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Riot Blockchain: An Efficient Bitcoin Miner

Mar. 04, 2021 1:52 PM ETRiot Platforms, Inc. (RIOT)MARA, PYPL, MSTR46 Comments
Chetan Woodun profile picture
Chetan Woodun


  • Riot makes use of blockchain technology to mine bitcoins.
  • The company has invested heavily in mining equipment.
  • However, one of its competitors has invested more aggressively for growth.
  • Still, given its higher productive efficiency, amid favorable demand-supply dynamics, Riot deserves higher valuations.
  • Most importantly, investors require some insights into the bitcoin ecosystem including the mining part, in view of high volatility.

After bitcoin's hugely successful performance in recent months, which saw the cryptocurrency cross the $57K level on February 23, 2021, there are questions whether the upside can continue, after the dip. There is also an interrogation mark as to whether all the good news have already been priced in, or there may be a fallback as observed at the end of 2017, when there was a 100% drop in the value of the digital currency in a matter of just two months.

Figure 1: Bitcoin value evolution

Source: coindesk.com

Closely associated with bitcoin's value are the stock prices of miners which produce it, just like those extracting gold from the earth's crust. Riot Blockchain (NASDAQ:RIOT) is one of several bitcoin miners, but in contrast to those which have to dig out gold from the earth's crust, it uses computing power together with blockchain technology to produce cryptos.

Bitcoin mining financials

Just like for gold, bitcoin mining remains a highly capital-intensive enterprise. Thus, Riot disbursed $35 million to purchase 15,000 Antminers of the S19j Pro model from Bitmain at the end of 2020. The ultimate goal of this heavy investment, combined with the company's prior mining equipment purchases, is to significantly increase its estimated bitcoin mining hash rate from 2.3 EH/s to 3.8 EH/s or by 65%.

The mining hash rate is the computational power that is used to mine and process blockchain transactions and these are on the high side compared to more commonly used software applications.

Figure 2: The growth path

Source: riotblockchain.com

Continued growth through expanding mining hash rate is key to make its presence in the mining community significant, namely by being the first to solve "blocks of transactions", but operating on a cost-effective basis is another important parameter too. This is possible through the Antminer 19 series which offers outstanding

This article was written by

Chetan Woodun profile picture
My aim is to provide differentiated insights, whether it is for investing, trading, or informational reasons. For this purpose, I am not a classical equity researcher or fund manager, but, I come from the IT world as the founder of Keylogin Information and Technologies Co. Ltd. Thus, my research is often backed by analytics and I make frequent use of charts to support my position.I also invest, and thus, in this tumultuous market, I often look for strategies to preserve capital. As per my career history below, I have wide experience, initially as an implementer in virtualization and cloud, and I was subsequently a team leader and project lead, mostly working in telcos.I like to write around themes like automated supply chains, Generative AI, telcos Capex, the deflationary nature of software, semiconductors, etc and I am often contrarian. I have also covered biotechs.I have also been an entrepreneur in real estate ( a mediocre one), a business owner, and a farmer, and dedicate at least 5 hours per week to working on a non-profit basis. For this purpose, I help needy families by providing sponsored work and contributing peer reviews and opinions for enterprise tech.I have been investing for the last 25 years, initially in mutual or indexed funds before later opting for individual stocks. Got a lot of experience in the 2008/2009 downturn when I lost a lot due mostly to wrong advice. Since then I do my own research and have fallen in love with Seeking Alpha because of the unique perspectives it provides to someone investing hard-earned money as well as access to some of the best analysts.

Analyst’s Disclosure: I am/we are long BLOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This is an investment thesis and is intended for informational purposes. Investors are kindly requested to do additional research before investing.

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Comments (46)

gohabsgo70 profile picture
Folks dont do as George Costanza and GO DOWN WITH THE SHIP.
A 100% drop in Bitcoin in 2017? Afraid not. That would mean that it went to $0. Never happened.
Your paying for future revenue. Imagine 100k Bitcoin. 65, 75, 100, 500k?
This ain't widgets and brick trades. If 10% drop gold and buy btc, its 200k by 2022.
intv, bfarf, Hive, hut8, mara to the Moon
bazooooka profile picture
@th777 might end up 20k btc this year. 200k could be 5 years off still.
Bitcoin just hit $60,000.00...yeah.
Long Bitcoin with Riot short (using puts to minimize risk related to WSB run-ups) just like I would do with any other commodity producer that was trading at 50-100x FMV. Riot is not a cryptocurrency play. I grew up in the Midwest. Our farmland is some of the best in the world. The valuable asset is the land.. it is finite and fertile. In this comparison, RIOT is more like a fleet of tractors... but their "fleet" depreciates exponentially faster. After 2-3 life span of their equipment, you will need to replace that ~$40M CAPEX. This company is a Wall Street scam. It is a junk company at a junk price with no competitive advantage. Who goes out to pay 100x the going rate of basic equipment? I would be serving up this equity like it was all you can eat pancakes if I was on the Board of RIOT. In fact, I would argue that they are violating their fiduciary duties by not issuing as many shares in this hollow company at these prices as humanly possible. If someone could post below through a DCF model how RIOT ever equates to these prices with no moat or really anything proprietary, I would love to see it. Buy crypto directly if you want to speculate. At $4B valuation, this is not crypto.
ThreeDayCondor profile picture
@Darmbru3 agree with all you wrote — save one small quibble:

For all the reasons you lay out, the board and the (former?) professional gambler / CEO Jason Les... are arguably daily committing federal securities fraud by selling shares on the NASDAQ, while in possession of clearly material negative information (100X overvalued did to Les’ hyping PR!)... info. they haven’t disclosed to the markets.

