Bitcoin traders aren’t the only people hoping to cash in on the digital asset’s rocketing fortunes: miners are, too. December saw a flurry of activity as companies eager to create new Bitcoin rushed to raise new capital.
The TSX Venture is becoming a go-to exchange for companies racing to generate Bitcoins. Mining firm Hashchain Technology began trading on the TSXV in December, having raised $4.4 million to date. The company plans to bring Bitcoin mining equipment online at its B.C.-based datacentre in January.
Hive Blockchain Technologies, formerly gold exploration firm Leeta Gold, listed on the exchange in September, and subsequently acquired an Iceland datacentre from cryptocurrency mining firm Genesis Mining, which became a stakeholder in the company.
In December, Hive announced that it will create a Bitcoin mining facility in Sweden, to be completed next year. This will complement an existing facility in Iceland. To finance the deal, it announced that it has received $50 million in a private placement expected to reach up to $100 million.
On a large scale, these companies are pursuing what many people have been doing with computers in their basements for years: mining for a digital asset that is now trading at around 13 times the price of an ounce of gold.
Miners perform a vital service for the blockchain, a giant, distributed ledger that records transactions made in Bitcoin. To ensure that everyone agrees on the transactions, miners use complex, computing-intensive mathematical calculations to seal them into the ledger so that no one can alter them later.
Miners are motivated by profit, because they earn Bitcoins from the network in return for their mining services. As Bitcoin’s price rises, it motivates more miners to join in. Bitcoin network’s mining power has increased almost 700 per cent in a year.
This makes things increasingly unprofitable for basement-based hobby miners with their constrained computing power. Those serious about Bitcoin mining are scaling up, using more electricity to fuel their increasingly computer-intensive infrastructures. Bitcoin mining is becoming a literal power grab.
In Montreal, Technologies D-Central has 50 or more computers noisily mining the currency in a warehouse. In B.C., a husband-and-wife team have reportedly invested their life savings in computers imported from China in hopes of cashing in.
Hashchain’s facility will consume 1.2 MW of electricity, while by September next year, Hive expects to control 44.2 MW. Newly formed Vancouver company Hut 8 hopes to dwarf them both by eventually controlling 60 MW of power, and it is partnering with Bitcoin mining giant Bitfury Group to do it.
Bitfury, which operates datacentres using its own Bitcoin mining rigs, is raising capital to build more datacentres in North America via a reverse takeover in Canada. (In an RTO, one company acquires the assets of another and then lists on a stock exchange, effectively taking the private company public.)
The deal gives Hut 8 the exclusive right to own and operate Bitfury’s datacentres in North America. Several executives from Bitfury now sit on Hut 8’s board.
In Phase 1 of the deal, which happened in early December, Hut 8 raised $38 million of institutional capital in a private placement. It also took control of 22 Bitfury facilities, constituting 24.2 MW of computing power.
In Phase 2, planned for the end of January, Hut 8 will complete the RTO by listing its shares on the TSXV. It will also extend its control to an additional 35 Bitfury datacentres operating at 38.5 MW.
The RTO allows Bitfury to capitalize quickly in a highly competitive market, said Valery Vavilov, CEO of the Bitfury Group.
“The RTO process was chosen because it provides flexibility to access the Canadian capital markets and enables us to raise money quickly,” he said. “The traditional IPO route is not guaranteed, and it is expensive. Given these factors, we think the RTO is the preferred capitalization route.”
Could miners cash in by creating and holding this strange digital asset? Those who bought or mined the cryptocurrency this time last year had made more than 2,000 per cent in profits as Christmas approached. Bitcoin hit US$19,870 during December, but some believe that the digital asset will far exceed even its current value.
“Bitcoin is going to go to 500 grand, because of the nature of how it’s limited,” said Sean Clark, CEO of Hut 8, referring to the cap that the Bitcoin network puts on the coins. No more than 21 million Bitcoins will ever be produced in total; 16.5 million Bitcoins have already been mined.
He also sees value in the Bitcoin network’s ability to secure transactions. Bitcoin’s algorithm increases the security of transactions as more miners contribute to power the network. This makes it an excellent store of value, he says.
Not everyone is convinced. Alex Button, chief currency analyst at currency-trading information company ForexLive, calls Bitcoin’s skyrocketing price a symptom of mania.
Bitcoin may have originally been proposed as an alternative currency, but with such volatile pricing, it doesn’t qualify anymore, he warns. Instead, people are labelling it an asset class.
“Any time that the pitch changes mid-stride, it’s an indication of an underlying problem,” Button says, adding that skyrocketing fees charged to process transactions on the network have challenged Bitcoin’s viability.
“In spite of all the rise in price, the initial dream of Bitcoin has flopped,” he says. “But we’re at the point right now where nothing matters except the price. This is what happens in a mania.”
Vavilov is unconcerned about the effect of Bitcoin’s volatile market value on Hut 8’s share price.
“It is unclear what will happen to the valuation of the shares if Bitcoin’s price tanks,” he says, but adds that such a drop will cause less efficient miners to leave the market. “This will allow Hut 8 to gain market share. Hut 8 is neutral on the price of Bitcoin because it makes more profit as the price increases and gains market share if the price decreases.”
Clark added that if market conditions changed substantially, Bitfury’s miner design would enable Hut 8 to quickly mine another currency. In the meantime, Hut 8 is already negotiating deals for cheap electricity with provinces across Canada. Canada’s cheap electricity prices, robust rule of law and regulatory environment drew Bitfury to the country first, he says, but adds that Hut 8’s exclusivity extends to the U.S. and Mexico.
Hive and Hashchain have their own risk-mitigation strategies: The equipment in Hive’s Iceland datacentre and another planned facility in Sweden are better suited to mine other cryptocurrencies, notably Ethereum. A portion of Hive’s computer power will be devoted to a cryptocurrency called Dash.
In cryptocurrencies, as with regular currencies, it seems that a little hedging goes a long way.
Article originally appeared in Financial Post