- The increased cost of running a crypto mining business is causing many miners to cease operations, with this having the potential to damage the Bitcoin ecosystem.
- “I am getting about one call a week from existing mining firms that are losing money and are trying to convince us to buy their operations,” said Andrew Kiguel – Hut 8 co-founder and CEO – in an exclusive BitStarz News interview.
- By forging unique partnerships with power companies and technology suppliers, crypto mining firms can continue to operate and provide institutional money with an entrance into the BTC market.
Mining is the beating heart of the cryptocurrency world. Without companies dedicating their time and resources to mining cryptos, transactions simply wouldn’t get confirmed and chaos would ensue. At BitStarz News we go the extra mile to bring you the exclusive insights into the crypto world you crave, this includes talking to the big names on the cryptocurrency mining scene.
This week Alex Meears – one of our writers – spoke with co-founder and CEO of Hut 8 Andrew Kiguel to get the inside scoop about the largest publicly traded crypto mining firm. This is along with getting his thoughts on how the company is fighting extortionate power rates, as well as the falling price of BTC. Fortunately, crypto mining doesn’t involve heading down into dark tunnels with canaries and lamps, but it does involve a whole heap of power and data!
AM: What made you decide to go from investment banking to crypto mining?
AK: I was an investment banker and part of what I was doing was raising equity for companies in the blockchain space. And while brainstorming with several clients, we thought it would be a great idea to create a vehicle that was publicly traded – so the shares can be bought and sold – and gave people exposure to BTC. The reason being that in the US all the talk about approval for a BTC ETF is very popular and has profound effects on the market. What that tells me is that there is a lot of people who would like to get exposure to cryptocurrencies, but they don’t want to take the leap of faith and go on online, provide all their personal information, and wire money to a company they have never heard of before. ETFs and Hut 8 have a very high correlation to BTC and provide people with the ability to get exposure to BTC through traditional investment platforms.
I was one of the co-founders of the company and we were looking for a CEO to come in and run the show. As someone who had been there from the beginning – bankrolling the fundraising and putting together the board – I looked at how I wanted to spend the last part of my career and I thought it would be the ideal situation to join a fully funded startup with an absolutely excellent board.
AM: Why did you decide to open a crypto mining company, especially given the high difficulty level and cost of electricity paired with the lower price of Bitcoin?
AK: A lot of other investment vehicles into the crypto space haven’t been approved yet, so the ability for people to get exposure via an ETF is just not available. From when we started the company, the mining difficulty level has gone up significantly and the price of BTC has come down. These are not things anybody expected a year ago when we started Hut 8. Despite that, our cost of mining BTC during the second quarter was just over $2,700 USD.
If you average our price out for mining BTC over the last month it stands around $2,300, so we still have pretty big margins available to us that are beyond just going out and buying an ETF or some other vehicle – if they become available.
AM: Would you consider making your own ASIC chips in the future, or will you continue to use providers such as BitFury?
AK: We will continue to use BitFury, as we have an exclusive relationship with it to purchase our crypto mining equipment and its technology services are exclusive to us in North America. Let me tell you why. When building your own ASIC chip, just the prefabrication to try and do that will probably cost you around $20-30 million, and the technology is moving very quickly. So, with BitFury we get a partnership with the second largest ASIC chip manufacturer globally – number two behind Bitmain. BitFury has been around for over eight years and has over 500 employees and I would rather let it do the tough work and come up with the technology. We are more than happy to just buy it and manage the mining operations.
It’s a bad idea for a startup to try and manufacture its own ASIC chips, it would be really tough unless you were capitalized with $1 billion or so just to get the thing going.
AM: What has made you pick Canada for your mining operations? Have local institutions such as banks, power companies, and land owners been cooperative in your quest so far?
AK: We deal only in Alberta right now, and we are quite large. We are about 67-megawatts, which is the largest crypto mining operation in Canada and I would guess at least top five in the US. What we did was a little bit different. We like Alberta for a few reasons, but one of the things about Alberta is that it has one of the largest natural gas reserves in the world – if not the largest. Alberta is landlocked and in the middle of Canada, and there has been all this debate in Canada about whether they should build a pipeline to the coast in order to export it. So right now, that gas is just trapped and we went to a city called Medicine Hat which operates its own power grid – it’s not part of the provincial grid – and struck a deal with very attractive rates. which are locked in for 10 years. So, our general electricity contract is between 3 and 4 cents per KWh of power.
We are also in a very entrepreneurial area. For example, in Medicine Hat we have a 42-megawatt turbine that’s two years old and is 100% dedicated to our operation, so we have managed to fix the electricity cost problem on scale and have guaranteed our rates without having to cut lots of smaller deals. In Quebec, the government has come out and placed a temporary moratorium on new mining at 15c CAD per KWh, which would make it almost prohibitive for new mining operations.
