There's no disputing that Bitcoin (BTC +0.13%) miner Riot Platforms (RIOT 3.86%) has been one of the top-performing stocks of the year. Up more than 175% over the first nine months of 2023, Riot Platforms has benefited greatly from the surprising rally in Bitcoin.
However, cracks are starting to appear in the Bitcoin miner investment thesis, and that is leading to downward pressure on the price of Riot Platforms. Over the past 30 days, Riot is actually down 10%, amid a broader sell-off in Bitcoin mining stocks on Wall Street. So is Riot Platforms still a buy?
The fundamentals still look good
If you take a look at the underlying fundamentals of Riot Platforms, there are no obvious red flags. The company recently released its latest Bitcoin production report for September, and everything looks good. The company mined 362 Bitcoins last month, up 9% from the previous month. At the same time, the company's deployed hash rate (which measures the computational power of its mining rigs) continues to rise on a month-over-month basis.
Image source: Getty Images.
And, perhaps most importantly, the company continues to improve its overall operational efficiency. Riot Platforms has long been acknowledged as one of the lowest-cost producers in the Bitcoin mining industry, and if anything, Riot is getting even better at streamlining its operations. In second-quarter 2023, Riot's average production cost for a single Bitcoin was $8,389. That's a 25% decrease from the previous year, when the cost was $11,316.
Cracks in the investment thesis
However, with Bitcoin stalled out near the $30,000 price level, analysts and investors are taking a closer look at the long-term growth prospects for Bitcoin miners. These companies make money in a rising price environment for Bitcoin, so if the price of Bitcoin is going to continue to languish in the $25,000 to $30,000 range, then it might be time to reassess how much money Bitcoin miners are actually going to make over the next 12 months.
NASDAQ: RIOT
Key Data Points
That's likely what led to a recent sell-off across the board in Bitcoin mining stocks. As a best-in-class mining stock, Riot fell less than rivals, but the pain was definitely palpable. Riot took a 17.8% haircut in September, and is now trading for under $10.
In October, the changing environment for mining stocks eventually led to JPMorgan Chase (JPM 1.65%) putting out an "Underweight" rating for Riot Platforms. According to JPMorgan Chase, hash rate increases across the industry are leading to a "crucible moment" and intense competitive pressures for Riot. Put another way, the entire industry has their Bitcoin mining rigs cranked to 11 as they attempt to produce as much Bitcoin as possible, and that's making things difficult for Riot.
The Bitcoin halving
The final factor to consider is the upcoming Bitcoin halving, now scheduled for April 2024. This event takes place only once every four years, and will be one of the most anticipated events of the year for the crypto industry. In three previous halving cycles, the price of Bitcoin has rallied, and many Bitcoin bulls are expecting the same to happen in 2024.
On the surface, the Bitcoin halving seems to be a bullish factor for Bitcoin miners. If the price of Bitcoin rallies after the halving, shouldn't Bitcoin miners make even more money from every single Bitcoin they mine?
Well, yes and no. The problem is that the halving also reduces the mining reward for each new block of Bitcoin by one-half. So, all things being equal, the price of Bitcoin would have to double in order to make up for the lower mining rewards. This new dynamic could lead to severe repercussions for every Bitcoin miner.
Moreover, investors need to keep in mind that the Bitcoin halving will also lead to increased production costs. After all, running massive facilities of energy-intensive Bitcoin mining rigs on maximum power is not cheap. The conventional thinking now is that production costs are going to double in 2024, from $15,000 per Bitcoin to $30,000 per Bitcoin. That's going to cause extreme duress for any Bitcoin miner that doesn't have costs under control.
Why not just buy Bitcoin?
The important point to keep in mind is that Bitcoin mining stocks are highly cyclical in nature. So it's completely unrealistic for investors to assume that even a low-cost producer like Riot can continue to churn out triple-digit returns, year in and year out. As we get closer and closer to the Bitcoin halving, this is going to become increasingly evident.
If you're a long-term investor, it might just be easier to invest in Bitcoin rather than Bitcoin mining stocks. You can still participate in the upside of crypto without worrying about picking a winner in the Bitcoin mining industry. As we head into 2024, I'm still bullish on Bitcoin, but less so on Bitcoin mining stocks.
