Leonid Sukala
Riot Blockchain (NASDAQ:RIOT) has been riding the Bitcoin (BTC-USD) rollercoaster, with the price of Bitcoin plummeting throughout 2022; although it appears to be consolidating now that there’s more clarity concerning what the Federal Reserve is doing concerning reining in inflation.
What remains to be seen in that regard is how long the Fed will remain aggressive, and when it pulls back because of the risk higher interest rates pose to the approximate $31 trillion in U.S. debt.
During this period of time, RIOT has seen its Bitcoin production drop in September because of an increasingly competitive market; I see that as a temporary situation that will be remedied over the next several months because of the company increasing its hash rate.
In this article we’ll look at the timeframe I see as when the Fed is likely to reduce how much it’s going to increase interest rates, what the 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 that outcome.
Most recent Bitcoin production and operations
The company reported it had produced 355 Bitcoin in September 2022, a decline of 13 percent year-over-year from the 406 BTC mined in September 2021.
RIOT sold 300 BTC in September 2022, generating net revenue of about $6.1 million. Consequently, at the end of September RIOT held 6,775 Bitcoin, all coming from its self-mining operations.
Concerning the drop in September production, that isn’t likely to continue on because of the increase in hash rate from adding a significant number of miners to its fleet, of which some are already being deployed and staged.
As of 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 that are deployed being staged, the company expects the number of miners to reach approximately 62,640 in the near term, which would increase its hash rate capacity to near 6.4 EH/s.
In addition to that, management stated it has received almost 15,000 S19-series miners, which include some of “the newest generation S19 XPs.” The strategy of the company is to continue to aggressively boost its deployed hash rate, with the goal of attaining “12.5 EH/s in the first quarter of 2023.”
If it is able to reach that target, it will be highly competitive against the majority of its peers.
Price of Bitcoin and the Fed’s policies
No examination of a Bitcoin miner can be done without taking into consideration the policy of the Federal Reserve in relationship to its fight to bring down inflation by raising interest rates. This of course is a negative catalyst for high-growth stocks like RIOT because of the resultant contraction of margins and, consequently, lower earnings.
Most importantly, since Bitcoin miners, for the most part, are proxies of the price of Bitcoin, how the price of Bitcoin responds to the moves of the Fed is what primarily determines the performance of RIOT, and its share price.
Looking ahead to the next five months or so, I think we’re going to see the Fed ease up on the gas and start to slow down the pace it’s going to raise interest rates. Some are already calling for that to happen in early November, but I’m not convinced of that yet. It’s possible, and it would be a positive catalyst for RIOT, but I’m thinking there is probably one more boost of 75 basis points before we see the Fed start to ease in December and the following couple of months at least.
If that’s how it plays out, we will see a very positive response from the market as money starts to flow back into higher risk stocks like RIOT. Combined with the increase in its hash rate and EH/s, it should leverage its share price nicely.
Under that scenario, there will probably be a significant jump in its share price, a pull back, and then another period of consolidation until there is more clarity in the second calendar quarter on where the Fed stands in relationship to interest rates and the economy.
My thesis concerning the Fed is because of the $31 trillion in debt of the U.S. government, 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 mark. In the worst-case scenario I see slightly above 5 percent as the ceiling for the Fed.
Conclusion
Unless there is some unforeseeable Black Swan event, I don’t see the Fed making any different moves than I mentioned above. About the only thing that would surprise the market is if were to raise interest rates by 50 basis points in November, which, again, would be a positive catalyst for Bitcoin and RIOT.
With the company increasing its hash rate that means it’s going to be 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 usually leverage well to the price of Bitcoin, outperforming it on a percentage basis because of the types of investors it attracts under more positive economic conditions.
While anything can happen under 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 drops further, investors can always average down to get a better cost basis for when Bitcoin prices reverse direction.
However it works out, I think by the end of December, and latest, by the end of January, we’ll see a more positive sentiment for Bitcoin because the Fed is very unlikely to do much more in the way of increasing interest rates, unless it’s at a small, incremental pace for a short period of time into 2023.
Another potential positive for Bitcoin is it could also revert back to being a store of value if the economy worsens, and if that were to happen, the price will soar, as would the share price of RIOT.
The bottom line is we really don’t know which way all of this will go in the short term, but over the longer-term RIOT should generate solid returns for investors willing to hold and not be pressed out of their positions.
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