Why Aluminum Portends Significant Risks to Argo Blockchain

Time:2022-01-03 Source: 897 views Trending Copy share

Thanks to the incredible rise of cryptocurrencies, it was only an inevitability that crypto-mining specialists like Argo Blockchain (NASDAQ:ARBK) stock would dominate business headlines.

While virtual currencies have earned their place in the mainstream consciousness, the reality is that the sector is too volatile for most investors. But a stake in ARBK stock or similar mining firm? Though still risky, it’s a much more palatable one.

Generally speaking, you have two choices regarding operational exposure in your market wagers: investments based on outcome versus those based on output. For instance, many financial analysts view the electrification of mobility as a guaranteed forecast. But do you gamble on an individual electric vehicle manufacturer, hoping that this brand resonates with customers (outcome), or do you invest in EV infrastructure to support integration (output)?

Usually (though exceptions always exist) output-based investments are safer than the outcome variety. So long as the industry itself becomes viable, supporting said industry will lead to a profitable opportunity. However, the magnitude of gains will be limited. Still, that might be good enough for those thinking about buying ARBK stock.

For maximum profitability potential, you’ll probably be better off picking a longshot cryptocurrency than an output-based mining venture. For instance, the highly speculative Shiba Inu (CCC:SHIB-USD) is not in any way a rational investment. Nevertheless, the intense gains SHIB produced over a short period will likely not be duplicated by ARBK stock.

Simply, it’s the nature of the beast. By going for predictability – mining popular crypto coins with a (relatively) long track record – Argo necessarily eschews outright profitability potential. Don’t get me wrong, the market can still imbue ARBK stock with a powerful premium. However, as the crypto-mining industry becomes more established, risks fade but so too does upside potential.

And that’s where Argo Blockchain’s narrative takes a twist.

Aluminum’s History Is a Friendly FYI for ARBK Stock
While everyone today takes for granted aluminum-based products, when the metal first made its introduction to the retail market, it met substantia fanfare. Highly regarded for its color and sheen, aluminum at one point was more valuable than gold or silver. Per a description from Slate:

The French government once displayed Fort Knox-like aluminum bars next to the crown jewels, and the minor emperor Napoleon III reserved a prized set of aluminum cutlery for special guests at banquets. (Less favored guests used gold knives and forks.) The United States, to show off its industrial prowess, even capped the Washington monument with a six-pound pyramid of aluminum in 1884.

But why such fervor for a mundane metal? Though aluminum had always been plentiful in nature, it wasn’t until a German chemist succeeded in extracting a few aluminum flakes from its ore that it captured public attention.

However, aluminum’s bull run was short-lived. Entrepreneurs “finally figured out how to separate aluminum from minerals cheaply and also how to produce it on an industrial scale,” plummeting the commodity’s price. For me, that’s the economic risk for ARBK stock.

According to Argo Blockchain’s filings with the Securities and Exchange Commission, the company notes that “we currently rely on renewable sources of power and plan to increase our reliance on renewable sources of power in the future.” On one hand, that’s a major plus for ARBK stock. Essentially, Argo can mine for “free” (not including upfront and maintenance costs).

But on the other hand, what happens if renewable mining becomes too cost-efficient and effective? As we see with aluminum’s market history, once it becomes easier to extract a commodity, its value necessarily suffers a downgrade.

Now many cryptos are inherently rare, which may prevent an outright collapse. Still, when a process becomes easier, it usually commands a lesser market value.

An Industry-Wide Inquiry
Of course, this dynamic is not meant to pick on ARBK stock. Basically, every mining company must address this burgeoning economic consideration. Back when nobody was talking about cryptos, you could mine them with your laptop. As they gained intense popularity, the mining difficulty level exponentially increased.

Put another way, a direct correlation exists between difficulty and value as you would expect for any other commodity. And let’s not kid ourselves. While the underlying blockchain technology is innovative, the speculative component of cryptos trades similarly to commodity markets. That brings up a worrying question: is mining becoming too easy?

If it is, that would translate to downside pressure for ARBK stock and other miners because the cryptos themselves would suffer a downgrade. Combined with the overall market volatility of digital assets, you’ll want to think carefully before pulling the trigger on Argo Blockchain.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

By Josh Enomoto

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