What's Going on With Riot Blockchain

Mining Company Jan 13, 2021

Thanks to the Telegram channel, 'Cosima Capital', we were introduced to a really awesome site called 'fintel.io' (this is not an advertisement, just giving credit where credit's due because this is the tool that was used to learn the information that we did for this report).

The purpose of this site is to allow us to get a beat on all of the SEC filings, stock offerings, plus all that other white collar yada-yada.

One filing of particular interest that we stumbled across, however, was one attesting that Bitfinex had loaned Riot Blockchain >$10 million at some point in time back in October 2017 (seems that this information is not exposed within public discourse either), so it felt incumbent upon us to ensure that the information was at least published somewhere (we do not purport to be accountants or financial experts, but perhaps those that are can make better sense of the information that we have stumbled across).

But before we hop into all of that, let's take a quick look at what / who "Riot Blockchain" is.

Introduction to Riot Blockchain

Their main site can be found here:

Riot Blockchain, Inc.
Riot Blockchain Inc. focuses on bitcoin mining and aims to be one of the largest and lowest-cost producers of bitcoin in North America.

According to the site:

"Riot Blockchain Inc. focuses on bitcoin mining, supporting the bitcoin blockchain by participating in Bitcoin's consensus system through proof-of-work mining, racing to find the next block and building upon the chain. We aim to be one of the largest and lowest-cost producers of bitcoin in North America."

As their name makes evident, the primary function of this entity is to serve as a mining company of sorts.

On the site, a bit more information about their operations can be found in a section that states:

"Bitcoin mining is Riot Blockchain's strategic focus and we are committed to the expansion of our operations."

Okay, sounds fair enough.

The screenshot above from their site provides a small look into the mining facilities they have on-hand.

Evaluating the Total Resources of the Company

One of the biggest points of criticism for the 'Riot Blockchain' company has been their relative lack of source.

See Below:

"As part of Riot's 2020 transformation, we have completely upgraded our fleet of mining hardware and continue to deploy new machines. We expect to have 1.45 EH/s online by Q2 2021."

Putting That Purported Hashrate into Perspective

Before we even begin digging into our food, let us start with the following:

The screenshot above is of a hash converter table for readers looking for a frame of reference.

BitinfoCharts Metrics

For those that don't know, 'Bitinfocharts', is a long-standing reliable source of information to refer to when looking to extract on-chain metrics and data from various resources.

Below is an example screenshot showing Bitcoin's hash rate (among other things), at the time of writing:

Assuming what we see above is true, then Bitcoin's hash rate at the time of writing is at 161.13 Eh/s.

Therefore, if Riot Blockchain is correct in their assertions that they'll have 1.45 EH/s to leverage on the Bitcoin protocol.

At the time of writing, that would represent a 1/111th share of the total hash rate (or 0.9% of the total hash rate) - which isn't bad.

Running Some Quick Calculations On Estimated Probability

Based on math done prior for other unrelated research, we remember and kn that we have done concerning this issue, there is an approximate 62.5% chance of the network finding the nonce by the 10-minute work, exactly at 10-minutes. This process effectively represents a bell-curve (in terms of probability):

Sparing the Calculations For Now

To keep this concise and to the point (of Bitfinex's curious involvement and multi-million dollar lends to the company), we're going to leave this part alone and leave it for the kids to find out / hear about whenever they're older.

Additional Information About Riot Blockchain

Clicking on their 'Our Operations' button (from the front page), we end up here: https://www.riotblockchain.com/bitcoin-mining

Agreement With Coinmint

This is another relationship worth noting (which is pretty interesting, all things considered).

According to Riot Blockchain's site, they use Coinmint for their co-location services.

See below (at the same link that we were visiting prior):

A Little More Info On Coinmint...

This excerpt on the front page of their website summarizes their duties pretty concisely

According to public reporting, the most important event of note to occur in recent history (related to Coinmint) is the bitter feud that has bubbled between the firm's owners (covered by CoinDesk)

The fact that operations were moved to Puerto Rico is an interesting fact worth noting - especially since a few known unsavory characters in the blockchain space have moved there, including Brock Pierce (via Noble Bank; infamously closed down in 2019 after serving the role of Tether / Bitfinex's primary bank of choice before they migrated to Deltec).

The rest of the article is a lot of he-said, she-said ; so we'll skip over the rest of it.

Coinmint is a Data Center

For those that do not know, the mining ecosystem / industry is fragmented by role.

