Typically, main stream banks are late to the party when it comes to coverage of early stage companies because these companies still present risk to conservative investors. However, since we are in the early innings of the new blockchain/cryptocurrency economy that is here to stay, firms are starting to look at companies that have adopted the new model early.
One such company is HIVE Technologies Ltd. (TSX-V: HIVE) which listed preceding the huge upswing in bitcoin prices that has attracted analysts’ attention and which presents a compelling opportunity to invest in the new sector.
On Monday, GMP Richardson Securities analyst Deepak Kaushal, P.Eng., CFA initiated coverage of HIVE with a “spec buy” recommendation.
Mr. Kaushal notes that HIVE offers investors a unique exposure to the emerging blockchain sector with a competitive advantage, high growth, free cash flow, attractive return on capital and exposure to diversification in the cryptocurrency space.
The investment thesis presented by Kaushal is that blockchain technology enables new decentralized economic systems that will profoundly change the nature of monetary transactions and will become critical to the global economy.
“For investors, we see a new, high-risk high-reward sector that has low correlation to other investment classes. We see miners as essential infrastructure providers for blockchain networks that can build diversified portfolios of cryptocurrencies at attractive returns on-investment. Today miners are accelerating investment to capture cryptocurrencies as early as possible, to maximize the potential for value appreciation. Over the long term, we believe miners will become utility-like in their risk-return profile, as blockchain networks mature and cryptocurrency spot price volatility stabilizes. We think miners are a good option for new investors to the sector given the potential for diversification to mitigate company and application-specific risk.”
He set a price target of $5.35.
Secondly, PI Financial analyst David Kwan also initiated coverage noting that HIVE is well positioned to outperform its peers. Mr. Kwan recommended the Vancouver-based firm with a “buy” rating.
The analyst cited Hive’s low-cost operations in stable jurisdictions and its partnership with cryptocurrency miner Genesis Mining Ltd. which brings a “key competitive advantage.”
“HIVE is leveraging Genesis’ extensive cryptocurrency mining experience and expertise as well as benefiting from cheap power costs, access to leading edge technologies, and lower operating and equipment costs amongst other things… Genesis owns over 25 percent of HIVE and has two representatives on the Board. We believe Genesis has a strong financial incentive to make HIVE a success.”
However, he warned that investing in the cryptocurrency and blockchain sector remains a risky proposition because of the volatility seen in cryptocurrencies and share prices of companies in the sector. He expects regulatory uncertainty and creep to be a problem in the near term.
However, Mr. Kwan is optimistic because Hive stands out in the space. “Some of the key attributes of a successful miner are cheap power, a cool climate…With operations in Iceland and Sweden and its partnership with Genesis, we believe HIVE checks all of these boxes and will be one of the lower cost miners, enabling them to generate stronger margins and cash flow in the good times and better weather the down times.”
The analyst set a price target of $5.25.
As of the close on Tuesday Jan. 30, 2017, shares in HIVE could be purchased for $2.60.
On Monday Sept. 15, HIVE Blockchain Technologies Ltd. (TSX-V: HIVE) began trading on the TSX Venture Exchange. The company commenced mining operations and began accumulating cryptocurrency the same day. It is providing access to the seemingly complex world of cryptocurrencies in a traditional way, through the public markets. However, it is also providing investors a unique opportunity to get access to the blockchain technology that will change how business is done.
At the very core of the global economy are contracts, transactions and records which define the economic, political and legal systems people operate in. However, the global system has not kept paced with advancements in digital payments systems which is creating massive slowdowns and backlogs for transactions being processed through financial intermediaries; this will have to change.
Blockchain could solve this problem. The technology is at the heart of bitcoin. Blockchain is an open, distributed ledger that can track transactions between two parties in a verifiable and permanent way. The ledger is programmable to trigger transactions automatically.
In a digital world where increasingly two parties never meet and will never meet, there needs to be a way to ensure confidence and the origin of any agreement or payment. When Ronald Reagan was negotiating with Russia over a nuclear arms deal, he often quoted a Russian proverb: “trust but verify.”
Blockchain offers this and helps to remove and reduce much of the insecurity and necessary due diligence with a built-in verifiable method, allowing transactions to quickly proceed with confidence which improves the speed of business to match the booming digital economy.
With blockchain, contracts are embedded in digital code and stored in transparent and open databases, where they are protected from deletion, tampering, and revision.
Every agreement, process, task, and payment would have a digital record and signature that could be identified, validated, stored, and shared. Intermediaries like lawyers, brokers, and bankers might no longer be necessary. Individuals, organizations, machines, and algorithms would freely transact and interact with one another with little friction. Blockchain is a disturbed network, a peer-to-peer network that does not rely on a central authority because of its inherent security. Here lies the massive potential of blockchain technology.
Blockchain was introduced in 2008 as part of bitcoin, a virtual/digital currency that does not rely on a central authority such as a bank or government for issuing the currency, transferring ownership, and confirming transactions. Bitcoin and digital currencies are the first examples of blockchain technology.
