Would I buy Bitcoin? No. Would I buy shares in Argo Blockchain (LSE: ARB)? Maybe. That might sound strange, so I’ll explain. To me, it’s similar to gold. I won’t buy gold, because it’s a straight gamble on where the gold price might go next.
But a gold miner is different. Based on a range of possible gold prices, we can estimate some sort of base level for the long-term profits a miner might make. Similarly, it should be possible to come to some sort of rational valuation for the ARB share price, shouldn’t it?
It’s not easy right now. Rather than any fundamental valuation based on profits, the Argo Blockchain share price is really just following where cryptocurrencies are going. Bitcoin has soared in 2021, but it’s fallen back some way since its high in April. And that’s what ARB shares have done too.
It seems it’s all down to Elon Musk. Tesla accepts Bitcoin in payment for cars? Buy Bitcoin. Oh, Tesla won’t take it any more? Sell Bitcoin. He says Tesla might sell its Bitcoin holdings, then he says it hasn’t… you get the picture.
It seems crazy to me to value something based on whatever one person happens to tweet in any one day, even someone as successful and charismatic as Musk. But that’s the way the cryptocurrency world seems to work.
ARB share price down again
Argo Blockchain ended Tuesday down 5.8%, at 130p. That’s still a climb of more than 2,500% over the past 12 months. But the price hit a peak of 360p at on 26 March, and has since plunged 65%. That suggests it’s hugely risky buying into a crypto mining stock, way more than a gold mining stock.
To get back to my gold miner comparison, I’d value a mining stock based largely on the cost of extraction per ounce. I’d examine historical gold prices, and work out what margins the miner might make at various levels. And if I think there’s still decent profit even if gold falls significantly, I’ll seriously consider buying the shares.
I’d want to see the share price trading at a discount to what I think the underlying profits might be like. But that’s not happening with the ARB share price.
Speculative valuation
At the end of April, Argo held a total of 936 Bitcoin, or Bitcoin equivalent (BTC). And it was mining at a rate of around 1,970 BTC per year. The company’s current market-cap stands at a fraction under £500m, or about the equivalent of 16,600 Bitcoin.
Mining at current rates would take around eight years to generate enough BTC to match the firm’s valuation. Well, presumably longer, as it costs money to run all the computers.
I know Argo plans to raise its production rate, but that will cost more money. And, right now, the ARB share price still appears to value the company based solely on the speculative future value of Bitcoin. It’s not based on any proven sustainable profits the company might make.
Should that happen, that’s when I’ll consider buying.