Has the Argo Blockchain share price fallen too far?

Argo Blockchain stock has been bouncing back after its recent plunge. But can the move higher continue, based on recent mining success?

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Diagonal chain made of zeros and ones. Cryptocurrency and mining.

Image source: Getty Images

Cryptocurrency mining company Argo Blockchain (LSE: ARB) owns impressive banks of specialised computers. And they chug along night and day aiming to verify cryptocurrency transactions and add them to a blockchain ledger. Each new block of transactions has a complex mathematical function that must be solved. And that’s the reason for all the computing power.

Argo Blockchain’s recent mining success

The company has enjoyed some recent success with its cryptocurrency mining operations. In an operational update on 3 March, Argo Blockchain said it mined 129 Bitcoin, or Bitcoin Equivalent, in February, up from 93 in January. To put those figures in perspective, at the end of February, the firm had 599 Bitcoins.

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When a traditional commodity miner hits ‘pay dirt’ the valuable stuff can be held in someone’s hand — for example, copper, iron ore, coal etc.  But with cryptocurrency, the process is different. Every time a bitcoin miner solves the required problem it can ‘claim’ bitcoins as a reward for the effort.

Based on daily foreign exchange rates and cryptocurrency prices, Argo Blockchain’s mining revenue in February came in at £4.34m. And that’s up from £2.48m in January. Meanwhile, the average monthly mining margin came in at 81% in February, up from 71% the prior month.

That’s an impressive rate of return. But the soaring value of Bitcoin against other currencies such as the dollar and the pound had much to do with the outcome. The actual process of mining cryptocurrencies involves a lot of costs — just like traditional mining. For example, running the computers takes a lot of power. And buying them in the first place is expensive.

On top of that, those vast banks of computers must be housed, installed and maintained. And, by some reports, they only have a useful life of around three years. So capital costs keep on coming for miners when the gear needs replacing.

Rising operating costs

Meanwhile, the rising value of cryptocurrencies has been driving up the prices of computing hardware for mining because of increased demand. And I can’t help remembering the commodity mining industry in the mid-to-late noughties. Back then, there was a great ‘story’ going on about a so-called commodity supercycle. Commodity prices were shooting up and so were mining companies costs because of the demand — everything, from employees’ wages through to the cost of dumper trucks, shot higher.

And it ended with commodity prices crashing and plunging mining companies into big financial losses because they’d lost control of their cost bases. To put it another way, the commodity supercycle ended up looking like a bubble that burst in the end.

The activity of cryptocurrency mining has already moved up the value chain away from individuals to big set-ups such as Argo Blockchain’s. It’s only such economies of scale that allow the process to be profitable. And the company is bent on scaling up even more. Just yesterday, it announced progress with plans to develop a huge new mining facility in Texas.

Argo Blockchain stock has delivered magnificent returns for some investors. And it may do so again if the expansion programme clicks. However, I’m cautious as the firm ramps up its assets and costs. My guess is cryptocurrency values could end up showing volatility in a similar way that commodities do.

Maybe the fall in Argo Blockchain’s share price is justifiable.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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