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Prosperous Canadian bitcoin miners buying up land in U.S. for farm expansion

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A technician works at the Bitfarms bitcoin mine in Magog, Que., May 8, 2019.Paul Chiasson / The Canadian Press

When Jaime Leverton took over the reins of digital asset miner Hut 8 Mining Corp. last December, the company’s business model was pretty straightforward: it mined bitcoin, meaning it powered a farm of computer servers that solved complex math problems that generated new bitcoin.

A year later, the Toronto-based company doesn’t just mine bitcoin, it also mines ethereum (another crypto asset), lends its bitcoin to two other crypto companies in exchange for a cash return, repairs computers for other miners for a fee; and construction of a new server farm in North Bay, Ontario.

As the price of bitcoin skyrocketed over the past 14 months, Hut 8 was suddenly swimming in a lot more revenue than it ever had, opening new doors for one of the oldest and largest miners of digital assets to innovate, Ms. Leverton told The Globe and Mail in a recent interview. β€œ2021 was the year we started to diversify because we could,” she said.

The growth trajectory of Hut 8, listed on the Toronto Stock Exchange, this year mimics that of other publicly traded Canadian crypto miners.

Many have seen their stock prices skyrocket, their income and profits soar, causing a healthy influx of capital which is then deployed to various new companies in the cryptosphere.

In a way, the maturation of crypto miners makes sense – it matches the explosive and unbridled growth of everything associated with blockchain technology, a fad that some have previously referred to as speculative, intended only for the wealthy and even worthless.

“It certainly wouldn’t be a good thing for us if the price of bitcoin drops dramatically,” reflected Geoff Morphy, president and chief operating officer of Bitfarms Ltd., another Canadian asset mining company. digital. “But really, I think we’re only in the first set of a long game.”

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Shares of Bitfarms, which trade on the TSX Venture Exchange, have risen by about 180% this year, and in June the company received approval to begin trading on the Nasdaq. In the first half of 2021, the company raised $ 155 million through four separate private placements with a number of anonymous U.S. institutional investors. Then, in November, the Quebec company announced its entry into the United States, through the acquisition for US $ 26 million of a hydroelectric power station in Washington State. The plant’s output is 24 megawatts, which will increase Bitfarms’ extraction capacity by around 30%.

The reason that bitcoin miners are able to grow and innovate their business is directly related to the price of bitcoin. Electricity is the biggest cost for a miner, accounting for around 85% of the cost of mining a single bitcoin. If electricity costs stay the same and bitcoin prices rise, the profit margins of these companies naturally increase in tandem.

β€œOur cost of operations is around US $ 6,000 per bitcoin right now. Bitcoin is currently close to US $ 50,000. So you can see where our margin growth is,” Mr. Morphy said. .

Indeed, the revenue growth of bitcoin miners is staggering. Between December 2020 and September 2021, New York-based Riot Blockchain Inc., a Nasdaq-listed bitcoin mining company, saw its revenue drop from $ 12 million to $ 127 million. And despite skyrocketing operating expenses from the expansion, Riot Blockchain is on track to record its first profitable year in 2021.

Hut 8 generated $ 40 million in revenue in 2020, but has already made $ 115 million in the first three fiscal quarters of 2021. It now has 5,000 bitcoins on its balance sheet (worth around 250 million dollars at today’s prices), and placed 2,000 bitcoin in a loan pool – half with New York-based Genesis Mining, a cryptocurrency miner, trading platform, and broker , and the other half with Galaxy Digital, another New York-based crypto company.

Most of the company’s revenue still comes from bitcoin mining, according to Ms. Leverton. But lending bitcoin to Galaxy and Genesis and making a return on it helps the company generate hard cash income as well.

Canadian and US bitcoin miners have also benefited immensely from China’s crackdown on cryptocurrency mining activity earlier this year. In October, the United States overtook China to account for the largest share of bitcoin mined globally, according to data released by the Cambridge Center for Alternative Finance. While China’s share of mined bitcoin (measured by ‘hash rate’ or the power of computers connected to the global bitcoin network) fell from 44% in May to almost zero in July, that of Canada fell from 44% in May to almost zero in July. from 1.9% to 9.6% and the United States share increased from 6.7% to 35.4% during the same period.

Bitcoin mining involves macroeconomic risks; it’s not inconceivable that some jurisdictions will ultimately take a tougher stance on cryptocurrency and follow China’s lead in effectively banning the digital asset. More urgent, however, are the environmental concerns surrounding bitcoin mining, given its immense consumption of electricity. (Some miners, such as Bitfarms, only use hydropower to generate electricity, in line with environmental, social, and governance goals the company is committed to.)

There is, ironically, some predictability to being in bitcoin mining, despite the volatility of bitcoin itself. The cryptocurrency is programmed in such a way that there can only be 21 million bitcoins, all of which will be produced by the year 2140. In February 2021, miners were earning 6.25 bitcoins for each math problem solved ( or each block of the blockchain they Add to).

β€œOur job is really to control costs,” said Mr. Morphy. “It is impossible for us to control the price of bitcoin, but if a company can enter into long-term contracts with electricity providers and keep costs fairly stable, we can somewhat predict a worst-case scenario in terms of fluctuations in revenue. “, he added.

The robustness of bitcoin mining activity has prompted a large number of new companies to enter the space. Griid Infrastructure LLC, an Ohio-based bitcoin miner, has announced that it will be listed on the New York Stock Exchange through a merger with a specialist acquisition company early next year – the Securities filings show that Griid is valued at $ 3.3 billion. Core Scientific Inc., another bitcoin miner, announced in July that it also plans to go public through a SPAC. The deal valued Core Scientific at over US $ 4 billion.

β€œA year ago there were only 10 listed mining companies, but recently we have seen a proliferation of new entrants” through initial public offerings and PSPC, Morphy said. .

This could fundamentally affect Canadian bitcoin miners, Ms. Leverton warns, stressing the value of Hut 8’s revenue stream diversification.

β€œWe don’t compete with each other in the traditional sense, in that we don’t compete with each other for customers,” she said. β€œThe more companies compete for a fixed amount of bitcoin, the less bitcoin there is to go through and the margins will become more compressed. It won’t happen right away, but it’s definitely something we’re watching. “

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