In 2023, soaring Bitcoin (BTC -2.40%) prices made investing in Bitcoin mining stocks a no-brainer. Bitcoin mining stock Riot Platforms (RIOT -1.49%), for example, is now up more than 300% during the past 12 months, making it one of the best-performing growth stocks of the past year.
But it could be a different story in 2024, due to important changes coming to Bitcoin within the next few months. Here's a closer look at the key factors that could affect the price of Riot Platforms in the year ahead.
The cyclical nature of Bitcoin
It might sound obvious, but Bitcoin mining stocks are highly correlated with the price of Bitcoin. When Bitcoin goes up, Bitcoin mining stocks go up. And vice versa. That makes sense, since a rising price for Bitcoin makes every new Bitcoin mined more valuable.
Right now, Riot Platforms is one of the largest publicly traded Bitcoin miners, and holds more than $300 million worth of Bitcoin on its balance sheet. So it's easy to see why Riot Platforms soared in the past 12 months -- the stock is extremely leveraged to the price of Bitcoin.
But, as crypto investors know, the price of Bitcoin is very cyclical. Long bull market rallies are followed by long bear market declines, and the cycle then repeats. Investors saw evidence of this during the past few years: A bull market rally that sent the price of Bitcoin soaring to an all-time high of $69,000 in 2021 was then followed by crypto winter in 2022 and a wrenching shakeout in the crypto industry. And then, in 2023, there were signs that the next bull market rally for Bitcoin was coming.
This cyclical nature of Bitcoin means that Bitcoin mining stocks are also highly cyclical. So that's one big reason some investors think that Riot Platforms could run out of steam in 2024. Unless the price of Bitcoin continues its dizzying ascent this year, Bitcoin mining stocks such as Riot Platforms could easily fall out of favor with investors.
The impact of the next Bitcoin halving
A primary reason for this cyclical nature of Bitcoin involves the halving, an event that takes place only once every four years. In a halving, the reward paid out to Bitcoin miners for mining a single block on the Bitcoin blockchain falls by half. This is all determined algorithmically, and cannot be changed.
Image source: Getty Images.
So what will happen to Bitcoin miners in the aftermath of the next halving, which is now scheduled for April 2024? If no attempt is made to bring online extra mining capacity and the price of Bitcoin does not increase, Bitcoin miners such as Riot Platforms could make half as much money as they did last year, simply due to the economic impact of the halving. In fact, unless the price of Bitcoin doubles, miner financial results will suffer.
For that reason, some are expecting a big shakeout in the Bitcoin mining industry in 2024. The smallest and least-efficient Bitcoin miners could be at greatest risk. At the very least, the Bitcoin miners that have not been investing in new Bitcoin mining rigs will be at a serious disadvantage.
That's one reason to be bullish on Riot Platforms. The company has been ramping up its fleet of mining rigs ahead of the halving. With all of this new mining capacity, Riot Platforms may be able to offset the fact that its mining rewards are being cut in half.
Evidence from the last Bitcoin halving
With the caveat that past performance is no guarantee of future results, it's interesting to take a quick look at how Riot Platforms performed during the last Bitcoin halving, which took place in May 2020. As can be seen from the chart below, the price of Riot Platforms was around $2 at that time. By the end of the year, the price of Riot Platforms was $17. By early 2021, the price of Riot Platforms had soared to nearly $70.
That dramatic rise in the value of Riot Platforms, of course, was accompanied by an equally dramatic rise in the price of Bitcoin. In May 2020, Bitcoin was trading for less than $10,000. Eighteen months later, it hit an all-time high of $69,000. So it's easy to infer that a big reason for Riot's soaring value was the soaring value of Bitcoin.
Is Riot Platforms a buy?
As Bitcoin goes, so goes Riot Platforms. Yes, Riot Platforms has taken steps to diversify away from Bitcoin, even going so far as to change its name from Riot Blockchain to Riot Platforms in January 2023. But the business of Riot Platforms is still all about Bitcoin.
Over the short term, Riot Platforms has the potential to outperform Bitcoin. We've already seen evidence of this in 2023. But if you're planning to buy and hold for the long haul, it might make more sense to consider an investment in Bitcoin instead.
