Riot Platforms (NASDAQ: RIOT) stock is up 18% yesterday. Bitcoin (BTC.X) is up 12% or so. Those aren’t over exactly the same timescale as BTC trades 24/7 in a manner that stocks don’t. But it’s similar enough that we can point to the reason why. For any and every miner is a commodity producer – they get the market price, whatever that is, for their output. But their costs do not change with that market price for the output. Therefore changes in price feed directly through to the bottom line. This is true of lithium, of gold and of crypto mining. It’s what being a commodity miner means in the sense of the economic model to employ in valuation.
As we’ve said before about Riot Platforms: “ “Riot Platforms (NASDAQ: RIOT) is up some 10% on the back of the rise in the Bitcoin price. Which makes sense as both are leveraged to that BTC price. Yes, we’re aware that they’re more than merely crypto miners, both of them, but it’s still true that they are leveraged to the Bitcoin price. Their energy costs, their overheads – so, both fixed and variable costs – do not change as the price of their output, BTC, changes. So, a rise in the Bitcoin price feeds through directly to their gross and thus net profit. Or, as the case may be, reduces their losses. So, if Bitcoin goes up in price then the value of these two stocks – so also with other miners – should go up by more than the change in BTC. It’s worth noting that they should also fall by more than any fall in BTC. Because that’s the way leverage does work, both up and down.””
Riot Platforms stock price from Google Finance
This will also be true, as we’ve said this morning, of Marathon Digital: “Clearly, all we’ve said about up and down above in that quote needs to be reversed. The BTC price has gone up that 11 to 12%. So the leverage, the gearing, works the other way around. This is just how the economic model works here. The costs to MARA haven’t gone up but the sales price of production has – therefore all the benefit flows through to the bottom line. Further, the capital value of that retained past production has also gone up.”
Miners are leveraged to the market price of the thing they mine. That’s all we really need to know here as our economic valuation model. Obviously, we’d like to know which way the BTC price is going to go but once we do know that then Riot will follow with that leverage.