Some of the roles that may be fulfilled by entirely different entities:

  1. Production of Miners (chips / tape outs / R&D)
  2. Mining Company - An entity more akin to btc.com ; their role primarily exists within the context of mining (literal mining)
  3. Data Centers - At a certain level, it may be more prudent to host your miners somewhere else entirely. This is almost always due to some tangible factor like lowered electrical costs, favorable regulations, etc. As noted on the Riot Blockchain page, this was their primary motivation for pursuing a relationship with Coinmint.
  4. Cryptocurrency Developers - This one is going to hurt feelings, but its the truth. This perhaps no more evident than on Siacoin (headed by David Vorick whom unethically bricked all ASIC machines off of the protocol for the sake of maximizing his personal profits via a self-created mining company called, 'Obelisk').
  5. Electric Providers - These are the folks that provide you the electricity necessary for your miners. Sometimes they are one in the same with the data centers that you're looking to contract to host your units.

Often times, it is cheaper for one to pursue a contract provider (for electricity) vs. attempting to obtain it themselves.

Riot Blockchain's Enigmatic Rise Started in 2020

If you haven't heard of Riot Blockchain before this year, then you're probably not the only one.

This 'SeekingAlpha' article outlines a number of reasons for why the company should've been considered a dud by investors all over: https://seekingalpha.com/article/4387954-why-fading-riot-blockchain

Specifically, the article notes that:

"At its current price, Riot Blockchain has a market cap of $171 million. That means its trading at 4.6x book. Revenue is only $7 million."

Wait...Riot Blockchain's revenue was only at $7 million by November 11th, 2020?

Turns out that data shows this was true:

The article does factor in the announcement from Riot Blockchain stating that they were planning on expanding by picking up 15k S9 Antminers at some point in 2021 (this is another enigmatic decision when considering the fact that there will likely be better miners available for deployment at some point in the future).

The article makes another statement that we agree with too, which is that, "This is an inefficient mining operation in the sense that it doesn't have the scale to really compete with the big ones."

It also notes that the, "Company is losing money", forcing it to "[tap] the market for $14 million." Which is not good.

So how did Riot Blockchain go from a stock price of $3.47 to somewhere north of $26 currently? Especially in light of the additional players that have entered into the market recently?

Another Look at Riot Blockchain's Price

Currently, Riot Blockchain is trading at $22.64 (per data from the end of the previous day of trading ; January 11th, 2021).

On the chart below from Google, we can see that Riot Blockchain's stock spiked up to >$26 on January 7th, 2021:

On that same screenshot, we can also see that the 52-week low for Riot Blockchain was $0.57. Overall, this represents a net appreciation of +4,800% in the last 52 weeks alone.

To put this into perspective, these gains dwarf what we've seen from Bitcoin this year (and, as the 'SeekingAlpha' article notes, with $7 million revenue there's hardly any reason to have such a fervent belief in this product).

Bitfinex Loan to Riot Blockchain

This part is definitely interesting because, why would Bitfinex think to be giving Riot Blockchain $10 million?

Information about this loan can be found in this filing here: https://fintel.io/doc/sec-biop-riot-blockchain-ex101-2018-may-25-18397-348

Specifically, it is stated:

"'Permitted Indebtedness' means a certain non-interest bearing line of credit of up to $10 million issued by Bitfinex, a cryptocurrency platform, in favour of the Company or its Subsidiary or Affiliate, to be used exclusively to maximize the efficacy and liquidity of all trading done through any cryptocurrency exchange operated by the Company or any of its Subsidiaries or Affiliates."

That's interesting.

If we scroll up a bit further in the filing we'll see that the 'company' being referred to here is 'GONUMERICAL LTD' ("a corporation incorporated and validly existing under the federal laws of Canada [hereinafter referred to as the, 'Company'])

GoNumerical LTD

After doing some cursory research, we quickly stumbled upon this page on Bloomberg detailing 'GoNumerical LTD' (shoutout to Bloomberg!):

The 'Chief Digital & Growth Officer' of this firm = "Thomas Jankowski" and it appears that this company "GoNumerical LTD" is dba (doing business as) Coinsquare (from Canada), which is definitely interesting.

Digging Deeper into Coinsquare [GoNumerical LTD]

They managed to vault themselves into the news a little while ago with accusations that the leader of exchange was laundering money through the exchange itself.

The allegations were detailed in this article by 'Decrypt' (created and ran by Consensys; just so you know): https://decrypt.co/32255/coinsquare-ceo-allegedly-forced-fake-exchange-volumes

Gist of the Accusations:

Coinsquare was accused of "wash trading", which is a universal cirme as far as markets are concerned.

What is Wash Trading?

Per Investopedia:

"Wash trading is a process whereby a trader buys and sells a security foir the express purpose of feeding misleading information to the market. In some situations, wash trades are executed by a trader and a broker who are colluding with each other, and other times wash trades are executed by investors acting as both the buyer and seller of the security. Wash trading is illegal under U.S. law, and the IRS bars taxpayers from deducting losses that result from wash trades from their taxable income."

