A friend of mine who is an investor based in Ontario Canada asked me recently to provide him with my thoughts on Hive Blockchain Technologies, which is a TSX listed company based in Vancouver. Below are my thoughts.
My process to analyse a public company (in Canada and/or the US) is pretty straight forward. The first thing I do is a Google search for their name. This helps link me to their company website, but also helps me see the main pages that might be relevant. I arrive at Hive’s website and download their investor presentation which is a 38 page PDF. According to their investor presentation, Hive owns 2 GPU based mining facilities and owns the option to buy 2 more facilities from Genesis Mining (which is a cloud mining company, that I’ve used and reviewed on this blog). Genesis in turn owns 30% of Hive.
The first thing that strikes me as I’m reading Hive’s investor presentation is they are rightly currently focused on GPU based mining, which includes such currencies as Monero, Dash, ZCash, Ethereum. Bitcoin mining is not profitable anywhere in the world unless the miner can secure a subsidized price for power, and this usually involves some shady deal with some government or utility. From what I can see, its profitable to mine bitcoins if your facility is in a cold climate, with no taxes, right next door to a hydro electric facility so that no transmission costs are involved. This should be a hint to Ontario based towns with old hydro facilities, and a missed opportunity for Ontario Power Generation.
The problem with focusing on GPU based mining is that in the long run, the profitability of this type of mining should erode. As the market for the most popular based GPU based mining becomes more liquid, it should drive down mining profitability (especially when any kid living in his parents basement running a GPU rig is getting free electricity because his parents pay the utility bill) to the point where profit focused miners will need search further afield to less popular coins to mine. Could this be one of the reasons why Genesis is selling to Hive?
At the time of writing, Hive has a market cap of 800 million Canadian dollars. I visit Sedar.com to find their financial statements. According to their September 30th, 2017 filing, Hive has 5.8 mil in cash and receivables, almost 9 mil worth of equipment, and accounts payable of 3.2 mil. Looks like they spent more than 500k on marketing expenses and 129K on professional fees. These expenses are likely related to their fundraising. They also recorded a 2.7 mil expenses related to share based compensation.
Starting in on the notes from the financial statements, looks like Hive will recognize revenue from mined coins as they are mined and apply an exchange rate at the time the coins are mined, they will also recognize the change in value of their coins on hand based on current rates and apply the difference to current year’s profit/loss. This accounting method could cause their income/loss to swing wildly as the value of the currencies they mine rise and fall. This accounting method could also cause Hive to pay a lot more tax than they otherwise would because they are realizing the tax liability on an ongoing basis, as compared to a passive investor in cryptocurrencies who would only recognize the capital gains and losses as they are realized.
Hive will also depreciate their computer equipment on a four year straight line basis. This policy will also have a dramatic impact on earnings and taxes since these assets make up a large part of Hive’s balance sheet.
Digging further into the notes on the financial statements. The initial deals with Genesis leave Hive public shareholders in a secondary position. Genesis will hold the balance of power. The deal to sell Genesis their shares comes at a great expense to Hive’s shareholders. A finder’s fee of 3.9 million shares was paid to secure Genesis’s 30% stake, and at current market prices, these shares are worth 12 million dollars. Genesis is also the service provider to Hive’s mining operations, so now we have a situation where the “manager” of the assets is also the largest shareholder, I’ve seen situations like this before, and it never turns out good for public minority shareholders.
There have been a number of related party transactions over the past few quarters, and as a public minority shareholder, this would be a red flag.
So Hive doesn’t make profits, the only way they will make money is if the value of crypto currencies gain in value relative to the Canadian and US dollars. Who would want to invest in this company? I’d say lot’s of people actually. The main investor would be the retail investor in Canada and US who knows enough about crypto currencies to be suckered in my a slick investment sales process. These investors know the potential power of crypto currencies, but not enough to evaluate the profitability of Hive specifically. I think these investors would be better off holding the crypto currencies and riding the wave themselves, rather than entrusting their money to a company with a lot less accountability directly to them. Another strategy for the retail investor who is a potential investor in Hive is to treat their cryptocurrencies as a fun hobby and learn about how to mine themselves. Find a friend who lives in an apartment building where the building pays the electricity, and setup a small GPU mining rig in their apartment, share the profits. You’ll never get rich this way, but actually, the best way to get rich is to do something like the managers of Hive has done, know more than your investors and sell them the investment, pay yourself a handsome fee in the meantime.