Introduction
In our previous article, we established our thesis suggesting HIVE Digital’s (NASDAQ:HIVE) best days are behind it. We showed why HIVE’s best-in-class operating efficiency is simply due to a temporal supply shock during the final remaining phases of Ethereum’s (ETH-USD) PoS transition. We also discussed the many headwinds facing HIVE’s recovery back to pre-PoS ETH levels.
After observing it for about 2 quarters, we think that HIVE is showing signs of positive recovery. Still, investors should find Bitcoin (BTC-USD) mining exposure elsewhere.
HIVE’s Journey of Recovery in 2023
Recently, we’ve discovered this worrisome trend of Bitcoin miners producing lesser Bitcoins QoQ. We first stumbled upon this dire observation in Bitfarms (BITF), then Iris Energy (IREN), and then Hut 8 Corp (HUT). Initially, we passed this observation off as simply a potential risk of sector consolidation where stronger miners will acquire weaker miners that are slowly phased out and becoming infeasible. However, this series of observations suggests that the sector consolidation trend is slowly emerging, starting with the merger between HUT and USBTC. We explained that this declining Bitcoin production is simply the consequence of not expanding fast enough. We coined this observation “Slow and Steady Lose The Race“. We strongly suggest reading it for more context.
In this regard, HIVE is actually doing quite well. Even though it has yet to recover back to pre-PoS highs, HIVE’s network share has continuously increased throughout 2023. In other words, HIVE expanded faster than the other competitors in 2023.
Table 1. HIVE’s Historical Network Share
| QR(CY) | Built-up Hash Rate (EH/s) | Bitcoin Network (EH/s) | Network Share |
| 2023Q4 | 4.08 | 430 | 0.949% |
| 2023Q3 | 3.89 | 400 | 0.973% |
| 2023Q2 | 3.48 | 398 | 0.874% |
| 2023Q1 | 3 | 347 | 0.865% |
| 2022Q4 | 2.06 | 272.5 | 0.756% |
Source: Author
Before Ethereum’s PoS-transition, HIVE had a capacity equivalent to 3.2 EH/s of Bitcoin mining in 2022Q2 when the Bitcoin network hash rate stood at only about 200 EH/s. Compared to today, HIVE has a 4.08 EH/s capacity (a 27.5% increase) while the Bitcoin network has almost tripled to 560 EH/s. This resulted in a lower network shared relative to 2022Q2 figures.
The Sustainability of HIVE’s Recovery Journey
The primary risk to the sustainability of HIVE’s recovery its HIVE’s cost structure.
The 2nd-order impact of declining production is the simultaneous decrease in revenue and increasing cost. Declining Bitcoin production means less revenue. But costs such as depreciation and operation will increase as capacity increases. Moreover, these costs are distributed over less amount of Bitcoin. Therefore, costs, regardless of which basis (aggregate, or per BTC), will increase across the board. This is the case with HUT. As for IREN, We can’t extrapolate due to the unavailability of post-merger data, and for BITF, we have not analyzed BITF through this perspective.
We thought that HIVE’s improving network share could avoid the problems above and would help stabilize its mining cost, especially on the “per BTC” basis. However, we discovered an anomaly (Table 2) where both HIVE’s total and per BTC mining costs increased throughout 2023. Given the slight fluctuation in Bitcoin production, we also computed the total mining cost per unit of capacity (1 EH/s) for more confirmation and it also indicated an increase in overall cost. Hence, we suspect that there could be something brewing.
For now, we’re willing to take HIVE’s word until we have more data to work with. HIVE stated that the increase in total cost is directly related to the energy cost associated with higher mining capacity, which we agree. Still, there should not be an increase in cost per Bitcoin. The potential cause for the uptick in cost per Bitcoin or cost per EH/s could be the abolishment of the energy tax reduction in Sweden for data centers starting from July 1, 2023. If it is true, then the increase could be persistent.
Table 2. HIVE’s Historical Cost Structure
| QR(CY) | BTC Built-up Hash Rate (EH/s) | Bitcoins Mined | Operating and Maintenance ($mil) | Depreciation ($mil) | General and Admin ($mil) | Share-based comps ($mil) | Financials ($mil) | Total Mining Cost ($mil) | Total Cost per BTC | Total Mining Cost ($mil) per EH/s |
| 2023Q3 | 3.89 | 801 | 18.1 | 16.6 | 3.5 | 4 | 0.8 | 43 | 53,700 | 11.05 |
| 2023Q2 | 3.48 | 834 | 15.6 | 16.5 | 2.8 | 2 | 0.9 | 37.9 | 45,400 | 10.89 |
| 2023Q1 | 3 | 792 | 14.2 | 11.3 | 3.4 | 0.7 | 29.6 | 37,000 | 9.87 | |
| 2022Q4 | 2.06 | 787 | 10.7 | 20.3 | 3.3 | 2.5 | 1 | 37.8 | 48,000 | 18.35 |
Source: Author
Based on HIVE’s cost structure presented in Table 2, it is observable that HIVE has been making a series of losses throughout 2023 (Table 2) since Bitcoin has been trading below $30,000 on average. The upcoming halving event will only increase HIVE’s losses even further if Bitcoin does not double today’s price. As of 2023Q3 (latest), HIVE’s all-in business cost stands at $53,700 per BTC, which will translate to $107,400 after the anticipated halving event in April 2024. This level of cost efficiency is just not sustainable based on our average $66,000 Bitcoin price for the period April 2024 to April 2025.
Moreover, the majority of these losses (along with capacity expansion) have been financed by the sale of 4,818 Bitcoins (=1604 reduction in reserves + 787 in 2022Q4 + 792 in 2023Q1 + 834 in 2023Q2 + 801 in 2023Q3) over the past 4 quarters. With only about 1,700 Bitcoins left on the balance sheet (down from 3,342 in 2022Q3), HIVE’s options to grow sustainably (remember the need to grow aggressively) and cover losses (due to the higher cost per BTC) are becoming more limited by the quarter.
If all 1,700 Bitcoins (or $68mil = 1,700 x $40,000) are used specifically for expansion, HIVE could acquire 4.25 EH/s worth of capacity using RIOT’s purchases price of $16mil per 1 EH/s. This figure will increase alongside Bitcoin. An expansion from the guided 6 EH/s (2024H1) to 8 EH/s (2024H2) may not be impossible, but HIVE’s historical growth rate (12%, the same as the Bitcoin network’s 12%) suggests that it is more likely for HIVE to achieve 6 EH/s instead of 8 EH/s by the end of 2024.
Even though HIVE may maintain its Bitcoin network share and production, HIVE’s cost basis is just too high to sustain HIVE’s current rate of recovery post-halving event.
Verdict
Overall, HIVE performed better than we expected. However, we would like to caution investors that the upcoming halving event could throw HIVE off course.
HIVE’s balance sheet and expansion plan may be good enough to at least maintain its network share and Bitcoin production, but HIVE’s cost basis post-halving is not sustainable if Bitcoin does not surprise us to the upside beyond $100,000.
In addition, HIVE failed to provide investors with sufficient safety net to compensate for the unprofitable business and excessive risks incurred from the halving event. Ideally, unprofitable miners like HIVE should trade below its book value by 20% to buffer against depreciation. Yet, HIVE priced at 2.58x its (adjusted) book value, only BITF is that priced higher than HIVE.
Therefore, we think that investors should find Bitcoin mining exposure elsewhere.
Table 3. Comps
Source: Author
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