This may not sound like a big deal, but it turns out that this is now a big deal (or at least it was for J.P. Morgan).

JP Morgan Got Beatdown by Multiple Federal Agencies for Engaging in Wash Trading Practices

Per the SEC's press release earlier in 2020:

"The U.S. Department of Justice and the U.S. Commodity Futures Trading Commission today announced parallel actions against JPMorgan Chase & Co. and certain of its affiliates for engaging in manipulative trading in the precious metals and U.S. Treasuries futures and cash markets. A total of more than $920 million, including amounts for criminal restitution, forfeiture, disgorgement, penalties,a nd fines, is to be paid across the three actions. The DOJ entered into a three-year deferred prosecution agreement with JPMorgan Chase & Co., whereas the CFTC announced settlements with J.P. Morgan Chase & Co., JPMorgan Chase Bank, N.A., and JPMorgan Securities."

Thus, if those accusations leveled against the CEO of Coinsquare were true, then that would be a **huge problem for them and the Canadian blockchain space, in general.

Additionally, this would call into question (to at least some extent) the legitimacy of Riot Blockchain's astronomical rise in stock price.

Appears That There Was Some Truth to the Accusations

No more than a few weeks later in 2020, another headline came across the presses (from CoinDesk this time), stating, "Coinsquare Exchange Execs to Resign Over Wash Trading Scandal".

Turns out that Coinsquare ended up getting investigated by the, "Ontario Securities Commission (OSC) [did you know that Canada had a securities commission? News to us too] after it was found senior executies told employees to make fake trades on the platform"

Some of the punishments and revelations released by the Ontario Securities Commissiono:

  1. "Between Q4 2018 and Q1 2019, 90% of Coinsquare's reported volume was faked in an illegal practice known as wash trading, the OSC said."
  2. "As part of the settlement agreement reached Tuesday, Coinsquare admitted that around 840,000 illicit wash trades were conducted on the platform, amounting to a total value of around 590,000 bitcoin (worth almost $5.5 billion at press time)."
  3. "The agreement also states that CEO Cole Diamond, founder Virgile Rostand and executive Felix Mazer knowingly “authorized, permitted or acquiesced” Coinsquare staff to carry out the wash trading, made misleading statements and sought retribution against a whistleblower seeking to expose the misconduct."
  4. "The senior executives have now agreed to resign, with Diamond to pay a $1 million penalty and Rostand $900,000."
  5. "The agreement acknowledged that Mazer had already voluntarily paid $50,000 to the commission, having acted as the company’s CCO contrary to the public interest."
  6. "Jeff Kehoe, director of the enforcement branch of the OSC, said the case was the first time the commission has taken action against the reprisal of a whistleblower since protections were added to the Ontario securities legislation in 2016." (this is really fucking sad)
  7. "Diamond and Rostand have also been banned from being registrants, officers or directors of companies or "market participants" for two to three years. Mazer received a one-year ban."
  8. "Coinsquare’s investment dealer subsidiary, Coinsquare Capital Markets Ltd., which was seeking registry approval with the OSC prior to the investigation, has been ordered to put in place major governance improvements, including an internal whistleblower program." [this is interesting, we'll make sure to keep note of the name of that dealer subsidiary, 'Coinsquare Capital Markets Ltd.]
  9. "Coinsquare, Diamond and Rostand must further pay a total of $300,000 for costs associated with the OSC’s investigation."
  10. "The OSC first accused the firm of illegal activities on Monday."

In spite of the grocery list worth items above, it is still worth asking, 'What other illegal activities was the firm accused of engaging in?'

It appears that CoinDesk didn't want to elaborate on those, but they did prevent a link to where we could find out more information about said 'illegal activities' being leveraged.

Since this is an extensive settlement agreement by the OSC (and probably the first one that we've ever had to look at from this Securities enforcement agency), we're going to leave it on the 'shelf' for the time being.

Here is the link though:

Archive of the Settlement Agreement = https://archive.vn/wip/cgemn [can you believe that this was not archived before we got to it? Yeesh]

Putting all of that to the side, it appears that this is the Company that is the other party to the agreement being made with Bitfinex in this agreement (which is extremely agreement); and given the reputation that Bitfinex has with regulators, the law and the broader blockchain community (which isn't good; they're considered bottom feeders by most rational people), it wouldn't be too much of a leap to say that this connection / relationship manifested out of a mutual interest to manipulate / game the broader markets.

Of course, this is just an assumption (for the time being).


There seems to be a ton of information that we do not know about the Riot Blockchain organization / company and that certainly doesn't help the aura of mystique around their 4500%+ price appreciation this year.

The reason why this is being brought up is because the price action of this stock is def worth looking at long-term...



Happy to serve and help wherever I'm needed in the blockchain space. #Education #EthicalContent #BringingLibretotheForefront

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