The price of Bitcoin continued to rise past $60,000 this month (before its most recent decline). And yet, despite this rising trend, the Argo Blockchain (LSE:ARB) share price dropped by 40% since the start of March. (although it’s still up at 176p from just 4.2p a year ago). What’s going on? And is this an opportunity to buy the business at a discount?
A cryptocurrency mining business
I’ve previously explained how Argo’s business model works. But as a quick reminder, it is a cryptocurrency mining company. Using an extensive collection of powerful computers, it processes complex financial transactions and is rewarded with digital tokens, such as Bitcoin. These tokens can then be sold or traded on cryptocurrency exchanges like the one provided by Coinbase.
In early April, Argo released an operational update that actually showed some promising performance. It had successfully mined 165 Bitcoin and equivalents. This is a 28% increase compared to the previous month and amounted to a total value of £6.57m. What’s more, since operating expenses are fixed and relatively low, around 84% of this revenue was pure profit.
Needless to say, these are some pretty impressive figures. So why is the ARB share price falling?
The falling Argo Blockchain (ARB) share price
As far as I can tell, the poor stock performance is most likely linked to its valuation. Over the last 12 months, the firm’s market capitalisation has grown by over 4,000% to £640m. This is quite a lofty premium when compared to the 764 Bitcoin on the balance sheet, which, based on today’s fluctuating price, are worth around £40m-£50m.
Another contributing factor appears to stem from uncertainty surrounding regulation. The US Treasury has already begun proposing new legislation to prevent illicit activities. Turkey has joined the list of countries that have banned the use of cryptocurrencies to complete payments. And just this weekend, the Bitcoin price dropped by nearly 15% due to rumours of financial institutions receiving fines for money laundering using these digital assets.Â
A company worth owning?
Despite the recent impressive operational performance of Argo Blockchain, it is still not a company I am interested in owning. Why? Because it doesn’t appear to me to have any notable competitive advantages. After all, beyond the initial cost of equipment, the barriers to entry for the cryptocurrency mining sector aren’t high. The business doesn’t have any control over the value of its core assets. It doesn’t hold any patents on its mining process. And speaking from experience, setting up a cryptocurrency mining system is not particularly difficult.
In other words, there doesn’t appear to be anything stopping another firm from simply copying Argo’s business model. And so, as I see it, over the long term, the ARB share price will ultimately be determined by the value of its cryptocurrency assets – something that is entirely out of its control.
Personally, I think there are far better businesses out there today. And so I won’t be adding any shares to my portfolio, even at the currently reduced share price.