It might sound strange to issue a warning for a publicly traded enterprise that saw its market value jump 335% since the beginning of the year. Unfortunately, that’s going to be the case for blockchain-mining specialist Riot Platforms (RIOT). While RIOT stock may appear to have Wall Street’s backing, persistent pensiveness in the underlying cryptocurrency market implies that investors should adopt a skeptical attitude.
To be clear, this isn’t meant to be an outright pessimistic call. Certainly, few other asset classes command as much intense loyalty as the crypto market. Anything can happen in this arena but that’s also the problem – that “anything” also includes the bearish domain. And when cryptos collapse, they can take down both individual coins/tokens and blockchain-related businesses in a hurry.
With significant headwinds rising – for example, the Federal Reserve’s resumption of interest rate hikes and this policy’s downwind consequences like mass layoffs – it’s not out of the question for cryptos to suffer. After all, it doesn’t get much more risk-on than decentralized assets. And that would likely bode quite poorly for RIOT stock and other blockchain miners.
Plus, the evidence is already building up. Yes, RIOT stock has been stratospheric this year. But in the trailing month in the open market, shares tumbled nearly 21%. As well, some rumblings in the derivatives market suggests the smart money may be calling time – or at least time out – on Riot Platforms.
RIOT Stock Presents a Somewhat Deceptive Options Picture
According to Barchart’s screener for the latest read in unusual options activity for RIOT stock, three transactions pop up. Notably, all of them are calls, which on paper implies a bullish framework:
Tempting the optimistic angle is the Barchart Technical Opinion indicator, which rates RIOT stock a 72% buy. To be fair, the technical indicator has reflected the recent downturn in shares. Therefore, it (accurately in my opinion) warns readers that confidence in the short-term trajectory is severely compromised. However, the longer-term outlook appears bullish.
Moreover, Wall Street analysts peg RIOT stock as a consensus strong buy. This assessment breaks down as six strong buys, one moderate buy and one hold. Interestingly, the median price target comes in at $16.89, implying over 15% upside from Monday’s close. Further, the high-side target stands at $24, implying nearly 64% growth.
That said, we are talking about crypto-related enterprises. As such, the low target sits at $6. If RIOT stock falls to this point, investors stand to lose 59% of equity value. Obviously, you want to avoid this fate if at all possible.
And that’s what brings us to Fintel’s options flow data for Riot Platforms, which filters out market noise and gets down to the core transactions, thus potentially indicating what the smart money is doing. Notably, the options flow screener also shows that Monday’s activity consisted exclusively of calls.
However, the key detail is that only one out of the five major transactions on the day represented a bought call, which of course is a classic bullish tactic. The other transactions were sold calls, implying bearish trades. Further, these sold calls were multi-sweep orders or orders that execute across multiple trades and exchanges simultaneously.
In terms of core statistics, traders selling RIOT calls printed volume of 7,297 contracts against open interest of 40,927. On the other hand, the bought RIOT calls resulted in volume of 716 contracts against open interest of 3,734.
Excessive Exposure to Cryptos
While the smart money may be betting against RIOT stock, that’s not the only reason to be concerned about the blockchain miner. In some cases, the interpretation of the options tea leaves could end up being inaccurate. Rather, the fundamentals in this case don’t present a confidence-inspiring profile for Riot.
Specifically, I’m worried about Riot Platform’s top line being highly dependent on the underlying Bitcoin price.
In fairness, the correlation coefficient between Riot’s quarterly revenue (from Q1 2020 through Q2 2023) comes out to 61.5%. That’s a far lower coefficient than the relationship between Coinbase (COIN) revenue to Bitcoin, which stands at 93.3%. Nevertheless, the broader point still stands: for crypto or blockchain enterprises to perform well, the underlying market must cooperate.
As a Bitcoin owner, I have a personal motivation for the BTC market to rise. At the same time, this isn’t my first rodeo. I know very well that cryptos can test anyone’s patience. And I also realize that it’s better to be realistic because this sector can hurt the naïve badly.
With blockchain miners selling some of their Bitcoin holdings and brewing skepticism toward a spot Bitcoin ETF, it’s probably better to head for the sidelines at the moment. At bare minimum, investors should approach RIOT stock and its ilk extremely cautiously.
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