Why were Riot Platforms Shares (NASDAQ: RIOT) Down?

Kerrisdale Capital, a well-known short seller, announced early yesterday that it had taken a bearish stance on Riot Platforms (NASDAQ: RIOT), the Bitcoin mining company. In a scathing report, Kerrisdale has declared that Riot is “headed for a mine collapse,” due to its current operational strategy and management decisions.

Following the release of the report, shares of Riot dropped almost 10% out of the gate yesterday, before rallying through the day. At the close of play, RIOT had regained all but 0.21% of the day's losses, as Bitcoin continued to hold above $70,000.

One of the main points of criticism revolves around Riot's prioritisation of energy arbitrage and frequent stock issuance. According to Kerrisdale, the company is better off playing these “energy arbitrage games” than trying to generate real value through its cryptocurrency mining operations. They pointed to the issue of excessive management compensation, in addition to how repeated stock issuance has diluted shareholder value.

Kerrisdale also raised the issue of environmental impact, an increasingly critical aspect as the public and regulatory bodies scrutinise Bitcoin mining practices. The report brought attention to the shift in the regulatory stance for miners in Texas, a key state for Riot and other miners due to its previously crypto-friendly environment.

In March, Riot encountered a significant hurdle when the company failed to secure a tax abatement for an essential growth project in Corsicana, Texas. This was after Navarro County commissioners voted against the proposal, signaling potential challenges ahead for mining projects in the region.

The report also suggested that Riot's business model is not a recommended path for investors looking to express a bullish view on Bitcoin. The anticipated rise in global competition within the crypto mining sector was cited as a reason for investors to steer clear.

Adding to their bearish outlook, Kerrisdale noted that after Riot put forth an unsuccessful acquisition offer, it became the largest stockholder of its rival, Bitfarms, by purchasing a 12% stake in the company.

Kerrisdale is no stranger to the Bitcoin-related business landscape, having previously criticised MicroStrategy, another company deeply involved in Bitcoin. Kerrisdale raised concerns over MicroStrategy's stock being overvalued and questioned the company's unique edge in the Bitcoin market as the share price has seen more than 100% gains so far this year.