But I agree — a fool and his money soon go separate ways.

bazooooka profile picture
@Darmbru3 For those who like BitCoin miners they should look at GWAC; but often its just best to buy BTC instead. www.sec.gov/...

Yep, completely agree. Bitcoin could gain unthinkable value within a generation, and it's becoming more stable as it continues to grow this strong base. On the other hand, RIOT will only face more challenges in continued efforts to scale with the currency, and its limited support makes it an easy target for bears whenever BTC loses steam. RIOT at these prices seems more like a momentum indicator for bitcoin, not an actual investment in my view. It depends on a lot of hard work over in bitcoin-land to fuel the next price pump, while bitcoin just keeps chugging along. I think the tortoise will beat the hare this time, too.

I'll lay out my concerns about the company, but if anyone has a different take or just some other thoughts I would be interested to get another perspective or discuss further.

1. It is already too late for this company to build relevance in this space. Riot went public in 2003 and it's been a penny stock for most of the last couple years--even though bitcoin did manage to stay above $3K after 2017--because they just didn't demonstrate any progress toward growth or profitably. What were they doing all that time? So they have about $60 million in bitcoin and ~2000 miners to date, which is a deteriorating asset probably not worth the $4 billion market cap. Now they're trying to scale up in the midst of a semiconductor shortage and all they can really do (or seem to be doing, anyway) is wait on more equipment from their supplier which happens to also be their #1 competitor in mining.

2. Their supplier is also their #1 competitor!!! Bitmain makes the best mining equipment by far at the moment and contributes more than half of bitcoin's total network hash rate with their mining operations. Now that's a strong business model leveraged on bitcoin. They can reduce their operating cost by making their own equipment in excess volume, and then rake in even more profits charging whatever they want to their competition for those rigs when demand is high. The fact that there aren't more chip companies doing the same leaves me skeptical on the long-term prospects of a company like Riot whose whole business is centered on endlessly procuring and deploying computing equipment. It tells me those chip companies don't feel positioned to compete (yet), so why should we expect Riot to have such great prospects with nothing organic to contribute?

For context, Bitmain is apparently set to IPO for ~50-60 Billion. Their hash rate seems to be around 75 EH/s, while Riot just achieved 1 EH/s. So they should see more than 75x the profit Riot does while making profit off of Riot itself, but they're being valued at less than 15x RIOT's market cap.

3. There's just too much competition for Riot to grow faster than bitcoin itself, I think. They have no competitive edge but a whole slew of unique risks compared to investment in bitcoin itself. I just don't see a case for RIOT to go 10x if bitcoin does, otherwise every billionaire would throw some change into a mining operation of similar size and make 1000x returns or whatever that would come out to as far as how much Riot's mining rigs and power cost.

Maybe I'm missing something, but it seems like this stock is just another stock that is essentially playing this wild momentum game. It's like this loop of hype and FOMO followed by a wave of selling pressure as soon as bitcoin shows weakness and then at the first sign of strength the shorts cover, bulls and algos pile in and the hype cycle begins anew until everybody made a lot of money except those who bought in at the top and got destroyed lol... It's kind of shocking to me that I still see articles like this one suggesting this stumbling business is some big opportunity. Do some of the authors get paid by the company to publish this stuff or what
Great article, Chetan. I just have one small comment to make referring to your comment: >>"...this time caused by the Tesla's CEO's emotions and whims."<<

I believe that the purchase of Bitcoin by the company Tesla (that's important) was not based on emotion or a whim, but a calculated move by Elon Musk. IMO, it was a genius move, decision by Mr. Musk.
bazooooka profile picture
Hmm; these guys, linked below, have similar implied market-cap but their expected/future hash rate and debt profile looks far better.

