HIVE Blockchain: Why The Way Forward Is Promising (NASDAQ:HIVE)

There has been a lot of concern among some investors concerning what effect “The Merge” will have on the performance of HIVE Blockchain (NASDAQ:HIVE), since it had significant exposure to Ethereum (ETH-USD).

The company has stated it’s going to transition its former Ethereum miners to other altcoins in order to make generate revenue to help replace revenue from Ethereum. An important question that must be answered is how quickly and to what extent that strategy will boost revenue.

That said, I’m on record as saying for some time that the price movement of Bitcoin (BTC-USD) has been the major driver of the share price of HIVE and will remain so in the future.

In this article we’ll look at the time frame I think HIVE faces before the price of Bitcoin enters into a sustainable recovery that will significantly boost the share price of the company, as well as how it’s positioned to endure the current economic weakness that continues to weigh on the performance of the firm.

A quick look at “The Merge”

There has been quite a bit of commentary concerning the impact “The Merge” will have on HIVE as Ethereum went from proof of work to proof of stake, resulting in a void for the miners it was using to produce Ethereum.

To get an idea of the impact, in August the company produced 16.7 Bitcoin equivalent per day, with Bitcoin accounting for 9.4 of that, which means Ethereum made up the remaining 7.3 BTC Equivalent a day. When including the decline in the price of Bitcoin and the loss of Ethereum production, that’s not an insignificant amount of revenue the company has lost.

One thing the company is doing to offset some of that is to increase its Exahash rate from 2.23 in August to 3.5 Exahash by Q1 2023. That will result in more Bitcoin production, and, if the price has started to sustainably rebound by then, which I think it well, the company is going to be in a much stronger position than it is today. If that’s how it plays out, momentum in relationship to revenue growth will return.

Also, by that time we should be getting the first look at the company’s strategy for mining altcoins is, and how it will impact the top and bottom lines going forward. I don’t see that as having any meaningful impact in the near term, but when combined with the rebound in the price of Bitcoin, it could be a solid catalyst in the future.

Balance sheet

At the end of June 2022, HIVE had $4.0 million cash on hand, with digital currencies valued at $71.4 million. Liabilities at the time were $29.2 million.

As of the end of August 2022, HIVE had a HODL balance of 3,258 Bitcoin, up from the 3,091 it had at the end of July 2022.

In early September 2022, HIVE announced it had entered into a $100 million at-the-market offering agreement with H.C. Wainwright. Per terms of the agreement, H.C. Wainwright “may from time to time sell shares of the company of up to $100M.”

The primary purpose of the proceeds will be to use it to expand its blockchain mining operations.

It should also provide a financial cushion if the company needs it, in the event the price of Bitcoin remains subdued longer than expected.

Macro-economic environment

As with all of its mining peers, the near-term performance of HIVE will directly correlate with macro-economic conditions that have triggered the Federal Reserve into boosting interest rates in order to lower inflation.

For that reason, the next couple of CPI readings will give a lot of clarity concerning how this will play out for HIVE. If inflation starts to pull back, there is no doubt it will improve market sentiment, which will in turn attract more capital into high-growth stocks like HIVE.

And if inflation pulls back for two or more readings in a row, it will accelerate the process, bringing money back into Bitcoin, in turn driving the price up, pushing the share price of HIVE up as well. At that time, the inflow of capital into higher risk assets will increase, rewarding high-growth stocks.

I believe this is likely to happen by the end of calendar 2022, and by latest, by early 2023. If that’s how it plays out, HIVE will return to its past growth trajectory, and its share price should move up in a big way.

I’m not suggesting here that this is going to happen quickly, in the sense of returning to prior levels in a rapid fashion, only that investors are going to look more to growth stocks that have been pummeled by inflation and the Fed’s response to it.

Conclusion

While “The Merge” turned some investors negative on HIVE, it’s my opinion that the sentiment is overblown based upon the fact the share price of the company has moved in correlation with the price of Bitcoin and will continue to do so in the future.

That’s not to say revenue won’t be impacted from Ethereum moving to PoS, but it does mean the market will continue to bid on the company based upon the price movement of Bitcoin, as the chart below confirms.

With HIVE being one of the most efficient miners, boosting its hash rate will result in an increase in the number of Bitcoin mined, which will make up for some of the loss in revenue associated with Ethereum. If HIVE is able to generate legitimate and sustainable revenue from other altcoins it’s attempting to mine, it’ll improve sentiment as the market awaits the return of the increase in Bitcoin prices.

HIVE has a decent balance sheet with enough financing to see it through this period of economic weakness. Unless there is an unforeseeable Black Swan that emerges, I’m confident HIVE is going to do very well in the months and years ahead.

Those getting in at the low entry point reflected in the share price of HIVE at this time, should do very well.