Shares of cryptocurrency infrastructure company Riot Platforms (RIOT 2.81%) rose 28.3% in November, according to data provided by S&P Global Market Intelligence. The price of the world's largest cryptocurrency, Bitcoin (BTC +0.62%), was up nearly 10% for the month, stoking optimism among the investor community. But Riot provided two financial updates during the month that excited the market, as well.
Riot Platforms' October update was released on Nov. 7. In October, the company produced 458 Bitcoins with its cryptocurrency mining operations, which was down 10% from October of last year. This is surprising because Riot increased its mining power (measured with something called a hash rate) by 71% during this same time period.
The same day, Riot Platforms gave its financial report for the third quarter of 2023, which showed the same basic thing. The company hit a record high hash rate in Q3 of 10.9 exa-hashes per second (EH/s), an increase of 95% year over year. But Bitcoin production was up only 6%.
NASDAQ: RIOT
Key Data Points
The lower Bitcoin production is actually intentional. And even though this seems counterintuitive, investors appear to be cheering the deliberate choices that management is making.
Why less Bitcoin could be a good thing
Contrary to other Bitcoin mining companies that try to go constantly at full speed, Riot Platforms has agreements with power companies to switch on and off, depending on the situation. The company actually receives credits for reducing its electricity consumption.
Because of this arrangement, Riot Platforms is mining Bitcoin more cost-effectively. In the third quarter of 2022, it cost the company over $8,200 to mine one Bitcoin. However, in Q3 its cost of mining Bitcoin turned negative -- it was essentially paid $6,141 per Bitcoin it mined.
There's a trade-off. Riot Platforms could be mining significantly more Bitcoin if it was running its miners more. But it's questionable how much more gross profit it would make by doing so. The company is opting for the more cost-effective strategy, and investors appear to appreciate that.
A good setup going into 2024
In the first half of 2024, Bitcoin is expected to experience a "halving event," where the payout to miners will be cut in half. This has happened three times before and led to enormous spikes in the price of Bitcoin because the balance between supply and demand was disrupted.
Riot is bringing more miners online right when this is scheduled to happen. In short, the company could be mining more Bitcoins than ever, right when the price is soaring.
That said, Riot still has net losses because of its enormous depreciation and amortization expenses; Bitcoin mining machines aren't cheap and need to be replaced periodically. And the company has been funding itself, in large part, with share offerings that dilute shareholders.
Therefore, while Riot is operating efficiently and there's a catalyst coming, investors need to be aware of the cost of doing business in this space and how this could limit long-term shareholder returns.
