Riot Blockchain Stock: Down, But Not Out

Riot Blockchain (NASDAQ:RIOT) has been riding the roller coaster for Bitcoin (BTC-USD), and the price of Bitcoin is plummeting through 2022; although it appears to be consolidating now that there is more clarity about what the Federal Reserve is doing about curbing inflation.

What remains to be seen in that regard is how long the Fed will remain aggressive, and when it will pull back because of the risk higher interest rates pose to the roughly $31 trillion in US debt.

During this period, RIOT has seen its Bitcoin production drop in September due to an increasingly competitive market; I see it as a temporary situation that will be rectified in the next few months due to the company increasing the hash rate.

In this article, we’ll look at the time frame I see as when the Fed is likely to reduce how much it will raise interest rates, what implications that will have on the price of Bitcoin and the share price of RIOT, as well as how a higher hash rate will leverage this outcome .

Latest Bitcoin production and operation

The company reported that it had produced 355 Bitcoin in September 2022, down 13 percent year-over-year from the 406 BTC mined in September 2021.

RIOT sold 300 BTC in September 2022, generating net revenue of around $6.1 million. Consequently, at the end of September, RIOT had 6,775 Bitcoin, all of which came from the self-mining business.

As for the drop in production in September, it is not likely to continue due to the increase in hash rate from adding a significant number of miners to the fleet, some of which are already being deployed and staged.

At the end of September, the company had a fleet of 55,728 in operation, with a hash rate of 5.6 EH/s. With 6,900 of the 9,070 S19j pros deployed in the scene, the company expects the number of miners to reach approximately 62,640 in the short term, which will increase its hash rate capacity to close to 6.4 EH/s.

In addition, management stated that they have received nearly 15,000 S19 series miners, which include some of the “latest generation S19 XPs.” The strategy of the company is to continue to aggressively increase its distributed hash rate, with the goal of achieving “12.5 EH/si first quarter of 2023.”

If it is able to achieve this goal, it will be very competitive against the majority of its peers.

The price of Bitcoin and the Fed’s policies

No examination of a Bitcoin miner can be done without taking into account the policies of the Federal Reserve in relation to its struggle to bring down inflation by raising interest rates. This is of course a negative catalyst for high growth stocks like RIOT due to the resulting contraction of margins and consequently lower earnings.

Most importantly, since Bitcoin miners are mostly proxies for the price of Bitcoin, how the price of Bitcoin reacts to the moves of the Fed is what primarily determines the performance of RIOT and the stock price.

Looking ahead to the next five months or so, I think we’re going to see the Fed ease off the gas and start to slow down the pace at which it’s going to raise interest rates. Some are already calling for it to happen in early November, but I’m not convinced yet. It’s possible and it will be a positive catalyst for RIOT, but I think it’s probably one more 75 basis point lift before we see the Fed start to ease in December and at least the next couple of months.

If that is how it plays out, we will see a very positive response from the market as money starts flowing back into higher risk stocks like RIOT. Combined with the increase in hash rate and EH/s, it should leverage the share price nicely.

Under that scenario, there would likely be a significant jump in the stock price, a pullback, and then another period of consolidation until there is more clarity in the second calendar quarter on where the Fed stands on interest rates and the economy.

My thesis on the Fed is because of the US government’s $31 trillion debt, it has limitations imposed on it because of the extraordinary amount the government would have to pay back if interest rates were to go much beyond the 5 percent limit. At worst, I see just over 5 percent as the ceiling for the Fed.

Conclusion

Unless there is an unpredictable Black Swan event, I don’t see the Fed making any other moves than I mentioned above. About the only thing that would surprise the market is if they were to raise interest rates by 50 basis points in November, which would again be a positive catalyst for Bitcoin and RIOT.

As the company increases its hash rate, it means it will become more competitive in the first quarter of 2023, which should result in significantly more Bitcoin being mined at a higher price than it is now.

Under that scenario, mining stocks like RIOT typically capitalize well on the price of Bitcoin, outperforming it on a percentage basis due to the type of investors it attracts during more positive economic conditions.

While anything can happen during the current weak economy within a high-risk asset class like cryptocurrencies, I believe RIOT is currently at a good entry point. And even if there is further erosion of the price of Bitcoin and RIOT’s share price falls further, investors can always average down to get a better cost basis for when Bitcoin prices reverse direction.

However it goes, I think by the end of December, and at the latest by the end of January, we will see a more positive sentiment for Bitcoin because the Fed is very unlikely to do much more in the way of raising interest rates, unless it is in a small, incremental pace for a short period into 2023.

Another potential positive for Bitcoin is that it could also revert to being a store of value if the economy worsens, and if that were to happen, its price would rise, as would the share price of RIOT.

The bottom line is that we don’t really know which way all this will go in the short term, but in the long term, RIOT should generate solid returns for investors willing to hold and not get pushed out of their positions.