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Crypto Protocols: ETH merger has little impact on BTC-focused stocks

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Roughly two weeks into the Ethereum merger’s completion, investors have likely heard of several of its implications for Ether (ETH-USD), Bitcoin (BTC-USD), and the broader crypto industry. It is less clear, however, whether and how the merger will affect businesses within the crypto ecosystem. Using the Alerian Galaxy Global Cryptocurrency-Focused Blockchain Equity, Trusts and ETPs Index (CRYPTO) as a reference, only a few pure-play constituents are impacted by the structural changes behind the merger.

Some cryptocurrency miners may see negative impacts from reusing ETH mining equipment (although the majority of public crypto miners focus on bitcoin mining), while exchanges offering staking services may see further revenue growth.

Quick Refresher – What is the Merge?

On September 15th, Ethereum finally made its long-awaited transition from Proof-of-Work ((PoW)) to Proof-of-Stake ((PoS)) – in other words, Ethereum switched 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 did not need to take any action.

Despite the recent attention paid to the merger, this event had been anticipated for several years when the new PoS blockchain was created on December 1st, 2020. On the regulatory side, the merger reduced Ethereum’s energy consumption by 99.95%; However, the SEC has previously raised some concerns about staking and whether it might raise questions about asset classification.1

The majority of public crypto miners focus on bitcoin mining

Since the primary change is the transition from mining to staking, the merger would affect Ethereum miners the most out of the companies within the ecosystem. However, most public crypto mining companies are focused on mining Bitcoin, with the exceptions of HIVE Blockchain Technologies (HIVE) and Hut 8 Mining Corp (HUT). Luckily, ETH mining rig is much cheaper and more flexible than BTC mining rig, so current ETH mining rig can be reused.

ETH is mined using graphics processing units (GPUs), which are standard computer 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, more expensive and are built for a specific purpose (e.g. Bitcoin mining).2 While there was uncertainty about the specific completion date of the merger, the transition began in December 2020, leaving miners preparing for the merger for at least a couple of years.

HIVE has already announced that it will reallocate its 6.5 terahash mining capacity from Ethereum to other minable coins.3 HUT anticipates using its Ethereum mining rig for opportunities outside of crypto — including artificial intelligence, machine learning, or visual effects rendering.4

Exchanges like Coinbase could benefit from staking revenue

The move from mining to staking is intended to benefit companies that either participate in staking or serve as a platform for staking. Staking involves depositing ETH as a validator, which can then produce rewards based on the deposited funds (similar to earning interest at a bank).

To simplify the process, platforms like Coinbase (COIN) can facilitate staking for a percentage of earnings. The company has already seen an increase in revenue from its staking services from ETH and several other digital currencies over the past few quarters. While COIN’s transaction revenue fell 66% year-on-year in Q2 2022, revenue from blockchain rewards (including staking) doubled over the same period. Blockchain rewards revenue accounted for 8.5% of total net revenue in 2Q22, compared to 1.7% in 2Q21.

bottom line

There is little direct impact for blockchain and crypto stocks as most companies are still focused on bitcoin and its impact on the sector as a whole is broadly neutral in the short-term (although there could be long-term supply/demand and regulatory implications). ). Among the individual companies most exposed to the structural changes behind the merger is COIN, which could benefit from increased staking revenues, while only certain miners (HUT and HIVE) may need to figure out how to leverage their existing ETH mining move equipment smoothly.

The Alerian Galaxy Global Cryptocurrency-Focused Blockchain Equity, Trusts and ETPs Index (CRYPTO) is the underlying index for the Invesco Alerian Galaxy Crypto Economy ETF (SATO).



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Editor’s note: The summary bullet points for this article were selected by Seeking Alpha editors.

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