E-mail enabled person-to-person messaging, bitcoin with blockchain accounting enables person-to-person financial transactions without going through a financial intermediary.
The development and maintenance of blockchain is open, distributed, and shared. A dedicated team of volunteers around the world maintains the software. Just like e-mail, bitcoin first caught on with a relatively small community. However, the community of supporters is changing as people are realizing the potential.
According to Marco Iansiti and Karim R. Lakhani writing in the Harvard Business Review, at the end of 2016 the value of bitcoin transactions was expected to hit $92 billion. That’s still a fraction compared to the $411 trillion in total global payments, but bitcoin is growing fast and increasingly important with instant payments and foreign currency and asset trading, where the present financial system imposes limitations.
According to a recent IBM study, one-third of C-level executives are using or considering adopting blockchain technology within their organizations. The study found that executives hope to enable new transaction applications that could help create trust, accountability and transparency among their organizations and partners.
Eighty percent of the 3,000 executives surveyed in the IBM study, indicated that they were using or considering blockchain either to develop new business models in response to a changing financial landscape. Furthermore, 71 percent of business leaders who are actively using blockchain believe that industry associations will play a key role in advancing the technology, suggesting widespread creation of industry standards.
The earlier a company is able to develop a business model around blockchain, the better they will be able to control its and its profitability.
Bank of America, JPMorgan, the New York Stock Exchange, Fidelity Investments, and Standard Chartered are testing blockchain technology as a replacement for paper-based and manual transaction processing in such areas as trade finance, foreign exchange, cross-border settlement, and securities settlement. The Bank of Canada is testing a digital currency called CAD coin for interbank transfers. According to the Harvard Business Review, there should be a proliferation of private blockchains that serve specific purposes for various industries.
All this is going to create massive demand for digital currencies to enable the blockchain infrastructure to work. However, there have been many campy and independent solutions created to mine digital currencies however the small scale limits their scalability and corporate adoption. The heavy data requirements limit the average user from mining without incurring massive expenses.
Industrial-scale mining is highly profitable even with cryptocurrency prices far below current levels. Professional-grade, scalable infrastructure is necessary to support a growing blockchain ecosystem.
In 2013, Marco Streng, a 29-year-old German mathematician, saw an opportunity for industrial digital mining and built a privately-owned cloud cryptocurrency mining company, Genesis Mining.
Crypto miners secure transactions on the blockchain and, in exchange for expending considerable computing resources to do so, are rewarded with newly minted cryptocoins.
Genesis’ customers purchase contracts that secure the computer processing power used to create Bitcoins or other cryptocurrencies like Ethereum. The processing power is produced in data centres built in remote northern locations (to keep the computers cool), with access to cheap electricity and great web connectivity. The company’s first industrial data centre was in Eastern Europe, with facilities added in Iceland, Sweden, and more planned locations.
Streng realized something was missing – accessibility. Many people won’t purchase Bitcoins or buy a cloud mining contract because of its complexities–both real and perceived, and yet these same individuals want to invest in what is fast becoming the future of banking and finance.
This is why one company, HIVE Blockchain Technologies Ltd. (TSX-V: HIVE) was created with the goal of building the leading listed blockchain company through the development and ownership of cryptocurrency mining infrastructure and other related blockchain businesses.
“The concept with HiVE is to give Genesis a footprint outside of the cryptocurrency world and build a bridge from the blockchain space to traditional capital markets,” commented Marco Streng said in an interview.
HIVE fills a gap in the equities markets by offering access to the growth of the blockchain sector in a traditional investment vehicle, shares. Shareholders gain exposure to both an operating cryptocurrency mining business and resulting cash-flow and price performance of a growing portfolio of cryptocurrencies generated from mining activities without having to select from the wide variety of currencies being developed.
HIVE is a partnership between Genesis Mining, the world’s largest cloud bitcoin mining company with over 700,000 customers, and Fiore Group, a leading Canadian merchant banking firm led by Frank Giustra, Gord Keep and Brian Paes-Braga.
Frank Holmes serves as the company’s non-executive chairman. Mr. Holmes is the founder and CEO of U.S. Global Investors, an award winning asset management firm specializing in gold and emerging markets.
Bjoern Arzt, Tobias Ebel, and Olivier Roussy Newton have also joined the board of directors of HIVE. Mr. Arzt and Mr. Ebel both advise Genesis and are Managing Partners of Logos Fund, a successful cryptocurrency mining investment fund based in Zug, Switzerland. Mr. Roussy Newton is an investment banker and entrepreneur focused on early stage blockchain and quantum computing firms.
Transformative applications of the blockchain are being developed and it is far from being a mature and established industry. But it makes sense to evaluate their possibilities now and invest in companies developing the technology for commercial purposes.
The long term value in blockchain will be most accretive when tied to a new business model in which to underlying value of the peer-to-peer frictionless transactions detaches from the short sighted use of blockchain for cryptocurrencies.
In the interim, HIVE technologies offers a safe and understandable route to participate and profit in digital currencies and from a technology that is in its formative stage which eventually will change how global payments are done.
The ground floor on blockchain technologies is here.
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|Lincoln Minerals Limited