Hut 8 Mining Corp (CVE:HUT) (OTCMKTS:HUTMF) is a bitcoin-focused company, providing investors the opportunity to enter the cryptocurrency space, but provides the security of traditional portfolios. CEO Andrew Kiguel provides an update on the current cryptocurrency rally, and suggests that bitcoin has greater staying power over alt coins. Kiguel identifies Hut 8 Mining’s strategic partnership with Bitfury, a crypto technology company, and its Medicine Hat build, which provides a 350 percent increase in the size of the company’s operations, as the reason Hut 8 Mining has performed well and held its value despite volatility in the crypto space. Kiguel explains that Hut 8 Mining is a publicly listed North American company that has been hoarding its bitcoin and is well-positioned if SEC decides ETFs can only purchase newly minted coin.
James West: Hey, welcome back to Midas Letter Live. My guest this segment is Andrew Kiguel; he is the CEO of Hut 8 Mining Corp., trading on the TSX Venture under the symbol HUT. Andrew, welcome back.
Andrew Kiguel: Thanks for having me back.
James West: Andrew, the crypto space has been very volatile to say the least, but also quiet, and I’m hoping that you can give us some reason to be excited about it.
Andrew Kiguel: Sure. So I think what’s happened is, bitcoin hit its all time highs last year in December, and since then, it’s really been, you know, falling since then, without much of a rally, with the exception really of a couple of spots here and there. We’re in one of those rallies now.
And so I think a lot of the, you know, what happened in December last year, there was almost this, you know, super evangelical was occurring around cryptocurrencies and, you know, bitcoin going to $100,000, and the promises that were being told to people. I think reality has come back and people sort of – some of the air got taken out of the balloon here, which I think is a good thing for the market as a whole, and in terms of what we’re doing.
James West: So do you think that the technical issues that seem to be dominating headlines around various cryptocurrencies are contributing factor to the reticence in the broader public to uptake cryptocurrencies? Because from my perspective, I get a little bit more nervous each time I hear of another fork in a bitcoin, for example, or hear of a dispute among the, you know, sort of the guardians of the code in Ethereum, and there’s all these emerging sort of conflicts that really tend to undermine my ability, at least personally, to develop confidence that this thing is going to move forward, at least not after a very long sort of period of this necessary conflict.
Andrew Kiguel: Right. So at Hut 8, we only focus on bitcoin, and it’s for a lot of the reasons that you just said, is that there is some additional volatility and uncertainty with some of the alt coins. So we stick to bitcoin, and the reason that Hut 8 was created was precisely for investors like you who say, you know what? I don’t want to go out there and create an online wallet and send pictures of my passport out and, you know, my employer information and my bank information.
Hut 8 provides you with that exposure to bitcoin, if you want part of that for your portfolio, that you can put it in your normal account, buy it through your broker, you can put it into your RRSP, your TFSA, you get that exposure. And currently, we are about 84 percent correlated to the price of bitcoin.
And going back to my original visit here, all of the fundamentals behind bitcoin still remain, and if anything, we’re a lot more optimistic about the direction of where bitcoin will be going. I think what’s happening here is a natural progression; it is going to be cyclical. But long-term, we’re still highly, highly, highly excited about what we see coming.
James West: Sure. You know, looking at your share price performance since you were here last, it’s, you know, more or less held its value even while, you know, bitcoin has been a lot more volatile. So what is it about your business model that makes it able to perform so much more absent volatility, even when it’s based on something so much more volatile?
Andrew Kiguel: So I think the partnership with Bitfury is key. They provide us with the technology and the know-how to run our operations, and so that’s a lot of the things that other start-up companies in the space have to deal with. There’s a lot of trial and error and trying to figure out how to use the equipment; we’ve completely cut that out. We have a turnkey solution that we employ with Bitfury. Bitfury is our largest shareholder, with 45 percent, and so they are aligned perfectly with us. We get the latest technology, it arrives on time, and it operates extremely well.
The other thing that we’ve done is, since I saw you last, we were building out a project in Medicine Hat, Alberta, for 48 megawatts. That’s a 350 percent increase in the size of our operations, and we accomplished that in mid-July, two months ahead of schedule, and that is now up and running and operating.
We’ve also reported a few quarters, so people can say, hey, this is a real company. For the first six months of this year, we did $11.5 million of EBITDA; that excludes the 350 percent increase, which will only be seen in our third quarter, because those operations only came in, in July. So I think we have been a lot more resilient than some of the other people out there, and I think also our capital structure is very clean. We have just under 83 million shares outstanding; there’s almost no dilutive instruments. What that is, it’s almost like bitcoin. We keep the stock scarce; we’re really minded in terms of making, doing things that are only accretive, and limiting any dilution to investors, because when the price of bitcoin goes up, we believe that the increase in the value of Hut 8 will actually grow higher than the appreciation that you see in bitcoin.
James West: So it would be an exponential effect, kind of thing?
Andrew Kiguel: We hope so. That’s the plan.
James West: That’s interesting. And is it safe to say that while this emerging new payment sort of platform and cryptocurrency goes through its growing pains, that really, I mean, in some respects you could make the argument that it’s just a matter of time till all these things are sorted out; it’s part and parcel of any new, disruptive technology that is disintermediating an entire legacy system, which certainly cryptocurrencies led by bitcoin are. So is that, essentially, the message you would give to your investors, is just like, be patient, this is going to work?
