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First FTX’s collapse, now this UK stock has tanked 96%. Are crypto stocks doomed?

Young Caucasian man making doubtful face at camera

Cryptocurrencies remain incredibly popular despite the incredible volatility and scandals. The latest example is the spectacular collapse of cryptocurrency exchange, FTX. But I am not here to bash cryptocurrencies.

On the contrary, I’d like exposure to it through more liquid, secure and less volatile UK stocks. Back in 2019, a Yale study concluded that a 4%-6% portfolio allocation to crypto was sensible. I figured my very defensive ISA portfolio could benefit from a small dose of ultra-high-risk alternatives diversification.

One UK stock that initially impressed me was Argo Blockchain (LSE:ARB). Within two years of listing on the AIM index, it had delivered a share price return of 1,260%.

I have rarely, if ever, seen growth as explosive and as rapid as that.

It was firmly on my watchlist up until earlier this year when a fundraising effort flopped. Even the London Stock Exchange has offered a helping hand by suspending trading in the shares to prevent them becoming worthless. How did this all happen?

UK crypto stock in focus: Argo Blockchain

In its first quarter following its listing, Argo’s revenue grew 291% to £74.2m. Its mining margin was 84%, significantly higher than its nearest peers like Riot (at the time). It took me a while to realise that these margins were largely out of the company’s control.

Its margin depends on the cost to mine Bitcoin (mostly the price of machinery and electricity) and selling the crypto when the price is high. But that margin will always be at the whim of whatever the market dictates the price to be.

When the price of Bitcoin was at all-time highs during 2021, Argo’s share price and revenues were flying high. But I have discerned that when the price is on the skids, the miners’ collapse could be imminent. Mining coins isn’t cheap. So, it’s quite literally a case of boom or bust for these types of companies when the chips (value of crypto) are down.  

Steering clear of crypto stocks

I viewed investing in crypto-linked UK stocks as a way for me to gain access to cryptocurrencies in a de-risked way. But sometimes, you can’t have your cake and eat it. The revenues of many of these stocks like Argo are inextricably linked to the ever-changing price of the asset being mined.

The case of the recently bankrupted FTX is no different. Its demise was fuelled by surge of customer withdrawals following the crypto price crash.

Don’t get me wrong, I believe cryptocurrencies, and the blockchain technology that underpins their use, will become more ubiquitous in the global financial system. FedEx uses blockchain technology to plan and track shipments. Microsoft has been accepting bitcoin payments since 2014. The trend will continue.

However, at the stock level, my risk appetite is too low to hold on to any crypto-linked UK stock for the long term. Ultimately, I have found that crypto-linked UK shares are invariably linked to the intense price volatility of the underlying cryptocurrencies. These crypto mining stocks have a lot to lose if cryptocurrency prices crash. It is why I plan to steer well clear of crypto stocks for the foreseeable future.

The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of investment advice. Bitcoin and other cryptocurrencies are highly speculative and volatile assets, which carry several risks, including the total loss of any monies invested. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

The post First FTX’s collapse, now this UK stock has tanked 96%. Are crypto stocks doomed? appeared first on The Motley Fool UK.

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Henry Adefope has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.