This week, Tesla pushed the price of Bitcoin to unprecedented new highs by acquiring $1.5bn of holdings. It is not entirely a surprise that Tesla has forayed into cryptocurrency because Elon Musk has form for dabbling in ‘alternative instruments’: in 2020 Tesla sold $428m in carbon emission credits, which accounted for all of its H1 operating profits.
Perhaps Elon Musk hopes to sustain the irrational exuberance surrounding the Tesla stock price by deriving future profits from this $1.5bn trade in cryptocurrency? One has to question whether Tesla investors would rather have made their own decisions about whether to invest in Bitcoin themselves, rather than Tesla Inc doing it on their behalf.
One of the beneficiaries of the record price of Bitcoin was Argo Blockchain (LSE:ARB), the only cryptocurrency mining company that is listed on the London Stock Exchange. Its share price is up an astonishing 1,800% over the last year. Argo is a large-scale crypto currency miner that uses inexpensive hydropower and efficient data centres to mine Bitcoin.
In January 2020 Argo generated £2.48m of income by mining Bitcoin and attained a 71% mining margin on it. The company reported that it held 501 Bitcoin, 172.5 of which were not mined, but were purchased at market rates. At today’s exchange rate and a Bitcoin price of $45,000, Argo’s holdings are worth approximately £16.36m. If it continues its January run rate through 2021 then this year it will improve its net position by +£21m.
Given these numbers, Argo Blockchain’s market cap of £466m looks unsustainable in my opinion. It represents £930,130 for every £33,209 Bitcoin that the company held at the end of January 2020. There is a cohort of people, me amongst them, who believes that Bitcoin will eventually hit $100,000 and beyond, but even at that price, it is hard to justify the Argo share premium compared to the exposure that could be attained by buying the underlying asset directly.
Argo might just about make sense if it was taking on debt to leverage its Bitcoin purchases and holdings, and therefore offering investors a leverage multiplier that they could not attain alone. But this is not the case. Argo Blockchain seems predicated entirely on rising Bitcoin prices and expanding its mining capacity whilst sustaining its very high margin mining yield.
Bitcoin prices are highly volatile and hard to predict. And for Argo to sustain its high margin mining yield will mean having to stay ahead of the competition in low-cost countries. It will also mean navigating the next Bitcoin halving, expected in 2024, when the number of Bitcoin available to be ‘mined’ will be halved, piling even more pressure onto miners.
Of course, despite these extremely high risks, cryptocurrency is ‘hot’ at the moment, and so the appetite from investors for exposure through equity investments is inevitably high, especially as many investors are perturbed by the unknown risks of investing directly into unregulated cryptocurrencies. Given this, Argo Blockchain might look clever and exciting.
It will be fascinating to continue to follow Argo Blockchain. But its current price of 130p, I believe an investment would be irrational exuberance.