Andrew Kiguel: Yeah, be patient, but the other message is, is because we are solely focused on bitcoin, like, we are a pure play in bitcoin, bitcoin’s market cap is larger than that of all the other alternative coins put together. It is the safest, the longest blockchain that’s there, and because of its simplicity, it’s the one that, no matter who you ask, it’s the one that everybody knows will survive.
So again, as an investor, you get that exposure to what is really the gold standard in crypto, without having to take the risks of what may or may not happen with all of those alt coins.
James West: So then, within the bitcoin sort of universe, we’re now at four different existing hard-forked variations on bitcoin, is that correct?
Andrew Kiguel: Yeah, that sounds right.
James West: And so, in terms of, like, for an outsider who is not really well versed in the land of cryptocurrency or the nuances of the technology underlying it, what are the fundamental differences between these, and can they co-exist together?
Andrew Kiguel: So they can co-exist, and there is some different views on this, but essentially, bitcoin, which is the original one, is still the largest, and the other forks are considered alt coins. The largest one is called Bitcoin Cash, which you may have seen out there, and the main difference is that within bitcoin, the blocks, which are done every 10 minutes, contain a certain amount of information, and the efficiency that’s there needs to be improved. Bitcoin Cash stores everything, so even if you’re buying a cup of coffee, but we’ve seen that Bitcoin Cash and some of the other forks have really just gone nowhere, Bitcoin Cash probably the most. But nonetheless, it’s been the original bitcoin algorithm that has survived and is the one that dominates the market.
James West: Okay, so do these – is it correct, or is it not the best way to think about it – like, I look at a hard fork and this new range of bitcoin and, am I to look at that and say well, that constitutes dilution in the entire bitcoin value proposition? Or are these actually just a completely new sort of cryptocurrencies in and of themselves?
Andrew Kiguel: Completely new. I mean, when you own a bitcoin and there is a hard fork, you get a piece of that new alt coin, but they’re completely new. They have their own rules. So the bitcoin algorithm is still 21 million bitcoin, to keep it scarce; it’s that anti-inflationary pressure, it’s still that original one that is the largest, the one that’s never been hacked. So that’s the one we focus in on. We do not focus on or mine any of the other bitcoin forks or any of the other alt coins.
James West: Tell me again, how do you arrive at your cost per coin produced?
Andrew Kiguel: Sure. So we have a deal, so on our website you can actually see a breakdown of this, if you go to hut8mining.com and look at our presentation. But essentially, we have a fixed cost per month – so our cost base is very predictable, we can break down. So about 75 percent of our cost is electricity, which is why the transaction, the deal that we have with Medicine Hat, the 10-year deal, is highly attractive, and I’ve never seen any other company in Canada announce anything like that. We know what our other fixed costs are, our overhead. So essentially, that’s our cost of mining. We basically just divide that by the number of coins that we mine in a month, a week or a quarter. So for the last quarter, our cost per bitcoin in USD was about $2,700, versus a current trading price of about $7,300 today. In Q1, it was a little bit lower, but as the difficulty goes up, our price will also go up. And the average for the first six months of this year was about $2,300 USD per coin.
So that compares very favourably, and it means that even in this environment, we still have very strong margins. That is still not inclusive of the Medicine Hat facility, which just came up in July. So you have to wait till Q3 to see what that impact is, but we have a better energy deal in Medicine Hat, and we’ve been able to trim costs as well from Q1 to Q2. So we’re anticipating that we’ll be highly competitive with respect to our price of bitcoin.
James West: Okay, so then, I guess the catalyst that is going to sort of launch the share price of Hut 8 is likely going to be a significant reversal or a sustained reversal in the price of bitcoin to the upside?
Andrew Kiguel: Yes, and I think also, as we let people know – so I know in the US, there’s all this talk about the ETF, the Exchange Traded Fund, for bitcoin. And you have some of the largest funds in the world that are putting papers in front of the SEC to get approval. We’re in a sense, we are almost like that ETF, given the high correlation we have to bitcoin. We’re now listed in the US, we’re exploring other exchanges. So I think we will be able to provide people with that exposure, so that could be a catalyst.
Here’s something else that I’ve heard: this is more whispers, this is interesting, but one of the key concerns that the SEC has with approving an ETF is that the bitcoin purchased by the ETF might be, the person on the other end might be an arms dealer or a drug dealer. It’s very hard to verify and go back; although you can see who did it, you don’t know where that money came from, which ironically enough is the exact same thing with US dollars, which are perfectly fine.
But one of the solutions that is being proposed is that the ETFs only purchase newly minted coin. So for someone like Hut 8, which is really hoarding its bitcoin – you know, we’re sitting on, today, probably over 2,400 bitcoin, and we continue to mine and store more on a daily basis – we believe if the SEC comes in and says ‘you have to buy newly minted coins’, with Hut 8 as a publicly listed North American company that has a whole whack of these newly minted coin, that we would be able to command a premium if we were to sell those, and the coin that we’re mining will be more valuable than that which is just trading on the market.
James West: Wow, fascinating, Andrew. We’re going to leave it there for now. Thanks for joining me today.
Andrew Kiguel: Thanks for having me again.
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