The outlook for Bitcoin (BTC -0.17%) mining stocks is very closely tied to the outlook for the world's most popular cryptocurrency. If Bitcoin is headed up, Bitcoin mining stocks are likely headed up as well. And if Bitcoin is mired in a nasty slump, well, Bitcoin mining stocks will suffer accordingly.
To see how all this plays out on Wall Street, consider the Aug. 15 release of quarterly earnings by Riot Blockchain (RIOT -2.16%), a Bitcoin mining company with extensive operations in Texas. By all accounts, the numbers were underwhelming, with the company missing estimates for both revenue and earnings. The company also had to take a major non-cash charge for Bitcoin impairment due to the falling value of Bitcoin on its balance sheet. But dig around the numbers a bit, and a different picture emerges for this cheap, beaten-down Bitcoin mining stock.
Bitcoin mining capacity
If you're going to invest in a Bitcoin mining company, it's best to find one that is highly leveraged to the price of Bitcoin. Otherwise, it probably makes more sense just to invest in Bitcoin, right? So that's one reason to be encouraged by Riot Blockchain's numbers. The company is clearly focused on being a market leader in the Bitcoin mining industry and is taking a number of important steps to scale its operations.
One number to focus on is the absolute number of Bitcoin mining rigs a company has. The more mining rigs, the more Bitcoin it can potentially mine. According to its latest earnings release, Riot Blockchain has 44,720 Bitcoin mining rigs, with a hash rate capacity of 4.4 exahash per second (EH/s). But here's the thing: The company plans to triple the number of Bitcoin mining rigs available to it and boost the hash rate capacity to 12.5 EH/s. By January 2023, Riot Blockchain plans to have more than 115,000 mining rigs available. That's a huge leveraged bet on the future of Bitcoin.
Bitcoin valuation issues
Moreover, let's go back to the company's income statement. In addition to reporting a nearly $100 million impairment charge related to its Bitcoin holdings, the company reported an even bigger $349 million non-cash impairment charge stemming from two different Bitcoin-related acquisitions in 2021. So, these non-cash charges caused its overall earnings picture for the quarter to look a lot worse than it actually was. For the three months ended June 30, Riot Blockchain reported revenue of $72.9 million. That figure is still more than double the $34.3 million that the company reported a year ago.
Bitcoin's whipsawing volatility in the crypto market makes it exceedingly difficult to determine the true value of any Bitcoin-related asset. To offset some of this volatility, Riot Blockchain did something very clever this summer -- it sold some of its electricity capacity back to the Texas power grid. The company actually made more money selling power back to Texas than it would have made mining Bitcoin, simply due to the slumping price for Bitcoin. On Aug. 3, Riot Blockchain released a special production and operations update detailing exactly how it did it. This is something I'm going to be looking for from other Bitcoin miners as well -- some clever way to deal with highly volatile Bitcoin prices.
Future Bitcoin price estimates
For the foreseeable future, Bitcoin mining stocks will be highly correlated with the price of Bitcoin. So, how you feel about the future price of Bitcoin will highly influence how you feel about Bitcoin mining stocks. When choosing among different Bitcoin mining stocks, I'm going to focus on Bitcoin miners making huge bets on the future price of Bitcoin. That typically means lots and lots of new Bitcoin mining rigs coming on-stream.
For that reason, I think there's a compelling story for investing in Riot Blockchain and other Bitcoin mining stocks that are also rapidly growing their operations. Yes, this past quarter was ugly, but did you really expect anything different? Riot Blockchain continues to scale up its Bitcoin mining operations, so keep a close eye on whether the company delivers on its goal of tripling its mining operations by January 2023.
The company's stock is trading at rock-bottom prices these days, so there might be no way to go but up. If you buy into the long-term growth story for Bitcoin, it's hard not to buy into the long-term growth story of cheap Bitcoin mining stocks.