the panic button? No, I don't think so. This article is talking about what has happened in recent days and what could happen if the trend continues. But the truth is this space has always been volatile and there are a lot of factors in play. That said, I believe it does illustrate some of the risks to both a Riot Blockchain and Bitcoin investment that one needs to be fully aware of before investing.