Argo Blockchain shares are rising again: should I buy now?

The Argo Blockchain (LSE: ARB) share price is up a further 10%, as I write this morning, after the company said CEO Peter Wall would start receiving his salary in Bitcoin. The company also said the number of Bitcoin (BTC) mined in February rose by 38% to 129 BTC.

Shares in this cryptocurrency miner have now risen by about 5,000% in one year, valuing the business at £1bn. This is an incredible result that’s probably made some lucky investors very wealthy.

I admit that I’ve stayed out of the cryptocurrency market so far. But with a growing number of big financial companies buying BTC, I’m wondering if I need some crypto exposure in my portfolio too. Should I buy Argo Blockchain shares now, or is it too late to enjoy big gains?

Mining revenue up 75%

In today’s update, Argo said that it mined 129 BTC in February, compared to 93 BTC in January. Mining revenue — the value of the coins mined during this time — rose to £4.34m. That’s a 75% increase on the £2.48m reported for January.

Importantly, Argo’s mining profit margin rose from 71% to 81%. This suggests the new mining machines added in January are doing their job and generating more BTC more efficiently.

That’s good news, I think. But the company has one big cost which isn’t included in this mining margin figure.

Machines need replacing

Mining machines are expensive and don’t last long before becoming outdated. This is reflected in the depreciation charge for the machines in Argo’s accounts.

In 2019 and during the first half of 2020, depreciation costs were around 25% of revenue. This non-cash charge isn’t included in Argo’s mining margin, but it gives me an idea of what the replacement cost of machines might be in the future.

As the BTC price rises, more computing effort is required to be awarded new BTC. This suggests to me that replacement equipment costs will always be a significant pressure on Argo Blockchain’s profits and the value of its shares.

Argo has added 4,500 new Bitmain Antminer machines to its network over the last couple of months. These have added 430 Petahash (a hash is part of a calculation that’s needed to verify a BTC transaction) to the company’s computing power, taking the total to 1,075 Petahash.

What I don’t yet know is how these new machines will affect Argo’s depreciation costs. I suspect there will be a significant increase in this charge in the 2021 accounts.

Argo Blockchain shares: my decision

What’s a fair price for Argo Blockchain? At the end of February, the company held 599 BTC. These were worth about $31m (£22m), at the time of writing.

The latest broker forecasts I can find suggest Argo could make a full-year profit of £2.4m in 2021. This money comes from selling a proportion of the BTC it mines.

If the BTC price rises further in 2021, then the value of Argo’s stash and its profits could rise more quickly than expected. However, even if I value ARB shares at 30 times profits and double the value of the firm’s BTC holdings, I still only get a market-cap of around £120m.

Argo Blockchain’s share price of 290p values the business at about £1bn. For me, that’s too much. I’m still interested in BTC, but I won’t be buying Argo shares today.