What happened
Shares of Bitcoin (BTC 3.46%) mining company Riot Blockchain (RIOT 10.13%) stock charged 22.9% higher in March. The stock benefited from a 24% increase in the price of Bitcoin. The company also reported quarterly earnings that showed phenomenal revenue growth along with margin improvement. The icing on Riot's cake was regulatory boosts from the U.S. and Europe.
So what
Everything trended in the right direction for Riot Blockchain last month. More than 85% of Riot's revenue was derived from mining last year. That source of revenue rose to $184 million in 2021, compared to only $12 million the prior year. Its cost-of-mining revenue dropped to about 25% of the top line, an improvement from 50% the prior year. It's also layering in hosting and engineering revenue, as it allows third parties to mine Bitcoin with its infrastructure. These services were made possible through Riot's May 2021 acquisition of Whinstone, North America's largest Bitcoin mining facility.
Image source: Getty Images.
Regulatory news was on the cryptocurrency stock's side last month, too. First, the European parliament voted against banning proof-of-work cryptocurrency mining activities, which are known to consume huge quantities of energy. This wasn't directly relevant to Riot, which isn't particularly exposed to European mining regulations, but it created positive momentum for the crypto industry overall. Another boost came from President Biden's executive order to create a regulatory framework for digital assets. This seems to signal the government's support of the role cryptocurrency can play in the economy. The ultimate impact of that news on Bitcoin and Riot remains to be seen, but the immediate reaction was positive.
All of those factors played a role, but Riot's financial success is ultimately determined by the price of Bitcoin right now. Its stock price reflects that fact. The company's cash flows and profitability are highly dependent on Bitcoin's price. Bitcoin charged upward in the back half of March after a few difficult weeks, so its mining operations should have become more profitable. Riot's share price rose along with it.
Now what
Riot Blockchain is an emerging leader of a new industry, and it's not profitable yet. It has tons of promise, but it has a long way to go until that potential is realized. Competition, regulation, and volatile Bitcoin prices are all legitimate threats to Riot's fundamentals in the long term. Investors can't just ignore that.
Even if things go really well for Riot, investors will have to endure some volatility along the way. Cryptocurrency markets have been notoriously volatile as investors and speculators try to figure out where this disruptive tech is going. Riot has substantial fixed costs, such as physical infrastructure and personnel, so a small change in Bitcoin price can translate to a large change in Riot's financial results.
If Bitcoin really goes to the moon as many holders are hoping, then Riot's market cap is almost certain to explode as well. Investors who want to unlock that upside will have to accept substantial risk and volatility to get there.