Canada joins the big boys club in the new frontier of Bitcoin mining
Connecting the dots between cracking wartime Nazi codes to today’s crypto currency mining battlefields may seem like a bit of a stretch, but for a new powerhouse Canadian Bitcoin miner the connection makes perfect sense. The name chosen for the new listing hints at a battle underway in a critical hardware market behind Bitcoin –
Hut 8 Mining Corp – named after the facility where British mathematician
Alan Turing broke the enigma code that helped determine the outcome of World War II.
But the new Canadian stock listing is no
Imitaion Game. It will soon give investors their first real chance to buy into the booming market for computer chips driving most of the world’s bitcoin mining farms.
Hut 8 Mining debuted on the
TSX Venture Exchange in early March, buoyed by a huge private placement from Mike Novogratz – the former
Goldman Sachs hedge fund manager-turned-crypto evangelist. The company is also backed by
Bitfury Group Ltd. – the main competitor to the Chinese company
Bitmain Technologies Ltd. that dominates the market. However, Bitmain is among those impacted by the Chinese government’s recent crackdown on its crypto industry, threatening the world’s largest nation from its dominant role in the world of cryptocurrencies.
“Hut 8 is a proxy for Bitfury in North America, that’s all it is,” says Sean Clark, CEO of Vancouver-based Hut 8. Bitfury already has 172 megawatts of data centers globally, has mined over a million tokens. According to investor documents, Bitfury expects to achieve revenues of US$450 million in 2018.
"This is about access to capital and scale," says Clark. "We found a perfect vehicle to capitalize incredibly quickly. Bitfury now is going to rebalance the global network."
Clark went on to say the listing won’t be deterred by recent market turmoil, including Bitcoin’s plunge to a nearly three-month low in early February. Bitcoin rebounded to about C$11,738 in early trading Wednesday.
“We’re long-term bullish on the price of Bitcoin so we expect volatility like this to occur," he said.
Following the transaction, Hut 8 Mining will be 49 percent owned by Bitfury, with the rest owned by insiders and private placement investors. By mid-2018, it will have acquired 60 megawatts of Bitfury’s mining farms in Canada and have an exclusive agreement with Bitfury to develop new data centers in the U.S., Canada, and Mexico, according to an investor presentation. That, along with Novogratz backing the deal to the tune of more than C$100 million.
"This industry’s dependency on highly-efficient silicon can determine who wins and loses," says Silicon Valley venture capitalist Bill Tai – who invested in Bitfury in 2014 over a slew of now-defunct competitors. He was won over by the then-scrappy startup, operating in the Caucasus republic of Georgia, that had designed from scratch a microchip customized to do just one thing – mine for Bitcoin.
Moving Out of the Parent’s Place
Crypto mining has departed the low-tech living rooms and basements where early prospectors once bootstrapped home computers to crunch the complex blockchain calculations that earn Bitcoins. Today, multi-million-dollar data centers roar with Application Specific Integrated Circuits (ASIC’s) – chips purpose-built to perform their single function rapidly, continuously, and with as little electricity as possible.
According to Michael Bedford Taylor, a professor at the University of Washington, the two main publicly-known contenders supplying such chips are Bitfury and Bitmain, Taylor was among the first academics to study Bitcoin mining hardware.
Samsung Electronics also reportedly plans to enter the fray. The hope among users "is that these ASIC chips will get commoditized," says Tuur Demeester, founder of Adamant Research, a blockchain investment research firm.
Whereas Bitmain sells rigs as is, Bitfury sells 100,000 ASIC chips packaged into a 40-foot shipping container called a BlockBox – a self-contained data center. Bitfury claims they claim set the unit in as little as two days and can spit out 46 Bitcoin a month as of the end of January.
The rivals square off in an ultra-competitive industry – each new generation of hardware makes the previous one obsolete, and the machines rapidly depreciate. The average lifetime of a mining rig today is less than two years, and more than 56 percent of its Bitcoin earnings will come in the first three months of use, according to Taylor. To gain an edge, the companies have increasingly become vertically integrated – producing the hardware, building giant server farms across the world, and mining themselves. In the process, they’re getting hungrier for cash.
Though reliable market share estimates are hard to come by, most agree Bitmain is the industry behemoth (it also operates the world’s two biggest mining collectives). The Beijing-based company was said to be raising C$65 million from venture firms Sequoia Capital and IDG Capital in September and told Bloomberg television in August that it was weighing an initial public offering with valuation ‘in the billions.’
Bitfury CEO Valery Vavilov estimates his company’s market share at about 10 to 12 percent. Headquartered in Amsterdam, it has raised more than C$125 million in funding from investors including Tai, Google Maps co-founder Lars Rasmussen, and venture capital firm DRW Holdings Inc.
"As a buyer, you always want to have more competition in your supply chain to drive prices down," says Sean Walsh, CEO of crypto-miner
Hyperblock Technologies Corp., which bought Bitmain machines.
Awareness
That concentration has long annoyed the crypto community, with its ideological commitment to decentralization.
"It’s a serious centralization concern because dependency upon a single hardware provider goes against the ethos of Bitcoin," said Lucas Nuzzi at New York-based
Digital Asset Research, an independent researcher on cryptocurrency investing.
The competitive landscape wasn’t always so barren. Several years ago, Bitfury’s Vavilov remembers vying against at least 20 competitors for Silicon Valley funding. One by one the others folded, as the price of Bitcoin plummeted by more than 80 percent in late 2013. Demand for rigs dried up, while proceeds from selling coins dwindled.
Bitfury barely squeaked by. "Every Friday, the company was trying to find somebody that would buy half a million dollars’ worth of Bitcoin so that we could make cash payroll," chuckled Tai.
The Canuck Advantage
Ironically, it takes a lot of hard cash to create an invisible currency.
"Part of this equation is access to capital," says Tai. "It’s very much like oil rigs – the more you can put up, the more output you’re going to get."
That’s where the ‘Great White North’ offers an edge – the ability to raise cash fast in a hot market. Canada has traditionally been a launchpad for early-stage energy and exploration firms on the TSE, VSE and TSX Venture Exchange, offering a shortcut to a public listing via reverse takeovers, known as RTO’s.
When
HIVE Blockchain Technologies Ltd. – a crypto miner with no manufacturing edge – listed via an RTO in September, it surged more than 500 percent in its first week and has raised nearly C$200 million in private placements in three months.
"If the capital markets react as we expect them to, there’s the opportunity to vend in other parts of Bitfury," said Clark. "Potentially, all of Bitfury…piece by piece."
It all points to the arrival of the new Bitcoin ‘Golden Age’.