On paper, blockchain miner Riot Platforms (NASDAQ:RIOT) represents a “Strong Buy” among Wall Street analysts presently covering the security. Indeed, no one has yet voiced a less-than-optimistic signal. However, the rumblings in the derivatives market present a worrying backdrop for all but the most sophisticated traders. Therefore, if forced into a binary assessment, I would be bearish on RIOT stock.
RIOT Stock Benefits from the Underlying Sector’s Perpetual Optimism
Bluntly speaking, investors don’t need to look far to find evidence of the underlying cryptocurrency sector’s waning performance. Presently, the total market capitalization of all virtual currencies sits at $1.04 trillion. That’s alarmingly close to the psychologically significant $1 trillion barrier, and it’s down about 11% in the trailing month. Still, RIOT stock just might benefit from the crypto space’s perpetual optimism.
For example, the decentralized asset community is responsible for colorful aphorisms that have become integrated into the mainstream lexicon. Perhaps most notable among these sayings is HODL or hold(ing) on for dear life. Even better for advocates of RIOT stock, well-respected experts voiced support for the blockchain ecosystem’s ascendancy.
Notably, TipRanks contributor Steve Anderson put the spotlight on Tom Lee, one of the founders of Fundstrat Global Advisors. In an interview with CNBC, Lee offered a massive price projection for Bitcoin (BTC-USD). According to him, should a crypto spot market exchange-traded fund (ETF) gain approval in the U.S., the value of the benchmark coin can reach between $150,000 and $180,000 per unit.
Such robust sentiment helps keep both cryptos and crypto-related enterprises like Riot Platforms in the news. It also helps fuel the flames of speculation that drives these risk-on assets. What’s more, blockchain advocates legitimately enjoy justification for their upside beliefs.
While many observers take the $1 trillion crypto market cap for granted, it wasn’t that long ago that people were amazed that the sector could even hit $100 billion. With even prior skeptics taking the digital asset market very seriously, it’s not unreasonable for respected analysts to now give names like RIOT stock the benefit of the doubt.
At any moment, cryptos can fly. However, this framework also cuts both ways.
Traders Take Advantage of Riot Platforms’ Frenzied Excitement
With confidence rising in numbers, it’s not shocking that retail investors have high hopes for RIOT stock. At the same time, the smart money (options traders) approaches the space agnostically. Essentially, they seem to recognize that RIOT can go in either direction. As a result, they’re probably taking advantage of the frenzied excitement.
Looking at RIOT stock options’ volatility smile – or the implied volatility (IV) plotted at various strike prices – IV rises at both ends of the pricing spectrum for far-out-the-money (OTM) options and deep-in-the-money (ITM) options (when viewed from the call holder’s perspective).
In simple terms, IV is essentially the option market’s storm forecast. While the forecast doesn’t guarantee a specific weather event will occur, it indicates the possibility that something unusual will occur. With heightened IV at both ends of the pricing spectrum, traders apparently recognize the possibility of extreme circumstances materializing — either intense bullishness or devastating losses.
It’s here that the distinction between the smart money and the average retail investor becomes quite evident. From the former side’s perspective, these traders don’t know where RIOT stock will eventually move. However, given that the IV has spiked for both calls and puts, they have an incentive to sell options due to their subsequently heightened premiums.
On the other hand, retail investors appear to be speculating on a directional trajectory. For instance, the open interest for OTM calls expiring shortly on September 15, 2023, is enormous. It’s possible that at least a good chunk of this open interest stems from retail buyers unwilling to cut losses and get something rather than nothing.
It’s exactly this type of behavior that the smart money generally takes advantage of by selling or writing options.
Financials Too Dependent on Crypto Mania
Finally, what deters many investors from buying RIOT stock outright is the underlying financials. Basically, the company’s growth depends heavily on crypto sentiment. When digital assets enjoy a decided bull market, Riot rings up robust sales. In contrast, when cryptos struggle, blockchain enterprises likewise lose momentum.
For instance, Riot’s revenue exploded from $12.08 million in 2020 to $213.24 million one year later. Obviously, the unprecedented rally in cryptos in 2021 contributed to Riot’s nearly 18-fold sales increase. However, in 2022, the top line printed $259.17 million, a relatively pedestrian increase of only 21.5%.
With quarterly sales now fading on a year-over-year basis, Riot is essentially a one-dimensional enterprise, and that’s a criticism across the blockchain board, not just against RIOT stock.
What is the Prediction for RIOT Stock?
Turning to Wall Street, RIOT stock has a Strong Buy consensus rating based on eight Buys, no Holds, and no Sell ratings. The average RIOT stock price target is $19.94, implying 94% upside potential.
The Takeaway: RIOT Stock is Best Left for the Experts
Although RIOT stock generates plenty of excitement among retail investors, it’s an idea best left to the experts. First, you have institutional traders likely taking advantage of the intense interest in RIOT by playing both sides of the field. Second, the company is too dependent on crypto sentiment. Thus, playing this idea without a hedged approach is extraordinarily risky.
