VIDEO: Hut 8 Mining Corp (CVE:HUT) CEO Andrew Kiguel discusses BitCoin
Hut 8 Mining Corp (CVE:HUT) (OTCMKTS:HUTMF) CEO Andrew Kiguel discusses his company’s North American exclusive relationship with BitFury, one of the worlds’ premier manufacturers of Bitcoin mining hardware, and why his company is the lowest valued Cryto miner opportunity on the planet. Andrew goes in-depth into the value of bitcoin and how and why it changes.
James West: Hey, welcome back to Midas Letter Live. My guest this segment is Andrew Kiguel. He is the CEO of Hut 8 Mining Corporation, trading on the TSX Venture under the symbol HUT. Andrew, thanks for joining us today.
Andrew Kiguel: With pleasure, thank you.
James West: Okay, so this is a cryptocurrency mining company?
Andrew Kiguel: Yes.
James West: And it sounds like maybe a dumb question, but how does it make money?
Andrew Kiguel: How do we make money? I’ll give you the genesis of the story, if that’s okay, take a step back and then I’ll walk you through how we generate revenue.
James West: Sure.
Andrew Kiguel: About eight months ago, myself and some of the other co-founders were having a conversation that it would be great if there was an ability for investors to access and have leverage to the price of bitcoin without having to own the underlying currency. We approached Bitfury, which is one of the largest blockchain/bitcoin companies in the world, they manufacture their own chips, silicon, they do that through Taiwan Semiconductor, which is a massive company, and they manufacture right next to where Apple manufactures theirs. And we created a partnership with an exclusivity over their technology software monitoring services from North America.
That was established, we did two fundraises, and then took the company public. Immediately upon going public, they have a technology called The Block Box, which is a 40-foot C can container, and those were set up already in Drumheller, Alberta, which is the dinosaur bone capital of Canada, okay? So these boxes are there, they’re sitting, they’re plugged in, and upon the day after we closed our financing, we started mining.
So on a daily basis – and this varies depending on the difficulty level and the price of bitcoin – but on a daily basis, we have 17 boxes there operating right now, 18.7 megawatts, and on a day we mine approximately 11 bitcoin today.
James West: Okay.
Andrew Kiguel: The way the revenue recognition works is, bitcoin is at about $8400 USD today, let’s call it $10,000 CAD. We mark to market that on a daily basis, so 11 bitcoin times $10,000 CAD, that’s $110,000 of revenue on a daily basis. Come September, I don’t know if you’ve seen, we announced a great deal with the city of Medicine Hat, Alberta, to basically take up another 42 megawatts. So we’re dropping another 40 boxes in Alberta, so we’ll have a total of 57 boxes operating approximately 60 megawatts.
At that point, based on the existing difficulty rate for mining bitcoin, and the current price, we’ll be doing about 40 to 45 bitcoin on a daily basis, which would translate to $400,000 to $450,000 of revenue on a daily basis.
Our margins are currently about 70 percent, so our cost for mining the bitcoin, our gross margin, is about just under, depending on which site, but it’s under $3,000 CDN per bitcoin, and like I said, it’s trading at about $8400 USD right now. So for somebody that wanted exposure to the bitcoin market, and I don’t know if you’ve ever tried to buy bitcoin or if you own it –
James West: There’s a long story there, which we won’t get into.
Andrew Kiguel: Well, it’s very complicated, and that was really the genesis for doing this, which is, I do own bitcoin, but you’ve got to set up a hot wallet with an exchange, you’ve got to wire money out to Gibraltar or something like that, the money disappears, then shows up a few days later; you buy your bitcoin, then you’ve got to figure out where to store it safely, because you don’t want it getting hacked.
James West: Yes.
