Cryptologgers: ETH Merger Has Little Impact on BTC-Focused Stocks
Roughly two weeks after the completion of the Ethereum merger, investors have likely heard more about its implications for Ether (ETH), Bitcoin (BTC) and the broader crypto industry. What is less clear is whether and how the merger will affect the companies within the crypto ecosystem. Using the Alerian Galaxy Global Cryptocurrency-Focused Blockchain Equity, Trusts and ETPs Index (CRYPTO) as a benchmark, only a few pure constituents are affected by the structural changes behind the merger. Some cryptocurrency miners may see a negative impact when they reuse ETH mining equipment (although the majority of public crypto miners focus on Bitcoin mining), while exchanges that offer staking services may see additional revenue growth.
Quick Update – What is the Merger?
On September 15, Ethereum finally completed its long-awaited transition from proof-of-work (PoW) to proof-of-stake (PoS) – in other words, Ethereum moved from a mining system to a staking system. This event was also known as the Ethereum Merge. This was a structural change to the blockchain, and ETH users and holders were unaffected and were not required to take any action. Despite the recent attention to the merger, this event had been expected for several years when the new PoS blockchain was created on December 1, 2020. On the regulatory side, the merger reduced Ethereum’s energy consumption by 99.95%. However, the SEC has previously expressed some concerns about betting and whether it could raise asset classification issues.(1)
The majority of public crypto miners focus on Bitcoin mining.
Because the primary change is the transition from mining to staking, the merger will affect the Ethereum miners the most out of the companies in the ecosystem. However, most public crypto mining companies focus on mining Bitcoin with the exception of HIVE Blockchain Technologies (HIVE CN) and Hut 8 Mining Corp (HUT CN). Fortunately, ETH mining equipment is much cheaper and more flexible than BTC mining equipment, so today’s ETH mining equipment can be reused. ETH is mined using graphics processing units (GPUs), which are standard hardware and can be used for multiple purposes, including mining various digital currencies. BTC is mined using application-specific integrated chip (ASIC) mining rigs — these are more powerful and expensive and are designed for a specific purpose (e.g. mining Bitcoin).(2) Although there was uncertainty about the specific completion date of the merger, began the transition in December 2020, so miners have been preparing for the merger for at least a couple of years. HIVE has already announced that it is seeking to reallocate its 6.5 Terahash of Ethereum mining capacity to other mining coins.(3) HUT expects to use its Ethereum mining equipment for opportunities outside of crypto – including artificial intelligence, machine learning or visual effects rendering. (4)
Exchanges like Coinbase can benefit from staking revenue.
The transition from mining to striking should come to companies that either participate in striking or act as a platform for striking. Staking involves depositing ETH to act as a validator, which can then produce rewards based on the balance deposited (similar to earning interest in a bank). To make the process easier, platforms like Coinbase (COIN) can facilitate the stake in exchange for a percentage of the return. The company has already seen an increase in revenue from its betting services in recent quarters from ETH and several other digital currencies. While COIN’s transaction revenue fell 66% y/y in 2Q22, blockchain reward revenue (which includes stakes) doubled over the same period. Blockchain reward revenue was 8.5% of total net revenue in 2Q22 compared to 1.7% in 2Q21.
Bottom line:
For blockchain and crypto stocks, there are few direct effects as most companies are still focused on Bitcoin and its effect on the sector as a whole is largely neutral in the short term (although there may be long-term implications for supply/demand and regulations). Individual companies with the most exposure to the structural changes behind the merger include COIN, which could benefit from increased stake revenue, while only certain miners (HUT CN and HIVE CN) may need to figure out how to smoothly transition their existing ETH mining rigs. .
The Alerian Galaxy Global Cryptocurrency-Focused Blockchain Equity, Trusts and ETPs Index (CRYPTO) is the underlying index of the Invesco Alerian Galaxy Crypto Economy ETF (SATO).
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[1] The merger | ethereum.org
[2] What is the difference between ASIC mining and GPU mining? :: HIVE Blockchain Technologies
[3] HIVE Blockchain provides production update from August 2022
[4] Hut 8 Mining Production and Operations Update for August 2022
