2023-12-20 14:58:14 ET
Summary
- Bitcoin's surge is driving up prices in the cryptocurrency market, including for miners.
- RIOT is on the verge of a massive breakout from a three-year downtrend.
- There's valuation upside as well, should Bitcoin continue its bull market.
The return of animal spirits in financial markets has brought about higher prices in just about everything. That certainly includes cryptos, and the OG altcoin Bitcoin is flying. I happen to think Bitcoin has a lot more upside into next year, and that means that the stocks linked to Bitcoin – such as the miners – also look quite good in my view.
In this article, we’ll revisit Riot Platforms (RIOT), a stock that is up almost 400% in 2023. I don’t think it’s going to see another 400% next year by any means, but I do see an extremely significant breakout coming, which could lead to further big gains. The last time I covered the stock, I noted it was either on the verge of a critical breakdown, or the start of a new bullish leg. Well, we know now for sure it was the latter. Of course, owning Bitcoin miners is not for everyone and there are risks, but as I look at the risk/reward balance, I cannot help but place a buy rating on Riot today, a rating upgrade from the prior hold. Let’s dig in.
Impending breakout from a multi-year downtrend
We’ll begin with a chart, as we always do, and in the case of Riot, there’s an impending breakout from a downtrend that began almost three years ago. I’ve drawn in the trendline connecting the 2021 high to today’s price action, and you can see the stock is very, very close to breaking that downtrend. There’s work left to do, but it is my opinion that this time is when we finally see the downtrend broken.
The stock is quite overbought given it’s up ~50% in just the past month, but that’s a temporary issue. Plus, stocks in strong uptrends become overbought at times, work through it, and continue higher. I expect to see that here.
Confirmation the downtrend is broken will happen in two phases. First, the stock needs to clear the downtrend line itself, which is currently just a few pennies above yesterday’s close. Second, the stock will need to navigate the prior relative high of $20.65, as that will mark a higher high, something that hasn’t occurred in quite some time.
Keep in mind that almost a fifth of the float is being shorted, so the higher it goes, the more shorts go underwater. That can help fuel buying activity, particularly if $20.65 is cleared. I’m not suggesting a short squeeze is coming, and not suggesting you run out and buy it on that possibility. I’m simply saying that a high percentage of shorts is a good thing for bulls as we see important levels taken out on the upside.
On the downside, there are three levels to watch. First, the 20-day exponential moving average should serve as support. It’s currently just over $14, but rapidly rising. The 50-day simple moving average should also serve as support if we see a price that low, currently under $12 but rapidly rising. Finally, the ultimate line in the sand is the upsloping trendline, currently just under $11, but rapidly rising. I don’t see a test of the 50-day SMA or the upsloping trendline barring a massive selloff in Bitcoin, so I’d be more in favor of using the 20-day EMA, but that’s for each person to decide on their own.
Let’s now take a quick look at the coin itself to see where RIOT may be headed.
I have been bullish on Bitcoin for months, and the action of the past few months has only confirmed that bullishness. I think Bitcoin is going a lot higher in 2024, but I’ll caution that it’s frothy at the moment, at least short-term.
I’ve drawn a trendline in the price chart and the PPO – which is my preferred momentum gauge – to illustrate a big, ugly negative divergence that’s forming. This happens when momentum does not confirm price highs with new highs of its own, and that’s often a foreshadowing of consolidation coming. It is by no means a guarantee, but it’s a warning sign. Now, Bitcoin may just ignore this and blast higher, but anytime a negative divergence forms, I take more care with risk management. Again, your choice, but something I’m watching.
The last thing on the charts is Riot’s share price relative to the price of Bitcoin, which we have had for the past three years. This valuation metric has moved around a ton, and today, it’s still very inexpensive relative to history.
The 2023 peak in valuation by this method was 65% higher than it is today, meaning that for Riot, we not only have a Bitcoin-fueled upside, but in my opinion, the stock’s valuation could move a lot higher as well. Just my view of the price charts and again, no guarantees, but this looks extremely bullish to me, with risk firmly to the upside from here.
Building for future growth
While all Bitcoin miners do roughly the same thing, the way the different miners go about it can be quite different. Riot’s long-term strategy is to eventually have ~8X as much mining capacity as it has today, and while there are many things that have to occur to get there, the point is that it’s nowhere near done growing.
Current capacity is about 12 EH/s, with that set to triple in the next two years, on the path to 100 EH/s eventually. We’ll see what the terminal rate ends up being, but for now, the point is there is an enormous increase in capacity coming on top of what’s already been achieved.
Some Bitcoin miners are held together financially with nothing more than hopes and dreams, but Riot is actually quite well-financed, which gives it an edge over those that aren’t.
The company’s growth plans for the next two years are already fully funded, which is a terrific achievement. It also places a high level of certainty on those growth plans, given financing is not a concern. Now, the “Estimated BTC sales” bar assumes $40k Bitcoin pricing with 2% monthly gains, as well as rising Bitcoin mining difficulty, so there’s some level of assumption built in there. Still, with the current cash balance and Bitcoin on hand, barring Bitcoin making new lows that are much, much lower than today, it is my view the financing picture looks quite good.
Power consumption is one of the most important things for any Bitcoin miner, given its cost, but Riot’s power strategy is well conceived. This is an example of how Riot can take advantage of prevailing power conditions.
It mines at full capacity when power is cheap, then sells excess power when electricity is expensive, only to resume when it’s cheap again. Management knows there’s value in mining when one of its main input costs – power – is cheap and not mining when it isn’t.
Finally, Riot’s competitive positioning on things like power costs and fleet efficiency looks quite attractive to me.
Its fleet efficiency isn’t best-in-class, but is near enough to its peers. The cost of mining, however, is indeed best-in-class, meaning its margins are better than pretty much everyone else’s, and that’s unbelievably important as Bitcoin trades higher. It means Riot should have the best operating leverage of any of the miners, and that means more earnings and financial flexibility.
Slapping a buy rating on Riot
I’ll reiterate that owning Bitcoin miners is fraught with risk, and is therefore not for everyone. They are heavily dependent upon Bitcoin pricing, which itself is extremely volatile. The upside, however, is much greater with miners than the coin itself if you're on the right side of the trade. There is operating leverage in play such that miners can see share price gains that are much larger than the move in Bitcoin itself. Of course, this works in both directions, so there's risk involved as well.
It is my opinion that Bitcoin is in a new uptrend that is likely to last for some time, and in Riot’s case, I think it is only a matter of time before it takes out the downtrend line, and then prior highs at ~$20. Use stops and risk management practices, of course, but I’m upgrading Riot to buy from hold.
For further details see:
Riot Platforms Is About To Break Its Multi-Year Downtrend