We’re only eight days into June and Argo Blockchain (LSE: ARB) shares have already fallen 20%. And since a 2021 peak of 360p, we’re looking at a 65% fall. Am I looking at rat poison here, or have I been handed an unmissable buying opportunity? After all, the ARB share price is up 2,800% over the past 12 months, so some investors have struck it rich.
There’s clearly one big driver of the Argo Blockchain share price, and it’s the price of Bitcoin (and other cryptocurrencies). That’s very volatile, and has been in a bit of a slump. At the time of writing, the price of one Bitcoin has dropped to $33,000. Folks who bought some a few years ago are very much in the money. But, right now, those who bought at this year’s all-time high of over $63,000 are looking at a big loss.
In turn, the big driver of Bitcoin seems to be celebrity comments. Crypto prices have famously been hanging on Elon Musk’s every tweet in recent months. And the latest big name to talk it down is Donald Trump. In the week that we heard of El Salvador’s plan to make cryptocurrency legal tender, the ex-president has called Bitcoin a scam. He told Fox Business he doesn’t like it “because it’s another currency competing against the dollar.”
Understandable volatility
With the value of Bitcoin so volatile and hanging on the latest headline, I’m not at all surprised that the ARB share price is also so volatile. But could Argo Blockchain actually be a good way to play the cryptocurrency market? In a way, yes, I think it could. It’s similar to the way I might buy a gold miner but I would never buy gold.
Wherever Bitcoin goes, providing Argo can mine it for a lower cost, it can make a profit. And right now, it looks like Argo can mine the stuff for a lot less than the market price. Argo’s latest update told us the company mined 166 Bitcoin or Bitcoin equivalent (BTC) in May. That brings the year-to-date total to 716 BTC. Mining revenue for May came in at £5.51m. That’s down from April’s £6.7m, as prices have declined. But here’s the profitability thing — Argo achieved an average mining margin of 82%.
ARB share price valuation
At the end of May, Argo held 1,108 BTC. At today’s price, that’s worth approximately $36.6m, or £25.8m. And what’s the valuation of the company? Argo Blockchain’s current market capitalisation stands at £486m. So investors are paying almost 19 times the value of the underlying Bitcoin assets when they buy Argo shares at today’s share price. On a trailing basis, Argo shares command a P/E of 318. That’s huge. Admittedly, though, I do expect it to fall this year as profits are on the up. But will earnings growth push the valuation down to something I see as reasonable? I very much doubt it.
So, I can see the value in the Argo business model. And, just like gold miners, it can be a profitable business. It’s just that I rate the ARB share price as way too risky, with little safety margin, even after recent falls. No, it will never be one for me.