Shares of a cryptocurrency mining company Riot blockchain (NASDAQ: RIOT) fell on Thursday as the price of Bitcoin (CRYPTO: BTC) continues to retreat. In fact, something has just happened to Bitcoin for the first time in three years and it could cause investors to re-evaluate their assumptions about this space. As a result, Riot Blockchain was down 10% as of 3 p.m. EDT.
As of this writing, the price of Bitcoin has fallen by around 18% from all-time highs reached earlier this month. Riot Blockchain operates Bitcoin. Hence, traders tend to buy and sell Riot Blockchain stocks based on the movements of Bitcoin. With Bitcoin falling today, it makes sense to expect Riot Blockchain’s stock to decline as well.
However, by zooming out for the big picture, Riot Blockchain shareholders have a parcel optimism about the long-term price of Bitcoin. Consider that even though it is now down more than 50% from 52 week highs, Riot Blockchain stock still has a market cap of over $ 3 billion. However, it only generated $ 12 million in revenue in 2020 – that’s an extreme estimate. But investors are prepared to pay that price on the basis of an assumption: the price of Bitcoin is heading much higher.
Consider that Riot Blockchain is already mining more Bitcoin than it ever did (196 Bitcoin in March), increasing its computing power (called a “hash rate”) to mine even more, and holding 1,565 Bitcoins to count. of its last update. If Bitcoin rises enough, there is a scenario in which the valuation of Riot Blockchain makes sense.
Here is the potential problem facing Riot Blockchain investors: Bitcoin may be losing its dominance. The term “Bitcoin dominance” refers to Bitcoin’s share of the total cryptocurrency market. The entire cryptocurrency market is currently valued at $ 2.02 trillion, according to data from CoinMarketCap. Bitcoin’s total market value is currently $ 999 billion – less than 50% of the total market for the first time in three years.
Alt-coins like Ethereum and others have gained market share in recent days. If people start replacing Bitcoin with these other options, it could lead to further declines in the price of Bitcoin and make the long-term outlook for Riot Blockchain business less optimistic.
So, is it time to hit the panic button? No, I do not think so. This article talks about what has happened in recent days and what could happen if the trend continues. But the truth is, this space has always been volatile and there are many factors at play. Having said that, I think this illustrates some of the risks to a Riot Blockchain and Bitcoin investment that one should be fully aware of before investing.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.