Andrew Kiguel: And then you don’t get anything reported on your monthly statement. So if you have an account at BMO or RBC, it doesn’t show up, it’s just sort of sitting out there online. The benefit of something like Hut 8 is, if you buy something like Hut 8, you have direct exposure to our bitcoin and our holdings, and I’ll get into that in a second, but it comes to you reported. It’s eligible for registered accounts, such as your RSP, TFSA; it comes on your monthly statement, and you can say okay, here’s my Hut 8, this is how much bitcoin they’re holding, and you get that exposure to bitcoin without actually having to go through all those steps. And we also secure it for you.
So to date, we started mining, we closed our first round of financing, which was done at the $2.50, and we had close to $1 billion of demand for that round, which was worldwide.
James West: Wow.
Andrew Kiguel: So we purchased these block boxes in Drumheller and started mining on December 22nd, 7 boxes. We dropped another 10 boxes in on February 8th, so that’s our 17 boxes, the 18.7 megawatts. And since then, we’ve mined well over 1,000 bitcoin. So at current prices, just our inventory is worth about $11 million, and that’s in three months.
As mentioned, we’re going to quadruple the size of our operations, that’s already fully funded, it’s happening, there’s been press releases. So at that point we will have a tremendous amount of bitcoin stored, and I can talk you through our strategy with respect to what we do with that inventory.
James West: Sure.
Andrew Kiguel: But that’s generally been the thesis.
James West: Okay, that’s interesting. That’s – that’s amazing. So I guess as long as bitcoin stays above $3,000 per coin, you’re making money. Or does it – what’s the sort of sensitivity there in terms of price of bitcoin, in your business model?
Andrew Kiguel: So it’s a very interesting question. So the difficulty in terms of how many people are trying to win that bitcoin reward changes based on how many people are trying to get it, and that’s called the hash rate. As the price of bitcoin goes up, you have more miners trying to mine bitcoin, so the difficulty goes up. The likelihood of getting that reward decreases.
As the price of bitcoin comes down, less people will be able to do it, because it’s not profitable for them, so we’re able to mine more bitcoin. So we’re sort of hedged.
Now, if bitcoin went to $100, yes, there’s an issue. But we are protected in terms of if price comes down, we’re able to mine more bitcoin, and as the price goes up, we’re able to mine less, but we have that inner inventory. And one of the things that we’ve been looking at and exploring is, we did a regression analysis on this difficulty level – the hash rate – and the price of bitcoin, and depending on what period of time you look at it on, somewhere between 0.5 to 0.8 correlation between the price and the difficulty level.
Today, the difficulty level is at about 30,000. So what that would imply based on a three-year regression, call it the mean, is about 0.5.
James West: Okay.
Andrew Kiguel: So at a $30,000 hash rate, that would imply a $15,000 bitcoin price, USD. We’re currently trading below that. So from the perspective of the company, we view a lot of this as capital allocation. As long as the price of bitcoin is trading below that mean, below that $15,000 level for that correlation, we think that’s a great buying opportunity; we think that’s a signal for us that our capital is best served by holding that bitcoin.
Once it rises above that mean, and it varies up and down, then we would view that as a potential selling opportunity where we can capitalize on that price, and again, as the price goes up and depending on how fast it goes up, our margins and our EBITDA would also increase.
James West: Okay. Interesting. That’s a lot to absorb.
Andrew Kiguel: Yeah…sorry….
James West: That’s quite all right. Okay, so then, you would obviously be a reasonably good person to ask about the price action in bitcoin – cryptocurrencies generally, but let’s focus on bitcoin.
Andrew Kiguel: Sure.
James West: The level of volatility in the course of the last year has been pretty outstanding, to the point where one would argue that it cannot possibly operate as a stable currency with such volatility. Obviously merely a circumstance of growing pains and the fact that it’s new. Is the future of bitcoin, in your estimation… I mean, it’s somewhat obvious, because you’ve invested your entire professional existence in it, but what is it about the future price of bitcoin, or where does it seem to imply from your experience, that it’s going to level off and become more stable?
