Summary HIVE Blockchain Technologies Ltd. had a suboptimal 2022, both financially and operationally. Volatility in the sector has prolonged the crypto winter. 2023 will be a challenging year for both HIVE and the cryptocurrency space as a whole. HIVE is a hold until more clarity surfaces about the future of Bitcoin mining. Investment thesis I have closely followed the cryptocurrency sector for over five years, and I have published 2 bullish articles on HIVE Blockchain Technologies Ltd. ( HIVE ) - 8/17/19 and 5/11/20 the base case of which was the company was worthy of some of “your spare change.” HIVE traded at $0.26 on the date of my first article, and has closed as high as $26.31, or a 100X since then. My interest in this industry pioneer was largely based on: HIVE was the first public crypto mining company HIVE was the first crypto miner for both Bitcoin ( BTC-USD ) and Ethereum HIVE has a well-defined green energy and ESG focus HIVE has a global presence (Canada, Iceland, and Sweden) HIVE has a strategic HODL policy However, HIVE has made a 180-degree pivot since my most recent article as of 12/31/22 bitcoin represented 99.9% (38.9/39.0) of their digital currencies compared to then when bitcoin represented 25.7% (887/3,455) of their digital currencies. The increased froth in the cryptocurrency sector has resulted in a prolonged bear market. HIVE (like many other cryptocurrency companies) has incurred suboptimal financial results as shown in the company’s SEC filing of 2/21/23. Stock performance seekingalpha.com/hive As the above chart shows, HIVE has decreased from $4.60 to $2.75, or 41.3% since 9/15/22, when Ethereum merged to proof-of-stake because it is better for implementing new scaling solutions, less energy-intensive and more secure than the previous proof-of-work architecture. This performance is much worse than the 30.9% average decline of the 6 stocks the company referenced on the 2/28/23 earnings webcast. HIVE's beta of 4.4 is higher than the average beta of 3.6 of their peer group. The company has a quant rating of 1.77 which is a “sell” and is about the same as the average quant of 1.83 of their peer group. In my view, these suboptimal metrics foreshadow a challenging near-term future on both a company-specific level and on a macro (Bitcoin mining sector) level as the crypto winter drones into month 10, as storm clouds linger on the horizon. Q3 Form 6-K Key takeaways from my review of the above SEC filing is that the condensed interim consolidated statements of financial position show that HIVE had a significant current ratio decrease from 3.17 as of 3/31/22 to a current ratio of 1.31 as of 12/31/22. The company also had a significant working capital decrease from $174.1M as of 3/31/22 to $15.3M as of 12/31/22. The condensed interim consolidated statements of (loss) income and comprehensive (loss) income show that HIVE had revenue of $88.1M for the 9 months ended 12/31/22 compared to revenue of $161.4M for the 9 months ended 12/31/21. HIVE had a net loss of $222.3M for the 9 months ended 12/31/22 compared to a net loss of $113.6M as of 12/31/21. The condensed interim consolidated statements of cash flows show that HIVE had net cash provided by operating activities of $46.8M for the 9 months ended 12/31/22 compared to $52.6M for the 9 months ended 12/31/21 Recap Based on my review of HIVEs Q3 6-K, as of 12/31/22, the company is on track to report a record loss in excess of $235M for FY23, which ends on 3/31/23. Since the price of Bitcoin is a de facto proxy for the sector, HIVE and the other Bitcoin miners will be affected by the incessant volatility of this widely-held cryptocurrency, which decreased 65% in 2022. This price meltdown is the principal reason HIVE recorded impairment charges of $98.8M and a revaluation of digital currencies of $80.5M for the 9 months ended 12/31/22. These writedowns had a material effect on HIVE's balance sheet and income statement, as shown by their worsening financial metrics referenced above, and will further constrain their ability to access the capital markets. To meaningfully rebound from the 45.4% YTD revenue decrease would require a significant increase in bitcoin, which appear unlikely. Other items of concern are that $2.8M of the $6.6M, or 42.4% of the sales taxes receivable is conditional upon a ruling by the Swedish Tax Authority related to an ongoing value-added tax issue and the 48.4% YOY increase ($9.8M vs. $6.6M) in general and administrative expenses. 2024 bitcoin halving According to current projections, the next bitcoin halving event (which happens approximately every 4 years) will occur in early 2024. Speculation that this event will result in a price spike in bitcoin, and other cryptocurrencies are supported by the following graph: www.commons.m.wikimedia.org Based on my study of the Samuelson hypothesis as an Economics major shortly after it was created more than 55 years ago, I believe that the upcoming bitcoin halving may very well serve as a litmus test of the Samuelson hypothesis as it applies to volatility in the cryptocurrency sector. Former “bitcoin billionaires” and FOMO evangelists Cameron and Tyler Winklevoss may insert themselves in the upcoming bitcoin halving narrative and thereby add their perspective to the situation. In addition, a combination of other factors will contribute to a fever-pitched froth in the sector as the bitcoin having date approaches, and thereby support the validity of the Samuelson hypothesis. Unfavorable risk/reward profile 2022 was a tumultuous year for all Bitcoin miners- the FTX collapse, the Ethereum merger, and pronounced volatility in the sector. HIVE managed to withstand this upheaval but in my view, 2023 will be a watershed year for the company. The company has deployed 4,200 HIVE BuzzMiners powered by the Intel Blockscale ASIC and is also launching its high-performance computing cloud business, which is 25 times more profitable than mining in order to meet the challenges of Bitcoin mining However, in my view, these laudable initiatives will not have a serious impact on profitability until Q4. Since HIVE has increased 79.7% YTD, I believe that the stock is currently “over their skis” based on my assessment of the cryptocurrency sector. My back-of-the-envelope price target is sub-$2.40 or 12.7% less than the 3/3/23 price of $2.75 absent a Black Swan-like event that would implode the entire industry. Conclusion Based on the foregoing financial and operational analysis, HIVE Blockchain Technologies Ltd. faces many serious challenges going forward, highlighted by pronounced volatility, which is embedded in the DNA of the cryptocurrency sector. The following caveats which I stated in my 8/7/19 article are even more of a concern in the present environment: Investment in this sector is fraught with a multitude of perils and pitfalls. The inherent volatility of the industry is reason enough that most investors should allocate no more than 0.005% of their portfolio to this space. The bottom line is an investment in the emergent cryptocurrency sector should be limited to “mad money” and appropriate only for those with a high-risk tolerance. Given the uncertainty of the bitcoin mining landscape, I believe that HIVE is a “hold” on a short-term basis and Caveat emptor ("let the buyer be very aware") is appropriate in the circumstances. The company’s fiscal year ends on 3/31/23 which means their audited financial statements will be available at sec.gov. in the coming months. I may update this article then as I expect more clarity about all things financial to be disclosed by HIVE management, which has a history of an aspirational thought process. At present, however, my view is that HIVE Blockchain Technologies Ltd. is a "hold."
