HIVE Blockchain Stock: Navigating “The Merger”

One of the biggest crypto trading narratives since the market stopped falling in mid-June has been renewed optimism in the merger of Ethereum’s proof-of-work mainnet (ETH-USD) and Proof of Stake Beacon Chain; now scheduled for mid-September. But a slightly underestimated component of moving from proof of work to evidence of stake consensus is that miners who previously secured the PoW network no longer have the same incentive in a PoS model because the transaction validation mechanism is completely different.

For Ethereum miners, this is especially problematic because ETH mining is still done with GPUs rather than the ASIC machines required by most other PoW networks. Ethereum miners cannot simply switch to securing Bitcoin (BTC-USD) because their machines are not capable of mining it profitably. Some of the ETH miners are now upset about moving to a PoS model, and there is a proposed fork of Ethereum that would pick up some speed. According to Decrypt:

Ever since a major Chinese Ethereum miner announced plans to resist the upcoming Ethereum merger and create a new parallel network and cryptocurrency, the idea has started to gain traction.

This effort is led by ETH miner Chandler Guo and has the support of Tron (TRX-USD) founder Justin Sun. Sun also owns the Poloniex exchange and said the exchange will support the hard fork called EthereumPoW (ETHW-USD). I’m going to say categorically that I don’t think ETHW can go anywhere. The Ethereum community is generally not in favor of the hard fork and the circle has already said it will not support USDC which lives on a bifurcated Ethereum PoW chain. I’ve shared my thoughts on ETHW with BlockChain Reaction subscribers, and you can join the service with a two-week free trial to access this more in-depth rationale.

For this article, however, there are two HIVE Blockchain questions (NASDAQ: HIVE) investors should consider moving forward:

• What is the impact of post-ETH merger revenues on HIVE?
• What are the viable alternatives for HIVE GPU machines?

Impact on the HIVE Blockchain

With ETHW looking more like a waterfall than a viable option for displaced GPU miners, the logical question is what will be done with these machines. This is of significant importance to HIVE Blockchain, particularly because a large portion of the company’s mining revenue has historically come from Ethereum mining. At HIVE monthly output updates, the company refers to the ETH it mines as “the BTC equivalent.”

Mining output	BTC	BTC equivalent	ETH % of total
January	264	161	37.9%
February	244.4	132.6	35.2%
March	278.6	168.8	37.7%
April	268.8	189.5	41.3%
May	273.4	185.8	40.5%
June	278.5	142.3	33.8%
July	279.9	185.2	39.8%

Click to enlarge

Source: HIVE Blockchain

The monthly year-to-date average for HIVE is 38% of the company’s mining production coming from Ethereum. It’s a big chunk of HIVE’s mining revenue that’s set to disappear in mid-September and unless we sell off the GPU machines, it looks like the best-case scenario for revenue from alternatives will be source fragmentation.

HIVE post-merger strategy

During the July Production UpdateHIVE crafted its strategy for GPU machines following a successful theoretical Ethereum merger with proof of stake:

HIVE’s GPU fleet is comprised of two types of cards, our legacy fleet primarily comprised of RX580 and can be reused for other GPU-minable parts. The second type being our data center grade cards, namely our Nvidia fleet that we announced last year when we joined the Nvidia Partner Network; these cards have other applications in high performance computing (HPC) applications. HIVE has developed a new platform for our data center level boards to create new revenue streams. The Company plans to create new revenue streams from GPUs, such as providing HPC services for rendering, AI, ML, molecular modelingetc

Let’s take the GPU mining angle first. The unfortunate reality for HIVE is that most GPU-mined coins are not typically used in DeFi or other on-chain activities. Thus, there is not a high demand for the coins which would require higher prices and, by extension, profitable mining. Many seem to believe that when the Ethereum merger is complete, GPU mining machines will switch to another cryptocurrency that can be mined profitably with the same hardware. At first glance, the obvious choice seems to be Ethereum Classic (ETC-USD) and this coin has seen one of the strongest rallies in crypto due to this speculation; up 200% since mid-July.

To be clear, HIVE already operates the ETC in its Icelandic factory. But it’s a small MW facility compared to the rest of the company’s operational footprint.

Is ETC Mining scalable?

Moving all GPU capacity from Ethereum to Ethereum Classic while maintaining miner profitability is currently not possible. It would take an ETC price 50 times higher than current levels to match the amount of miner revenue currently generated from Ethereum mining. Due to coin price differences, the difference in block reward revenue from Ethereum to Ethereum Classic is extreme. Since early July, the average daily income of Ethereum miners is $21.3 million. For Ethereum Classic, it’s only $487,000. And this ETC figure is benefiting from a strong rise in the price of the coin over the past few weeks.

If you look at a much longer term view, ETC miner revenue as a percentage of ETH miner revenue has been trending down for a while and has only averaged 1.7% year to date. . Without a coalition of ETH miners and developers working together to migrate Ethereum business from DeFi and NFT sales to Ethereum Classic (or ETHW), we are unlikely to see robust fundamental demand for Ethereum Classic for transactions and payment of the gas.

This chart shows the daily adjusted transactions of Ethereum and Ethereum Classic according to Messari. While ETH typically tops 1 million daily transactions, ETC only surpassed 100,000 in a day twice last year. The fact is, there isn’t enough activity on Ethereum Classic to justify higher coin prices and without exponentially higher ETC prices, GPU miners won’t find a revenue savior in post-merger Ethereum Classic. ETH. The money just isn’t there.

Other options?

Of course, HIVE has already noted in its own strategy verbiage that pivoting to other GPU-minable tokens isn’t the only part of the plan. They will also seek to use the machines for different computing activities; including rendering and AI. A theoretical fit is Livepeer (LPT-USD) (OTCQB:GLIV). Last month, I got to chat with Livepeer co-founder Doug Petkanics for the BlockChain Reaction podcast. In our chat, he mentioned how the GPU chips used for Ethereum mining can be used for other purposes like transcoding video on the Livepeer network:

People who mine cryptocurrencies using GPUs or graphics processing units, the type of device used to mine Ethereum, for example, can continue to use the part of those units that is used to hash cryptocurrencies. But it turns out that these GPUs come with video encoding chips that can’t hash cryptocurrencies; they just sit there doing nothing. And what Livepeer allows them to do is say “oh, when the video encoding needs to be done, we can earn extra money for it without disrupting our cryptocurrency mining”. And it’s really powerful. It’s almost an obvious value proposition for these miners.

Video transcoding and rendering are certainly very exciting potential applications, but like ETC, there isn’t a lot of revenue footprint ready and waiting for displaced ETH miners. According Livepeer’s website, the network paid just over $203,000 in fees. This will not be enough for companies like HIVE which historically generate several million dollars on a monthly basis.

Summary

Ethereum miners are in an incredibly difficult position, and HIVE Blockchain is no different. The best-case scenario for HIVE in September would be for the merger to be delayed again. But with the success of the testnet merges, it seems more and more likely that this time is real and that the merge will happen when the devs say so. While I think HIVE Blockchain execs are on the right track with their thinking on how to monetize the company’s GPUs post-merger, the reality, at least in the crypto market, is that it doesn’t. doesn’t seem to be a viable option. I think if the company can find non-crypto businesses that are willing to pay for IT services, HIVE can recoup at least some of the revenue that they are about to lose from Ethereum’s move to a full proof-of-stake consensus. But it will likely be a very bumpy ride, and shareholders should be prepared for that. I do not personally own any HIVE shares. But if I did, I would be looking to reduce my exposure.