Andrew Kiguel: Sure. So let’s think back to the genesis of bitcoin. Bitcoin, the original whitepaper for bitcoin, came out in October 2008, and if you recall what was happening at that time, that was sort of the crux of the global recession. You know, you saw all kinds of, call it, questionable actions by governments all over the world, particularly in the United States with respect to the bonds. The markets were collapsing. And then all of a sudden this new thing comes out: bitcoin.
And the whole reason why bitcoin was developed was to get around the third-party intermediation. In a sense it’s very anti-establishment: it’s like, we don’t want to deal with the banks, we don’t want to deal with the governments. And that was the genesis of bitcoin and what started creating that.
So initially, what made bitcoin extremely attractive to people, less so in places like North America – so in Canada and the United States, sure, there’s a certain level of mistrust of government; you know, in the United States maybe more so right now. But if you’re living in places like, for example, the Ukraine or Latvia, that have been invaded by the Russians, and you see your entire wealth deteriorate; or if you’re living in places like Argentina, where inflation has eroded your buying power that you have, something like bitcoin becomes extremely attractive. It’s a place to store value; it’s almost like a digital gold. And that was really what started creating it.
As a form of use of transaction, as an actual currency, not highly efficient the way it was originally developed.
What’s happened since then is, as people started using it as more and more of a stored value and they say, you know what, I’d rather have my money parked in bitcoin, where as long as I have my password, I can access that anywhere in the world – I’m not regulated by a government that tells me I can or can’t take my money out of my country, I don’t have to worry about inflationary pressures within my country or what my government is doing – it provides a safer haven. And that’s what sort of created the, I think, a lot of the appreciation.
What’s happened, I think, in the last few years, in my mind, is that you have a lot of speculators that have come in. and while there’s a lot of people that own and hold their bitcoin and are not sellers, there’s a tremendous amount of people out there that use it as a form of speculation, and that’s what causes a lot of the volatility that’s there.
James West: Okay.
Andrew Kiguel: But if you go back to, again, what the use of it is – if you’re in places like Africa or South America or Eastern Europe or Russia or China, Japan – Japan now recognizes bitcoin as legal tender – I think Microsoft and Amazon now have options to buy product with bitcoin. There’s new developments underway within bitcoin, the primary one called Lightning Network, which is going to enable the ability to process transactions at an extremely cheap price and very quickly through bitcoin, much faster than Visa or Mastercard. And these are the things that I think will allow bitcoin to stabilize over time, because it’s going to start being used as more of a currency, perhaps, as opposed to a stored value or just by speculators. And that’s what’s really exciting, and I think what could drive the growth of bitcoin in the future.
And again, if you ask a lot of – you know, I was a skeptic, so before Hut 8, I was an investment banker for 20 years, and my initial reaction upon hearing about bitcoin was, you know, the same thing: this is a fraud, it’s a bubble, all these things. And as I started digging deeper and learning more about it, I became more fascinated with what it was and the potential uses for it.
And so as I look at that and I see what the future is, I mean, I think the CEO of Twitter said – he put out a public bet that he thinks it’s going to $500,000 in about four years. And I think the people that are sophisticated in seeing what its potential is, see the tremendous amount of value that’s there.
So bitcoin is divisible by eight, so you can put it up into separate pieces; the smallest piece is called the satoshi, and in places like the Republic of Georgia, they’re actually attaching land title to pieces of bitcoin. Now again, in a Canadian or American context, why do you want to do that? But if you’re in the context of an area where, you know, the threat of things being taken from you is a potential reality, being able to attach something that is publicly, you know, throughout the world recognized as hey, I own this, this is mine, and whether it gets taken away or not, I have evidence here – is of tremendous value, and it’s very compelling for people all over the world.
James West: That is probably the most rational argument I have yet heard as to why bitcoin will succeed. Andrew, we’re going to have to leave it there for now; that’s actually double what the usual interview is, but I didn’t want to interrupt you, because seriously, I’ve just had a tremendous education, for which I thank you. We will come back to you in the near future.
Andrew Kiguel: Sure, anytime.
James West: Thanks for joining us today.
Andrew Kiguel: Thank you very much.
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