True to our warning, MGT Capital Investments Inc. (OTCMKTS:MGTI) has continued to edge lower as uncertainty continues to grip the cryptocurrency space. The stock remains under pressure, amidst growing concerns about the company’s cash burn rate and what the future holds for cryptocurrencies.
Just as was the case in our previous update, MGT Capital Investments, remains susceptible to further declines, given the strength of the bearish run. Trading volumes have dropped, as investor’s sentiments on the stock continue to hit lower lows.
A closer look at the chart above, it is clear the stock will have to close above of $2.18 a share if it is to be considered a bounce back play. Given that it is trading in a downtrend, a close below the $1.80 mark could see the stock plunging to the $1.70 level, another key support level.
Given that the stock has lost more than 60% in market value since the start of the year, it would take a major development for it to bounce back from the current levels. The firm’s outlook has taken a hit in the wake of Bitcoin plummeting from record highs of $20,000 to below the $10,000 level.
Before we look at the factors that have contributed to the stock’s underperformance, let us first understand what MGT Capital Investments actually does.
MGT Capital is a company that acquires and develops a diverse portfolio of Cybersecurity technologies. While the company has business segments in Cybersecurity and gaming, in the recent past, it has shifted its focus to growing crypto assets and expanding bitcoin mining operations
Currently, it operates a 5.0 Pet Hash Bitcoin mining facility capable of producing 100 bitcoins a month.
The stock has lost more than 60% in the market over the last three months on a string of bad news and developments that have forced investors to question the company’s long-term prospects. For starters, the company has increased its focus and interest in an industry that is extremely volatile. With Bitcoin, price experiencing extreme levels of volatility the stock has had to contend with huge price swings on the downside.
Bitcoin mining profitability requires MGTI to invest more to gain market share. As a result, the company has been spending a lot to bolster its mining capabilities a move that has seen its cash balance decline by 87% over the past three years.
The cash burn rate is a point of concern to investors given that it comes at a time when the cryptocurrency industry is young and widely unaccepted. Declining cash balance at this early phase of development could make it impossible for MGT Capital to stay ahead of the curve going forward.
The company may have to obtain more financing in future to increase its bitcoin mining capacity. Such a move, although necessary, poses the risk of plunging the company into debt.
In what is seen as an attempt to strengthen mining operations MGT Capital Investments has inked a deal to purchase 1,000 S9 Antminer mining rigs from Bitmain Technologies. The company has also received another set of 1,000 S9 Antminer from a third party.
Integration of the new machines w will take the company’s mining operations to 7,000 Bitmain S9s with the ability to generate 100Ph/s hash power.
“Notwithstanding the recent weakness in Bitcoin pricing, our operating efficiency, and debt-free balance sheet allow MGT to grow and generate substantial free cash flow. This swift selloff will solidify our standing as a world-class leader in crypto mining. Moving forward, we are extremely confident of our further expansion opportunities,” stated Stephen Schaeffer, President of the Company’s Crypto-Capital Strategies business unit.
There is no doubt that MGT Capital Investments is positioned to become the largest Bitcoin miner in the U.S. The company has expanded its mining operations at home and abroad after spending millions of dollars to acquire mining equipment. Having mining operations in multiple locations gives the company an edge given that cryptocurrency is international.
There is no doubt that MGT Capital Investments remains well positioned to enjoy robust growth and deliver value to shareholders by pursuing strategic objectives. However, the fact that the cryptocurrency mining and blockchain industry is characterized by uncertainty and high risk, remains a big headwind that should continue to affect the stock’s sentiments on Wall Street.
MGT Capital Investments generates a good chunk of its revenue from Bitcoin mining operations. What this means is that the price of the company’s common stock has a direct correlation with the price of bitcoin. For the stock to spike higher from the current level, Bitcoin price will have to bounce back after a recent sell-off. How soon that will happen is still open for discussion.
Given the bearish run that has engulfed the cryptocurrency space in recent months, it goes without saying that MGTI Capital does not look attractive as an investment opportunity at current levels. It would be wise to wait for a significantly lower entry point given that the stock remains susceptible to further declines from current levels.
Disclosure: We have no position in MGTI and have not been compensated for this article.