If you have a long-term perspective regarding the blockchain and the future of cryptocurrencies, I suppose you can view the current fallout in SOS Limited (NYSE:SOS) as a discount. From the closing peak of this year, SOS stock is down nearly 72%.
Before I get into my skeptical analysis of the Bitcoin (CCC:BTC-USD) miner — because if you’ve been reading my work recently, you know it’s coming — you should consider what our own Louis Navellier had to say. As an “emerging blockchain-based and big data-driven marketing and solutions provider as well as cryptocurrency mining operator,” SOS is “coming off an outstanding year with financial results that exceeded expectations,” he wrote earlier this month.
More importantly, management is “making a series of moves to scale up its cryptocurrency-mining operations and expects even better results in 2021.” Should the cryptocurrency market stabilize and rally once more, that would be a much-needed positive for SOS stock.
Still, even bulls acknowledge the difficulty regarding the mining operator. Navellier mentioned that allegations made by short-selling research firm Hindenburg Research “raised doubts that SOS owned cryptocurrency mining rigs at all.” Of course, management vehemently denies the allegations but the damage to SOS stock was done.
The best way to prove folks wrong is to put your head down and do what you do best. But with the widescale crypto volatility, SOS might not get the chance.
SOS Stock Is Trending at an Awkward Time
Nevertheless, volatility alone is not going to deter many of the new investors that have hit the scene. Indeed, it might attract them. Further, cryptos have a tendency of sharp declines followed by astounding gains. Using this historical trend, it might make sense to speculate on SOS stock.
As someone who has ridden this market through its highs and lows like no one else at InvestorPlace, I genuinely appreciate the power of this logic. But if you’re going to speculate on SOS stock, only do so with money you can afford to lose. Chances are, that’s exactly what’s going to happen.
Unlike other red ink sessions we’ve seen over the last several months, this one seems different. The crypto complex started correcting sharply a few days before May’s midway point. Since completing the correction, subsequent price action has not offered bulls much confidence. And the more sideways action occurs, the more emboldened the bears become.
But the critical reason I’m skeptical about SOS stock is the nature of the underlying mining business. While analysts and outside observers focus on the technology of the blockchain, not as many people assess the architecture’s economic viability. Here’s why this is important.
Volatility Linked to Blockchain Economics
In a traditional peer-to-peer (P2P) money transaction business, you pay a (centralized) company for monetary transfer services. The administration of said service and the revenue it generates all funnels to one source, the centralized company.
Many P2P crypto projects operate of course under a decentralized protocol. The business is the same but how it functions is different. Rather than one company providing the service and receiving all the rewards, multiple people contribute their computing power to keep operations running.
But computing power costs money — and folks need to be compensated for that power expenditure. Since this reward is linked not to a stable currency but a volatile cryptocurrency, the economics of the blockchain is necessarily volatile.
This is the reason why mainstream investors don’t like SOS stock or similar investments. Essentially, it’s volatility baked into more volatility.
China Is a Crypto Nuisance
From what I can gather, it appears that SOS’ mining operations are largely if not entirely concentrated in China. Well, that’s going to be a problem because the Chinese government made it explicitly clear that it will crack down and sweep out mining operations within its borders.
It’s surprising that SOS stock didn’t implode on the news. But some hope exists that it and Chinese rivals can pivot toward other countries, including utility-friendly regions in the U.S.
Even with the pivot, I would be cautious. For one thing, China opinion globally and especially here in the U.S. dropped to or fell near rock bottom. Therefore, we’re not going to be doing Chinese companies any favors.
On a bigger scale, the economics of mining are tied to volatile cryptos. When you can lose 50% or more of your holdings, you just don’t have revenue predictability. That’s a problem for any business and in this case, it’s an extreme one.
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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.