Penny stocks are volatile investments. So too are Bitcoin mining stocks. Cryptocurrency data centre specialist Argo Blockchain (LSE:ARB) fits into both categories, with a market cap of £53m and a share price just above 11p as I write. Accordingly, it’s fair to say this isn’t a stock for faint-hearted investors.
The company operates purpose-built computers in its strategic North American locations to mine Bitcoin by solving algorithms in blockchain networks. It earns revenue in the form of rewards and fees from its mining activities.
Its share price is down 71% compared to where it was a year ago. In that timeframe, the firm has lagged the 52-week performance of other popular crypto miners like Riot Platforms (+142%) and Marathon Digital Holdings (+26%).
So, what’s holding the company back and will it catch up with its competitors? Here’s my take.
Bitcoin mining
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The Bitcoin price has surged 69% in 2023. That’s been good news for crypto miners, which currently receive 6.25 coins per block solved. Argo Blockchain shares have benefited too, climbing 53% since the start of January, but not to the same extent as some bigger industry players.
This is a risky sector. A quick glance at the five-year chart for the Argo Blockchain share price shows as much. The stock’s highly correlated to the value of Bitcoin, hence the extraordinary jump during crypto mania in the pandemic. But investors who bought shares at the 2021 peak would be nursing a huge 96% loss today.
It’s hard to separate the future direction of Argo Blockchain shares from that of Bitcoin. After all, mining so-called ‘digital gold’ is the core of its business. In Q1 FY23, the company mined 491 coins at an average of 5.3 coins per day, generating revenue of $11.4m.
Crypto fans enthuse about Bitcoin’s future potential. Sceptics, like Warren Buffett, believe it’s worthless and avoid any exposure to it at all costs. I put myself somewhere between them. I can see a future role for Bitcoin in the global economy, but I think it’s unlikely ever to replace fiat currency, as some outlandish predictions suggest.
Debts to pay
So, why has the Argo Blockchain share price underperformed other crypto miners?
For me, the answer lies in the company’s balance sheet. Many of the firm’s competitors went bankrupt when the Bitcoin price crashed in 2022. Argo Blockchain managed to stay afloat, but it came at a heavy price.
The company sold its Helios mining facility in Texas to Galaxy Digital for $65m. It also took out a $35m loan from the same firm, secured against its mining equipment. The urgent need for debt reduction weighs on the outlook for future share price growth.
To reduce its liabilities, Argo Blockchain recently raised $7.5m from a share sale, representing a 12% stake. This sent the share price tumbling. A large debt burden adds further risk to what is already a speculative investment proposition.
A stock to buy?
Although there’s a case to be made for this penny stock’s future potential, I’m not tempted. It’s simply too risky for me.
If I was going to add a Bitcoin miner to my portfolio, I wouldn’t pick Argo Blockchain first. I’ll follow the stock with interest, but I’m looking elsewhere for now.
