Around the middle of last month, I gave a cautionary take on blockchain technologies and cryptocurrency mining firm SOS Ltd (NYSE:SOS). It wasn’t the most popular article, I can tell you that. With all that hype surrounding the virtual currency sector, the last thing anyone wanted to hear was a bearish take. Nevertheless, I’m glad I warned readers about SOS stock.
Since the time of publication, shares have cratered 40%. What makes the loss all the more alarming is that the underlying crypto sector performed very well during the same period. For instance, Bitcoin (CCC:BTC-USD) was up double digits before succumbing to its bout of volatility. But even at the time of writing, Bitcoin is only down 8% since March 16.
I don’t know about you, but I’ll take an 8% loss versus a 40% one. But in my view, the most important question is whether SOS stock is a harbinger or a discount. Here, I find that the underlying company is stuck between two undesirable circumstances.
First, we must acknowledge the pink elephant in the room. Two short-selling specialists, Hindenburg Research and Culper Research, published damaging reports regarding SOS Ltd. Essentially, they charged that the company was a pump-and-dump scheme, allegedly going to extreme lengths such as using fake addresses and doctored photos of crypto miners to create an illusion of success.
To be clear, I’m not going to assert one way or the other whether these claims have validity. But these short sellers made the accusations, and, eventually, they eroded confidence in SOS stock. In fairness, SOS responded to the charges with extensive video footage regarding its mining operation.
Second, even if SOS stock is backed by a legitimate business, I’m not sure if the cryptocurrency sector will continue buttressing shares. Following Bitcoin’s recent record-breaking run to above $64,000, it’s now languishing under $53,000.
SOS Stock Faces Two-Front Battle
My main issue regarding SOS stock is that I don’t like the setup, as it faces technical and fundamental risks.
First, I recommend readers pull up the Bitcoin to U.S. dollar chart on Stockcharts.com — use the symbol “$BTCUSD.” Once populated, you’ll discover that BTC this year touched its 50-day moving average three times this year: in January, March and April.
The first time Bitcoin touched the 50 DMA, it responded with an approximately 89% move to Feb. 21. In the second go-around, BTC responded with a roughly 24% move to April 13. Following the volatility, BTC-USD is currently straddling its 50 DMA again.
If Bitcoin responds positively once more, it would seem that fading momentum would only result in a modest move. But chances are, Bitcoin will correct from here. Notice that it has straddled the 50 DMA for four days, while the prior two bounce backs occurred almost immediately.
Logically, should BTC-USD crumble, it will probably take down other cryptos. In turn, this would bode very poorly for SOS stock.
Let’s say, though, that Bitcoin manages to hold momentum. In that case, the focus will then turn to SOS stock’s financials. Frankly, I don’t like what I’m seeing. On its website, the company only provides quarterly reports for years 2017 and 2018. The most recent financial information I can find is only for the six months ended June 30, 2020.
With such a banner year for crypto, it seems odd that SOS is not showcasing its fourth-quarter 2020 results.
Too Much Speculation Across the Board
I might get blasted for saying this, but something about this company doesn’t seem right. Management knows that short sellers targeted SOS stock. Therefore, it’s in the organization’s best interest to disclose their latest financial data. Even if it doesn’t want to disclose it for whatever reason, you’d figure the executives would give some hint about its explosive revenue growth.
Of course, if there is no explosive growth, that poses a red flag. But I believe any intellectually honest individual will agree: The lack of recent information (especially for a super hot sector) fosters speculation among potential investors — and not the good kind.
But as I said earlier, even if the financials were in tip-top shape, the crypto sector itself is very questionable. Personally, I see a correction coming. There’s been too much speculation baked into the blockchain tokens themselves, along with ancillary businesses. For this reason, I’m still leery about SOS stock.
On the date of publication, Josh Enomoto held a long position in BTC.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.