""The ultimate goal of this heavy investment, combined with the company's prior mining equipment purchases, is to significantly increase its estimated bitcoin mining hash rate from 2.3 EH/s to 3.8 EH/s or by 65%.""
a lot of talk of RIOT and MARA,,, if you can ,,better to buy Canadian comps like
Bitfarm BITF, Hut 8 HUT, HIVE, excellent leverage to BTC, low cost/ Petahash,
have US OTC tickers too but tight to trade, tons of volume now,
HIVE is 40% Etherium so it may not do as well after JULY EIP1559 Rev, may affect miner profits,, look it up,
diversify thru 4-5 of these for best results,,, and yes they are going to go up for 2021 regardless of BTC skepticism , expect 20% range /day movements,,Good Luck!
@o2bwealthy i agree with ur statement about Canadian miners and am invested in them myself. I see the most upside in HUT 8 sinds they have the biggest HODL and in the bull market thats where most of the value comes from. The only problem i see with HUT8 is their disclosed hashrate. Iam wondering, whould u agree with the statement that HUT 8 is the best canadian miner right now?
Wonderful article on an underrated and UNDERVALUED stock
bazooooka profile picture
@Dom Rome Can you explain the valuation thesis on this one?
@bazooooka I won't waste my time, the sentiment in this comment section is clear.
There are some in these comments that just last year believed that bitcoin would never see $20,000.
These same individuals believed RIOT over $10 is impossible and "absolutely foolish".

My sources tell me they're in for a surprise in the next few weeks.

The loudest mouths typically have the least value to speak.

Enjoy earnings and U.S. stimulus
Best Regards to everyone, even to those with opposing logic
@Dom Rome

Get a grip, Dom Rome...you take these guys seriously?! The article IS a good article.
Will be interesting to see how much of the true reality is disclosed in their 10K which will be filed soon.

Could get real ugly.
Jeff Boyd profile picture
@crypto_investor_2021 Will also be interesting to see if they have a conference call. If they do, or announce an acquisition of some kind, I think they can keep the pump going.
ThreeDayCondor profile picture
Last thought, here: Riot is an IN-efficient miner — compared to the Sichuan mega miners (10X to 50X its size, with essentially free electricity). Those companies are state subsidized, in China. Not so tiny Riot.

And it falls, anew on the NASDAQ — here on Friday.

Exactly how many Bitcoin do they have?
ThreeDayCondor profile picture
@REIT investors R us best guess is around 1,200.
bazooooka profile picture
Maybe they should have raised money back in 2017 and then only deploy it into BTC after the coin draw down over fifty percent from its high from that year. They can maybe do similar this time. Otherwise it be huge electricity bills and depreciating tech and the stock risks a ninety percent drawdown if the tide turns.
ThreeDayCondor profile picture
@bazooooka the company Riot did do a $25 million equity raise in 2017. The investors got wiped out. See, antics of one Barry Honig. Now banned by SEC.
bazooooka profile picture
@ThreeDayCondor Yeah I watched the hype back then too but never dug into the details.
FiXu Research profile picture
"the market is pricing miners much higher than the value of bitcoin itself." That's because there is hype. Recommending this company at 366 EV/sales is a joke. This company is worth $2 max. If you want to invest in bitcoin go buy bitcoin, stock market is not the best place to invest in bitcoin and that's a much better advice than your article.
Jeff Boyd profile picture
@FiXu Research They did do the equity ATMs in December so they have around $300M in cash. Around 90M in shares.

Still a joke company but hey I don't know that the share price won't skyrocket anyway.
Chetan Woodun profile picture
@FiXu Research
Before writing about bitcoin, I used to think the same, but why would institutions invest in BTC ?
ThreeDayCondor profile picture
@Chetan Woodun Seriously?! I’d rightly note that “institutions”invested heavily in... Enron (2000-01) too.

Institutions placed their money with Bernie Madoff too (2005?)...

Institutions were the main holders of Bear Stearns (2007-08).

Institutions owned Cal P&E (bankrupt 2018)...

The idea that a cadre of “institutions” owning something means anything... is silly.

It only means that some will do almost anything chasing temporarily yields/run ups.

Do better.
trusthouse profile picture
Riot is a fashionable empty shell. Good luck.
I dunno, I like being up 500%, anymore empty shell recommendations?🤔
recommendation: sell
ThreeDayCondor profile picture
This article is... precious.

At today’s NASDAQ prices... Riot needs 100 YEARS of $50 million a year in revenue, to defend today’s market value.

It can’t get there — ever. And it’s never made a GAAP penny of net profit.

In 2021 Riot will make under $25 million in revenue — and no GAAP profit.

To argue it’s a better “value” than Marathon ... is to admit that both are HORRIBLY overpriced.

Are either of these companies more valuable per share than Apple?!

That’s where they are. This is — in candor — hard to take seriously.

Good luck you bag holders!
@ThreeDayCondor unless you just bought in the last two weeks you’re definitely not a bag holder with these puppies. I’m up 250% on RIOT and 400% on MARA even after this correction.
ThreeDayCondor profile picture
@WillyDogg — it is not even a $2/shr stock when rationally evaluated.

Get out now, to save your “gain.”

You’ll thank me later.
Platypussy profile picture
@WillyDogg The GME'ers who bought at 300+ felt pretty good too for a wee little while.

All the rising stock price confirms is that a lot of people think the same way as you do right now.

As they say, 'good to be smart, better to be lucky!'
I only had 300 contracts and 1000 shares at $0.65. Can we crash like last time? I wanna buy that low again 😂
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