What should investors do with Riot Blockchain after Bitcoin is sold? (NASDAQ:RIOT)

Crypto miners such as Riot Blockchain (NASDAQ:RIOT) is finally starting to catch the attention of investors again. Many of the companies in the area have been brought to their knees because of the aggressive sales. With the relevant new adoption of Bitcoin (BTC-USD) and other crypto payment systems, some investors have coined this as the first crypto bear market, but sales like this have happened for Bitcoin at least twice before.

So what has happened to Riot Blockchain lately? The company has been quietly doing a good job of Bitcoin production throughout the crypto bear market. I have covered Riot Blockchain several times in the past. For a more detailed company profile, complete with historical price targets based on Bitcoin prices, search here. I’ve also created a crypto “cheat sheet” that documents important terms for novice crypto investors. You can find the sheet here.

Production numbers are now averaging 402 tokens per month for the past three months, with June’s figure coming in lower than the average of 318 coins. This puts Riot Blockchain towards the top of producers, which is an impressive feat. In the past, Marathon Digital (MARA) was often seen as the darling of the Bitcoin mining industry, but Riot Blockchain has been posting more impressive numbers for a while now, and investors should probably stop and take notice.

Crypto miners tend to produce only one or two products at a time, and for Riot Blockchain, that product is Bitcoin. The company also offers other Bitcoin-related offerings, but mining production is by far the most important revenue driver, and thus investors should pay particular attention to any disruptions to its core business. Riot recently announced that they were trying to control power costs, which would result in a drop in production during the month of July. This accounted for the 24.5% drop in sequential monthly Bitcoin production for that month. This is of particular concern as the company can do very little to control the price of electricity, and it is one of the significant direct costs associated with production. Furthermore, as more bitcoins are produced, the overall difficulty of mining each token will increase significantly on average, which means more electrical costs per token, assuming the efficiency of the mining fleet does not change significantly. For Bitcoin miners, electricity is literally income over time. Bitcoin miners use a fleet of sophisticated computers to solve complex cryptographic formulas with the hope of earning a reward. The process is often referred to as solving a block. As the total computing power (often referred to as the hash rate) of the fleet increases, the probability of earning Bitcoin increases. This is where the high electrical costs that miners are currently experiencing could become quite problematic, as many of them have communicated plans to significantly increase their overall production capacity with hopes of increasing Bitcoin production for the next big move up. Riot was no exception to this rule, as the company had long communicated its ambitious growth plans to shareholders.

That now looks threatened as companies are forced to consider the reduced profitability of mining at high electricity costs and the effects it could have on cash reserves as the Bitcoin price continues to remain at a low level, making it unaffordable to sell tokens on the market.

So what should investors be looking for?

While Bitcoin can certainly sell off from here, the token is enjoying remarkable stability in the $20,000 to $25,000 range. It is important to note that this is not a profitable region for Bitcoin mining companies. Many of them see direct costs closer to $10,000 per token, with total costs reaching as high as $30,000 per coin. The good thing about top tier miners like Riot Blockchain is that they manage to maintain adequate liquidity to navigate downturns to some extent. What would be problematic is for Bitcoin to remain at depressed levels for a very long period of time, as this would almost certainly make mining an unprofitable endeavor. The average recession lasts about 17 months in the US, and there are signs that Bitcoin is more strongly correlated to stock prices than it is inversely proportional to inflation. Put another way, as the United States emerges from recession, the increasing volatility that tends to lift all boats is likely to lift Bitcoin as well.

On a more negative note, the risk of regulation for Bitcoin miners seems to be becoming more and more prominent. The government recently investigated the impact of crypto mining on the environment, which brought a wave of unwanted negative media attention to companies like Riot Blockchain. The good news is that crypto regulation is still quite unpopular among Americans. A recent poll suggested that roughly 3 in 10 Americans thought crypto should be regulated, compared to one in five who thought it shouldn’t.

Any kind of meaningful environmental regulation around cryptomining is likely to be devastating to the industry, but for now, with the relatively positive view of voters towards decentralized currency, it looks unlikely. Investors should pay close attention to headlines surrounding mining regulation, particularly with regard to the environment and power grids.

The other important element for investors to take into account is forced sales by mining companies. Companies have recently started liquidating part of their crypto taxes to finance their operations. This is of course standard practice, but at depressed levels there is a tendency for mining companies to hold onto the tokens they produce until crypto prices reach attractive levels. A prolonged decline in Bitcoin prices could force miners to sell at unattractive prices, which would significantly hamper profitability, but more importantly, signal liquidity concerns if done haphazardly.

The takeaway

While the production history is up in the air with the recent cutbacks, Riot remains one of the top Bitcoin miners and will likely make it to the other side of a recession. I am a long term Bitcoin bull and for this reason I am also bullish on Riot Blockchain. The company operates responsibly, but Bitcoin prices are beyond the company’s control. I consider blockchain as one long-term purchase.