Riot Blockchain’s dilution-based growth and expectations for Q2 2022 (NASDAQ:RIOT)

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A company can be financed in 2 ways: equity or debt. The notion of debt is negative because companies risk insolvency when they go into debt. The late Peter Lynch once said:

During the purchase depressed stocks in distressed companies, look for those in a superior financial position and avoid those with a lot of bank debt. • Businesses that have no debt cannot go bankrupt.

Riot Blockchain (NASDAQ:RIOT) actually matches the above description. First, RIOT is indeed depressed as both Bitcoin and RIOT are down 70% and 90% from their respective highs. Second, RIOT has no debt. RIOT’s total liabilities are only 10% of its total assets.

Completion of the first quarter of 2021 with record current assets and zero debt.

Given this backdrop (depressed but debt-free), we were prompted to take a deep dive into RIOT’s zero debt policy. Therefore, this article aims to review RIOT’s zero debt policy in the release of its Q2 quarterly report.

Identify the source of RIOT growth

It is clear that the growth of RIOT is supported by dilution. RIOT’s outstanding shares have increased from 84.12 million (2021Q1) to 117.3 million (2022Q1), or 40% in one year. $600 million was raised.

The significant increase in the number of shares outstanding occurred in the fourth quarter of 2021, which saw an influx of cash. In Q4 2021, RIOT’s cash position increased from just $57.8 million to $312 million, deposits for asset purchases increased from $94.4 million to $266.17 million dollars and properties and equipment went from $200 million to $263 million. These variations represented 80% of the cash raised.

In the following quarter (2022Q1), the decrease in cash to $113.5 million is reflected in the increase in deposits and properties, and equipment.

Since this growth (in mining capacity) occurred without a significant change in leverage, we can establish a thesis that RIOT’s growth is supported by dilution.

Dilution to cover operating expenses

Moreover, we can also establish a thesis that RIOT maintains its commercial activities by dilution.

Since RIOT is a Bitcoin mining company, RIOT’s sole source of income is Bitcoin mining. RIOT would need to sell mined Bitcoin to raise funds to cover expenses. The lodging segment is omitted here because it is loss-making ($9.7 million in revenue versus cost of revenue of $15 million). However, it does not appear that RIOT is selling enough Bitcoins to cover its business expenses.

During the period from Q1 2021 to Q1 2022, RIOT produced (self-mined) 5,218 Bitcoins while RIOT’s Bitcoin reserve increased by 4,549 Bitcoins. This implies that 87% of mined Bitcoin was held by RIOT. Could the 669 Bitcoins sold cover operating expenses? Unlikely, based on RIOT’s operating expenses during the period.

So what does investing in RIOT mean?

In order to maintain shareholders’ claim to the same amount of profit amid a 40% dilution, RIOT’s profit must increase by 40%. Therefore, investing in RIOT means that investors believe Bitcoin can appreciate to increase RIOT earnings by more than 40%.

A 40% dilution is by no means marginal. However, Bitcoin’s volatility could justify this 40% dilution. RIOT’s all-inclusive trading cost for Q1 2022 per BTC is $30,800. Assuming a Bitcoin of $50,000, RIOT’s profit per Bitcoin mined would be $19,200. Bitcoin only needs to appreciate by 15.4% to increase profit by 40%, thus justifying the 40% dilution.

In fact, Bitcoin doesn’t need to rise 15.4% to justify the 40% dilution. Since Bitcoin is an asset, RIOT’s valuation increases when Bitcoin appreciates. The more Bitcoin in RIOT’s reserve, the less Bitcoin needs to appreciate to justify the 40% dilution.

While our thesis sees Bitcoin bottoming out at $10,000 by the end of 2022, our thesis also sees Bitcoin hitting $100,000 in 2024.

Since Bitcoin is in a bear market and is expected to remain in a bear market or sideways market until 2024, dilution is preferable in terms of insolvency risk. No debt, no bankruptcy.

What if RIOT could no longer dilute shareholders for capital?

It’s simple, RIOT is going to have to start selling more and more of its mined Bitcoins. However, therein lies the problem.

RIOT has already started selling Bitcoin to raise funds to cover expenses amid Bitcoin’s steep decline since April 2022. For each passing month since April, RIOT is selling more and more of its mined Bitcoins at a time. in absolute amount and in relative amount. But the money from the sale is dwindling.

