When it comes to Chinese cryptocurrency miner SOS Limited (NYSE:SOS), the risk is just too great to justify taking a position.
Cryptocurrencies and the shares of the companies that support them are risky enough on a good day. But investing in a “blockchain services company” based in China, where the rule of law is fluid and fraud is rampant, is likely too much for most investors to handle.
Even the more widely held and accepted cryptocurrencies such as Bitcoin (CCC:BTC-USD) and Ethereum (CCC:ETH-USD) are volatile assets and prone to huge swings both positive and negative.
So, too, are legitimate U.S.-based crypto stocks such as Riot Blockchain (NASDAQ:RIOT), Marathon Digital (NASDAQ:MARA) and the Grayscale Bitcoin Trust (OTCMKTS:GBTC).
Buying stock in a China-based cryptocurrency company such as SOS adds another layer of risk that truly requires investors to have nerves of steel. Of course, this line of reasoning has not prevented the hoards of retail investors who frequent the r/WallStreetBets sub-Reddit from piling into SOS stock at a manic pace.
The Latest Short-Squeeze
SOS stock appeared to get caught in a short-squeeze by Reddit investors on April 7 when it jumped nearly 30% to $5.78 a share during the trading day. The stock has since fallen back to $4.14. However, that single day move in early April was nothing compared to the 789% jump the stock experienced from the start of this year through to Feb. 17.
In that six-week period, the company’s share price went from $1.44 to $12.80 before plunging to $4.77. Of course, that rally and retreat was driven entirely by a short-squeeze perpetrated by r/WallStreetBets investors.
SOS stock has many of the attributes that seem to be valued by the retail investors who frequent the sub-Reddit. A fledgling business, SOS shares amount to a highly speculative penny stock at this point. The company also works to both mine Bitcoin and support the underlying technology of cryptocurrencies, which are red-hot right now.
The stock is widely shorted by professional investors who are betting that the share price will go down, making it susceptible to a short-squeeze. When it comes to the r/WallStreetBets crowd, SOS appears to tick all the boxes.
Fraud Claims Hang Over
Apart from being the target of a retail investor pump-and-dump scheme, SOS presents some legitimate issues of concern that people should be aware of. Notably, Hindenburg Research, which acknowledges having a short position in the stock, has accused SOS of making a number of fraudulent claims, including listing a hotel as its office headquarters, fabricating the background of a senior executive, and making false claims about the current state of its technology.
SOS has rejected the claims, calling them “distorted, misleading and unsubstantiated.” Still, Hindenburg’s accusations should raise a red flag.
Additionally, SOS’ financial reporting has been hit-and-miss, to say the least. The company last updated investors on its financial position in June 2020, when it provided full-year 2019 results. Those 2019 results showed that revenue declined nearly 40% from the previous year and that they incurred a net loss of $10 million.
Since last summer, the company has been quiet on its financials other than to say it has raised $125 million through a share and warrant offering to buy cryptocurrency mining technology and fund the construction of a new facility in Luzhou, China.
Given the relatively small size of SOS and thin analyst coverage of the company, as well as its location within China, it is difficult to find a lot of well-sourced information about the company.
Play It Safe, Avoid SOS Stock
Investing in anything related to cryptocurrencies can be ulcer-inducing under ideal circumstances. Throwing money at an opaque Chinese company — and SOS stock qualifies — that may or may not be a legitimate cryptocurrency miner is foolish at best and reckless at worst.
Investors looking to gain exposure to cryptocurrencies would be better off taking a position in GBTC or investing in a U.S.-based company that is legitimately involved in the crypto space, such as RIOT stock. SOS stock is a pass.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.