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With interest spiking in virtual currencies, many people who missed the initial boat may be tempted to acquire shares of crypto-mining firms like Cipher Mining (CIFR). However, investors ought to be extremely careful, only putting to risk capital they can afford to lose.
On paper, Cipher Mining — a blockchain mining specialist with a focus on renewable energy utilization — corrals two of the most talked-about business items over the trailing-year period: cryptocurrencies and special purpose acquisition companies. Heavily hyped as democratized investment vehicles that give the average Joe a fighting chance against Wall Street’s alpha wolves, they have instead left a questionable performance record, presenting an awkward backdrop for CIFR stock.
Back in October of last year, Good Works Acquisition Corp. — a blank-check firm seeking a business combination with a technology company — launched Cipher Mining’s initial public offering, distributing 15 million shares priced at $10 per unit. In March of this year, Reuters reported that the SPAC established a merger agreement with Cipher Mining, a seemingly ideal choice, given the sharp rise in (BTC-USD) price.
In a two-for-one deal, regular retail investors could participate in opportunities from which they would ordinarily be boxed out. On the SPAC front, shell companies like Good Works allow anybody to participate in any phase of the journey, from pre-merger to post-combination. Thus, a Bloomberg Businessweek opinion piece pejoratively (but nevertheless accurately) described SPACs as the poor man’s private equity funds.
For bitcoin mining, the process of extracting BTC through algorithmic-intensive computing processes had become too onerous, as the crypto coin’s price soared exponentially from mere pennies to the five-digit rate it commands today. Yet thanks to publicly traded enterprises like Cipher Mining, anybody with a brokerage account could pick up shares of CIFR stock, thereby connecting retail investors to the broader digital asset narrative.
Initially, both avenues seemed to provide fresh prospects for everyday investors. However, as time went on, the picture became murkier. (See Cipher Mining stock charts on TipRanks)
CIFR Stock Depends Greatly on Pure Market Sentiment
Hailed as a democratized platform, the SPAC vehicle allowed anyone to buy new shares of a public enterprise at its initial offering price, theoretically putting regular folks on the same level as institutional buyers of traditional IPOs. However, those participants who failed to perform their due diligence quickly realized that SPAC-based IPOs tend to be extremely dilutive.
So far this year, business combinations have under-performed benchmark indices, as equity-rich sponsors and major backers took care of number one, leaving retail buyers scrounging for scraps. Unfortunately, CIFR stock hasn’t been able to convincingly beat the negative reputation of blank-check firms. At the time of writing, shares are only 3% above their initial offering price.
For Cipher Mining stakeholders, the lack of robust momentum is a double whammy, because the underlying cryptocurrencies themselves feature a democratized air about them. Disassociated from any centralized market or exchange, bitcoin and other digital assets trade wherever an internet connection exists. Thus, the sector commands a certain romanticism.
However, just as with SPACs, the facilitation of democratization alone hasn’t been enough to provide a comfortable backdrop for conservative investors. Instead, virtual currencies are subject to wild gyrations; this volatility could severely impact CIFR stock, just as it did to older crypto-mining-related firms like Marathon Digital (MARA) and Canaan (CAN).
Moreover, Bitcoin itself is mathematically becoming a higher-risk, lower-reward venture, which then impugns downwind investments like crypto-mining companies. For instance, in terms of bullish returns, 2013 represented a breakthrough year for Bitcoin, generating 5,959% profits. In 2017, another banner year, BTC returned 1,291%. In 2020, the coin gained 302%.
On the other end, 2011 was a tough year for the young Bitcoin, shedding 11%. Later, 2014 saw a whopping 61% decline, while 2018 did one worse at a loss of 72%. The pattern is obvious: the upside magnitude of bitcoin rallies is decelerating, while the downside magnitude of bitcoin crashes is accelerating.
Under this inversely related paradigm, it’s more imperative than ever to call an investment like CIFR stock correctly. Otherwise, entering at the wrong price could be devastating.
Not surprisingly, financial analysts have a lackluster view of Cipher, with the company garnering a “Smart Score” of only 4, indicating a neutral-to-cautious stance. Moreover, with little coverage, there is no average Cipher price target against which to gauge risk sentiment.
Don’t Disregard Common Sense in ‘New’ Investments
In one of the most famous passages from the Book of Ecclesiastes, the unidentified author laments that there is no new thing under the sun. Frankly, you can apply the same principle to investing.
While the specific technicalities and nuances may differ from one investment vehicle to another, the harsh reality is that anytime you put your money in capital markets, an element of danger exists. Further, if anyone suggests that a new investing fad benefits the average person, you don’t necessarily need to run but you do need to research the claims.
If there’s any authentic truism in the market, it’s that you have no friends on Wall Street. Certainly, your opposition has zero incentive to give you a helping hand.
Disclosure: The author held a long position in Bitcoin.
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