• RIOT is a blockchain technologies company

• A massive gain since March 2020

• RIOT trades like a digital currency ETF product

• A highly speculative stock that lacks earnings

• The potential for a crash- Be careful

The digital currency asset class has had an explosive few months. In March 2020, Bitcoin, the leader of the cryptocurrencies, dropped to a low of $4,210 per token, nearly one-quarter the price at the late 2017 peak. Nine months later, in December, Bitcoin was trading at a new high. In October, Square’s (SQ) CEO, Jack Dorsey, announced his payments company invested $50 million in Bitcoin at around $11,000 per token. Dorsey also said his company planned to accept digital currencies in its ecosystem.

In early 2020, Tesla’s (TSLA) Elon Musk not only made a $1.5 billion Bitcoin investment but said TSLA would accept Bitcoin as payment for its EVs. Shortly thereafter, SQ upped its ante investing another $170 million in Bitcoin. The price of the token did an over ten-bagger from the March low, rising to a high of $58,610 per token in February. SQ and TSLA shares have been trading higher and lower with the digital currencies.

While many market participants remain wary of investing in digital currencies because of custody and hacking concerns, they have been searching for stocks that move higher and lower with the cryptos. Riot Blockchain, Inc. (RIOT) has been a beneficiary of the bullish price action in the digital currencies over the past months.

RIOT is a blockchain technologies company

Riot Blockchain, Inc. (RIOT) and its subsidiaries build, support, and operate the Blockchain technologies ecosystem. The company mines for Bitcoin and provides a variety of services in the digital currency arena. Riot Blockchain changed its name in October 2017, but the company has been around since 2000, with its headquarters in Castle Rock, Colorado. RIOT’s website outlines its portfolio of business and substantial Bitcoin mining activities.

At the end of last week, RIOT’s market cap stood at $2,721 billion at $40.30 per share. The stock trades an average of over 33.3 million shares each day.

A massive gain since March 2020

In late 2017, when Bitcoin rose to its first record high at over $20,000 per token, RIOT shares reached $46.20. The correction in the digital currency market took the shares to a low of 51 cents in March 2020 as risk-off conditions caused selling in markets across all asset classes. Bitcoin fell to a low of $4,210 per token in March 2020.

Source: Barchart

By November 14, 2020, RIOT shares recovered to just over $4 per share when they exploded to the upside, reaching the most recent peak at $79.50 per share on February 17. Bitcoin futures reached a high on February 17 at $54,035 per token. The cryptocurrency continued higher to reach $58,610 on February 22 when it turned lower and was at the $49,405 level at the end of last week. Bitcoin fell by over 15.7% from the February high on March 5. RIOT shares at the $40.30 level were over 49.3% lower, more than triple the percentage correction in the digital currency.

RIOT trades like a digital currency ETF product

In 2007, before Bitcoin existed, RIOT shares reached an all-time high of $3,638.40. While the company is not a leveraged ETF product, the stock trades like one.

Source: Barchart

The chart shows that RIOT’s value has evaporated like a double or triple leveraged ETF product that reflects an underlying market. These products are awful long-term investments as they experience time decay. While RIOT is not the same, the stock’s performance is similar.

A highly speculative stock that lacks earnings

With no liquid ETF or ETN products available reflecting Bitcoin or other digital currencies, the market has adopted RIOT as a surrogate. The company’s fundamentals do not support its share price action.

Source: Yahoo Finance

While RIOT beat consensus earnings projections in three of the past four quarters, the company lost money in each. RIOT will report Q4 2020 earnings in late March, with forecasts for an eight cents per share loss.

I view RIOT and other similar companies that are moving higher and lower with digital currency prices as highly speculative and short-term trading tools. For those that do not wish to hold tokens in a computer wallet or trust exchange custodial arrangements, RIOT can be a substitute for trading. I do not view this company as a long-term investment vehicle.

However, if Bitcoin were to go to the $100,000 level as some belief, RIOT shares would likely follow like an obedient puppy. Meanwhile, if digital currencies rally because of the emergence of ETF and ETN products and more secure custodial locations, the market could abandon companies like RIOT, which would make the value of the company equal to its holdings. As the crypto market matures, Riot’s Tesspay and Verady products would likely face substantial competition. Tesspay is developing a blockchain-based escrow service for wholesale telecom carriers. Companies like Square (SQ) and other leading payments companies could dominate the business.

Verady provides accounting and audit services for blockchain assets. While RIOT believes, “traditional accounting systems, firms, and standards are currently lacking functionality around cryptocurrencies,” and Verady will be a “bridge” between the cryptos and traditional financial accounting, that may be more than a reach. Competition could be significant in the accounting world as acceptance of the asset class rises.

The potential for a crash- Be careful

It is virtually impossible to pick tops in parabolic markets or bottoms in those that are falling knives. Prices tend to move far higher than logic, fundamentals, or reason dictates during aggressive bull markets that create frenzied buying. When sellers become more aggressive the buyers the results often get ugly.

RIOT trades a lot like a leveraged ETF or ETN product, making long-term investment more than risky. Even though the stock rose from 51 cents to $79.50 from March 2020 through mid-February 2021, the 2007 record high at $3,638.40 is a warning sign. RIOT has been a liquid and effective short-term trading tool for Bitcoin followers. However, the stock carries more risk than the digital token’s price.

Gravity is a powerful force. It is impossible to forecast where Bitcoin’s rally will end. It is not a question of if a brutal correction occurs but when and from what price level.

Do not look at RIOT as a growth stock. It is best to handle the stock as a leveraged ETF product with all the same risks.

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RIOT shares were trading at $50.46 per share on Tuesday morning, up $11.48 (+29.45%). Year-to-date, RIOT has gained 197.00%, versus a 4.03% rise in the benchmark S&P 500 index during the same period.

About the Author: Andrew Hecht

Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...

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