Is Now a Good Time to Buy Bitcoin Mining Shares?

The prospects for Bitcoin (BTC -0.52%) mining stocks are very closely tied to the outlook for the world’s most popular cryptocurrency. If Bitcoin is on the rise, Bitcoin mining stocks are also on the rise. And if Bitcoin is stuck in a nasty slump, well, Bitcoin mining stocks will suffer accordingly.

To see how this all plays out on Wall Street, consider the August 15 release of quarterly earnings by Riot Blockchain (RIOT -1.15%), a Bitcoin mining company with extensive operations in Texas. By all accounts, the numbers were underwhelming, and the company lacked estimates for both turnover and earnings. The company also had to take a large non-cash charge for Bitcoin write-downs due to the declining value of Bitcoin on its balance sheet. But dig around the numbers and a different picture emerges for this cheap, beaten-down Bitcoin mining stock.

Bitcoin mining capacity

If you are going to invest in a Bitcoin mining company, it is best to find one that is highly leveraged for the price of Bitcoin. Otherwise, it probably makes more sense to just invest in Bitcoin, right? So there’s reason to be encouraged by Riot Blockchain’s numbers. The company is clearly focused on being the market leader in the Bitcoin mining industry and is taking a number of important steps to scale its operations.

Image source: Getty Images.

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 increase its hash rate capacity to 12.5 EH/s. By January 2023, Riot Blockchain plans to have more than 115,000 mining rigs available. There is a huge bet on the future of Bitcoin.

Bitcoin valuation issues

Also, 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 larger $349 million non-cash impairment charge stemming from two different Bitcoin-related acquisitions in 2021. So these non-cash charges caused the total cost . the profit picture for the quarter looks much worse than it actually was. For the three months ended June 30, Riot Blockchain reported revenue of $72.9 million. That number is still more than double the $34.3 million the company reported a year ago.

Bitcoin’s fluctuating volatility in the crypto market makes it extremely difficult to determine the true value of any Bitcoin-related asset. To offset some of this volatility, Riot Blockchain did something very smart 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 from mining Bitcoin, simply because of the falling price of Bitcoin. On August 3, Riot Blockchain released a special production and operations update detailing exactly how it did it. This is something I will be looking for from other Bitcoin miners as well – a smart way to manage 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 greatly affect how you feel about Bitcoin mining stocks. When choosing between different Bitcoin mining stocks, I’m going to focus on Bitcoin miners who make big bets on the future price of Bitcoin. That usually means lots and lots of new Bitcoin mining rigs going live.

For that reason, I think there is a compelling story to invest in Riot Blockchain and other Bitcoin mining stocks that are also growing quickly. Yes, the last quarter was ugly, but did you really expect anything different? Riot Blockchain continues to scale up Bitcoin mining, so keep an eye out to see if the company delivers on its goal of tripling mining by January 2023.

The company’s shares are trading at rock-bottom prices these days, so there may be no way to go but up. If you buy into the long-term growth story of Bitcoin, it’s hard not to buy into the long-term growth story of cheap Bitcoin mining stocks.