The cryptocurrency space has been on fire over the last 14 months. The price of Bitcoin has surged more than 1000% since March 2020, hitting a record high of more than $63,000 last month.
While Riot Blockchain is a Bitcoin mining company, Silvergate Capital operates as a bank holding company. So, let’s see which of the two companies is a better buy today?
Riot Blockchain stock is tied to the price of Bitcoin
In the first quarter, Riot Blockchain mined 491 Bitcoins, representing a 75% increase in Bitcoin production year over year. This is an important statistic to consider because Bitcoin mining in 2021 was twice as difficult. The Bitcoin network conducts a halving event every few years, and this last took place in May 2020. Here, the reward for mining a single Bitcoin is cut in half. S0, in the last year, Bitcoin miners have received just 6.25 tokens for every block they mine.
Companies including Riot Blockchain also have to increase computing power constantly to keep pace with these halving events. The computing power is mined via a hash rate, and Riot Blockchain ended 2019 with a hash rate of 100 peta-hashes per second or PH/s. It increased its hash rate to 1,600 PH/s at the end of April and 7,700 PH/s by the end of 2022.
The amount mining companies are paid depends on the hash rate they provide to the blockchain network. So, it is clear why investors are excited about Riot’s increase in computing power; it should result in higher payouts going forward.
However, not every analyst is bullish about Bitcoin. According to Citron Research, Riot Blockchain stock is worth $2, meaning it is trading at a huge premium at its current price of $33.8. The market cap of Riot Blockchain stands at $2.83 billion, which means its trading at an 11x forward price to sales multiple. However, investors should also consider that the company is forecast to increase its 2021 sales to $205 million, up from $12 million in 2020. The price of Riot Blockchain stock is directly related to the price of Bitcoin, which makes investing in this crypto-mining company a high-risk bet.
The bull case for Silvergate Capital
A California-based bank valued at a market cap of $2.32 billion, Silvergate Capital aims to drive revenue generation by focusing on the cryptocurrency segment. Silvergate provides banking services to retail and institutional customers who want to invest or trade in Bitcoin and its peers.
The company created the SEN, or Silvergate Exchange Network, where crypto traders that buy or sell currencies on exchange platforms, such as Coinbase, open an account with Silvergate. Basically, Silvergate has partnered with multiple cryptocurrency exchanges and holds the funds in a trading account. Furthermore, Silvergate does not pay customers interest on these deposits, which will benefit the company, even more, when interest rates rise.
The SEN business vertical has experienced handsome growth. During Silvergate’s Q1 earnings call, CEO Alan Lane said, “In the first quarter, activity on the SEN continued to grow at a record pace with nearly 167,000 transactions and more than $166 billion in SEN volumes, up 84% on a sequential basis.” Its average deposits from digital currency customers in Q1 rose to $6.4 billion from just $3.8 billion in Q4 of 2020.
Analysts tracking the stock, expect Silvergate to increase its sales by 68% year over year to $153.7 million in 2021 and by 40% to $215 million in 2022. Further, earnings are forecast to rise by 82% in 2021 and by 40% in 2022.
It indicates that Silvergate stock is trading at a forward price to sales multiple of 15x and a price to earnings multiple of 38x.
We can see that both Riot Blockchain and Silvergate Capital are enticing bets especially if you expect Bitcoin prices to soar over the long term. However, in case the crypto markets crash, the downside for Silvergate investors will be limited compared to Riot Blockchain.
Silvergate also enjoys consistent profits and ended Q1 with a bottom-line margin of 33% and with $4 billion in cash. In a nutshell, Silvergate is fundamentally strong and seems a better bet for long-term investors.
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RIOT shares were trading at $30.85 per share on Monday morning, down $2.54 (-7.61%). Year-to-date, RIOT has gained 81.58%, versus a 13.21% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...
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