FTX collapse drags down HIVE Blockchain, Argo and MicroStrategy

The fallout from the demise of FTX has exposed flaws in how crypto exchanges are structured and regulated. Argo Blockchain, HIVE Blockchain and MicroStrategy could find themselves caught up in a near-term broad sell-off in digital assets, but the underlying technology remains robust.

- The FTX collapse is “an expensive ad for bitcoin”, says MicroStrategy CEO Michael Saylor

- Despite risks, the investment case for blockchain remains strong

- All three stocks are held by the Bitwise Crypto Industry Innovators ETF 

Bitcoin has been weighing on the balance sheets of MicroStrategy [MSTR], Argo Blockchain [ARB.L] and HIVE Blockchain [HIVE], but there are reasons to be bullish on the cryptocurrency and blockchain in general.

The recent collapse of crypto exchange FTX was reportedly caused by founder Sam Bankman-Fried’s trading fund Alameda Research borrowing customer funds for trading and using FTX's utility token as collateral. In the aftermath, MicroStrategy CEO Michael Saylor tweeted that the collapse was “an expensive ad for bitcoin”.

“Too many good ideas have been pursued by the crypto industry in an unethical, unsound, irresponsible fashion. The only viable future is registered digital assets trading on regulated digital exchanges,” he added.

The price of bitcoin has taken tumble as investors exit their positions in digital assets and take a risk-off approach. Blockchain stocks with exposure to cryptocurrencies have been tumbling as well. The MicroStrategy share price is down 32.4% in the past month through 21 November. The Argo Blockchain [ARB.L] share price has fallen 36.4% and HIVE Blockchain [HIVE] is down 36%.

Liquidity pinched at crypto miners

The share price performances of blockchain stocks have not been helped by a spate of bearish news.

HIVE Blockchain’s second quarter report revealed that revenue had slumped 45% year-over-year to $29.6m in the three months to the end of September. It swung to a net loss of $37m from a net profit of $59.8m in the year-ago quarter. While the company didn’t incur losses on coins in Q2 2023, it did record an impairment of $26.2m related to its mining rigs.

Fellow crypto miner Argo Blockchain announced on 31 October that a £24m financing deal with a strategic investor had fallen through and it may have to lighten operations. The October update also noted that it had sold 3,843 mining machines to improve its liquidity and cash stores.

MicroStrategy missed both top and bottom line estimates for Q3 2022. In slightly better news, however, it only incurred an impairment charge of roughly $700,000 versus $65.2m in Q3 2021. It ended the three months to the end of September with a holding of 130,000 bitcoins valued at $1.993bn, reflecting cumulative impairment losses of $1.990bn.

Long-term investment case intact

In MicroStrategy’s Q3 earnings call, Saylor reaffirmed the company’s commitment to its strategy of holding bitcoin on the balance sheet long-term. Saylor highlighted the fact that the MicroStrategy share price had gained 116% since embarking on its bitcoin initiative through the close on 31 October. Bitcoin had gained 72% in the same period.

In the near-term, there’s likely to be plenty of volatility. WisdomTree’s director of digital assets research, Mirva Anttila, says that while contagion from the FTX collapse is likely to continue for days and even weeks ahead, the business case for blockchain remains intact.

According to Anttila, the problem was not in crypto, but in FTX’s “business model of lending customer assets without their knowledge or understanding”.

“The early stages of most new technological developments are prone to problems, hiccups and setbacks; however, these recent issues have been business model and risk management failures as opposed to technological issues. Blockchain or bitcoin didn’t ‘break’. The underlying technology generally performed as intended,” wrote Anttila.

Funds in focus: Bitwise Crypto Industry Innovators ETF

All three stocks are held by the Bitwise Crypto Industry Innovators ETF [BITQ]. As of 22 November, MicroStrategy is the second-biggest holding, with a weighting of 9.29%. HIVE Blockchain and Argo Blockchain have been allocated 4.45% and 1.74% of the portfolio respectively. The fund is down 80.6% year-to-date and down 31.7% in the past month.

MicroStrategy is the top holding of the Schwab Crypto Thematic ETF [STCE], with a weighting of 6.13% as of 21 November. The fund, which also holds Hive Blockchain at 1.28%, launched in August this year and is down 35.9% so far and 15.2% in the past month.

In the Global X Blockchain ETF [BKCH],  HIVE Blockchain is the fund’s ninth largest holding at 3.88%. It also holds Argo Blockchain at 1.28%. The fund is down 29.1% in the past month through 22 November and down 81.7% year-to-date.

The crypto miners are also held by the iShares Blockchain and Tech ETF [IBLC], with a weighting of 0.53% allocated to Argo Blockchain and 1.93% to HIVE Blockchain as of 21 November. The fund is down 19.6% in the past month and down 52% since launching in April.