AM: Being one of the largest publicly traded crypto mining firms is quite an achievement, what made you decide to opt for an IPO rather than an ICO?
AK: That is mainly due to my background and the background of some of the key people involved – and goes back to what we were saying earlier. If we did a blockchain type ICO, we would be giving people exposure to BTC who already have the exposure to BTC, as they would need BTC to buy into the ICO. Some of our larger shareholders are some very big institutions like Fidelity and a number of other large Canadian and American institutions. They’re not allowed to go and buy BTC and hold it in their investment fund, but they can go and buy Hut 8 and hold it in their investment funds. That’s why the audience and capital was there, in fact our first fundraiser at Hut 8 was $38 million CAD attracted close to $1 billion of interest from around the world just for that round.
AM: Are you worried that the price of Bitcoin will continue to fall – and with more mining firms opening causing the difficulty level to go up – and make mining unprofitable?
AK: I think it is a concern for anybody in the crypto mining space. There is a good Morgan Stanley report out there that estimates for an industrial-sized miner – including depreciation and amortization – the cost of mining is around $8,000 per coin, which would mean that most miners out there are currently losing money on the mining process. I think part of it depends on when you ordered the equipment and what the price of your electricity is. I think Hut 8 has some good advantages to withstand what is happening right now, but it’s a concern.
When the SHA-256 algorithm for BTC was developed, the network hash rate – or number of people competing with you to get the next block reward – is supposed to move in tandem with the price of BTC. So, as the price of BTC goes up, so too does the network hash rate and difficulty, keeping the margins and everything in line. What has happened is that it became decoupled this year, we have seen the difficulty by around 500% since December 2017 and the price of BTC has come down by 70%. This has decoupled the economics of how it is supposed to work.
Interestingly, I am getting about one call a week from existing mining firms that are losing money and are trying to convince us to buy their operations. So far, we haven’t seen anything interesting, but I am seeing a lot of weakness in the crypto mining world right now and whatever stage they bought in at, they are looking to get out. A lot of the equipment we are seeing for sale is one or two generations old and there will need to be a lot of cutback spend by these companies that didn’t invest properly – most likely by the end of next year. If the price of BTC isn’t higher, it’s not going to be worthwhile for these firms to reinvest into BTC mining.
AM: Where do you see the price of Bitcoin heading by the end of the year?
AK: This is not a Hut 8 guidance by any means, it’s just my personal thought about what’s going on. On the negative side, I think there is a lot of equipment being sold for very cheap prices compared to what it was being sold for back in December, and this could cause the network hash rate to increase at fairly strong levels towards the end of the year. As long as the Chinese government doesn’t cut down on the very cheap coal-fired electricity production plants, that will also keep the network hash rate relatively high.
On the positive side, I think we are moving close to having a custodial service for institutions, which will allow institutional markets to come in and thus directly into BTC. I think we are getting closer to the potential approval of an ETF in the US, which will also bring in a lot of new money and will be very positive for BTC. My personal view – and going with trends from the last quarter of last year where we saw a significant increase in the price – we could see a pop here, but I don’t think it will pop as high as $20,000, I do think $10,000 could be achievable though.
AM: Do you think there is a future in crypto mining for hobbyists or will large companies such as yourself put an end to mining cryptos for fun?
AK: When BTC mining started out, it was only done by hobbyists and they were originally doing it with GPU chips, but the ASIC chips caused a massive leap in the hash rate and made GPU mining unfeasible. Now, unless you are at scale like Hut 8 and you can negotiate a cheap power contract and have partners like BitFury, there is little chance of success. Possibly the most foolish thing you could do right now is just go out and buy an Antminer or something similar and try to do it yourself, you simply can’t compete.
AM: Do you have any measures in place to prevent your company from controlling 51% – or more – or the total network hash rate?
AK: Fortunately, that’s not a problem we will have to worry about for a long time. We are about 490 PH/s right now, which at the current total network hash rate makes us just over 1% of the total network hash rate. So, in order for us to hit 51%, we would need billions of dollars to reach a hash rate of that magnitude, and that’s not something that’s on the horizon just yet. I wish it was a problem for Hut 8, but I don’t think we will be getting close to 51% for the meantime. Bitmain controls close to 80% of the ASIC chip mining market, and that is a lot for a platform that is supposed to be decentralized.
As the rising cost of electricity continues to plague crypto miners, the Bitcoin ecosystem looks up to innovative companies like Hut 8 who continue to help keep the network running smoothly. At BitStarz News, we take pride in bringing you the hottest crypto news, so stay tuned for more exclusive interviews with industry experts.