  • 250 Bitcoins (out of 508 or 50%, to raise $10 million) sold in April
  • 250 Bitcoins (out of 466 or 54%, to raise $7.5 million) sold in May
  • 300 Bitcoins (out of 421 or 71%, to raise $6.2 million) sold in June
  • 275 Bitcoins (out of 318 or 86%, to raise $5.6 million) sold in July

This trend is a worrying sign. If Bitcoin were to decline further, the sales of mined Bitcoins would not be enough to cover the expenses. Next, RIOT would have to dip into its Bitcoin reserves to cover its expenses.

In such circumstances, share offerings (dilution) will also not be feasible. RIOT’s share price would fall further while greater dilution would result in less cash being raised. Assuming that investors will subscribe to stock offerings.

It is indeed a vicious circle.

Performance expectations for the upcoming second quarter

RIOT mined 1,395 Bitcoins in Q2, a figure similar to its previous 3 quarters. Therefore, the overall trading cost of RIOT per BTC (excluding stock-based compensation (SBC)) should be around $29. RIOT’s stock-based compensation has historically fluctuated wildly (Table 1). But if SBC normalizes, we expect RIOT’s all-in trade cost to anchor around the $30,000 level. If the overall cost of the business per BTC increases materially beyond $30,000 (not caused by SBC), RIOT should be devalued accordingly as it forecasts lower profitability in the future, higher liquidity risk and more severe dilution.

We also expect the cost of revenue per BTC to be at the low level of $10,000, which is consistent with Q1 2022 and Q4 2021. If the cost of revenue increases, this would imply that the increase in energy cost or labor cost creeps into RIOT costs. This would be devastating as winter approaches, as energy demand is expected to increase further.

We expect cash on hand to remain above $100 million. This is because the cash needed to cover operating expenses has been raised through sales of mined Bitcoins. Any decrease in cash must be followed by an increase in deposits or properties and equipment. If this expectation were to be violated, the liquidity risk is significant.

Table 1: RIOT management SBCs as a percentage of total spend


Revenue cost (millions)

Damping (mil)

Management comp (mil)

Teacher + Admin

+ consult (mil)

Interest Exp (mil)

Total self-mining cost (mil)

% management compensation



2:25 p.m.




43.25 / 40.25








60.17 / 29.73


























Source: Author, RIOT Form 10-Q


RIOT’s cost structure aligns with industry averages. Therefore, the expected capacity (Table 2) should be the primary factor in determining RIOT’s valuation against other Bitcoin miners. On this basis, the market capitalization of RIOT is justified. RIOT has lower expected capacity than MARA and CORZ and higher expected capacity than others.

CORZ may seem undervalued compared to RIOT, but CORZ is plagued with operational and business inefficiencies. The revenue cost of CORZ is 2 times that of RIOT. CORZ nearly exhausted its Bitcoin reservices by selling over 7,000 Bitcoins in June to raise $160 million. We still have to wait for official filings from the SEC to determine how the money raised is used. Whether to cover its cost of operation or for deposits and asset purchases (expansion).

Table 2: Market capitalization of Bitcoin mining companies compared to planned capacity

Company Bitcoin reserve (June 2022) Accumulated mining capacity Planned capacity in the near future Net bitcoin reserve market capitalization (in billions of dollars)
Digital Marathon (MARA) 10,055 3.9 23.3 1.27
Scientific Core (CORZ) 1,959 8.3 16 0.875
Riot Blockchain (RIOT) 6,654 4.4 12.8 0.847
Iris Energy (IREN) -* 1 ten 0.29
Bitfarms (BITF) 3,144 3.6 8 0.246
Blockchain HIVE (HIVE) 3687 (3239 BTC + 7667 ETH) 2.17 6 0.346
Mining Hut 8 (HUT) 7406 2.78 6 0.25
Soluna Holdings (SLNH) -* 1.021 4 0.06

Source: Author


In this article, we established our thesis that the growth and function of RIOT is supported by dilution. Given the current Bitcoin bear market, RIOT could enter a vicious circle of selling more Bitcoins or stocks to raise less cash.

Since the production performance is already known before the publication of the second quarter report, we focus on the expenses. If the actual numbers deviate from our expectations set out in the previous section (for the worse), we will need to further downgrade RIOT accordingly.

Considering the vicious cycle, dilution and other forms of business risk (eg inflation), we maintain our view that Bitcoin is the better investment than RIOT.

About Catherine Wilson

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