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

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

A year later, the Toronto-based company is not only mining bitcoin, it is mining ethereum (another crypto asset), lending its bitcoin to two other crypto companies in exchange for a cash yield, repairing other miners’ computers for a fee, and constructing a new server farm in North Bay, Ont.

As the price of bitcoin soared over the past 14 months, Hut 8 was suddenly swimming in far more revenue than it ever had, opening up new doors for one of the oldest and largest digital asset miners to innovate, Ms. Leverton told The Globe and Mail in a recent interview. “2021 was the year we started diversifying, because we could,” she said.

TSX-listed Hut 8′s growth trajectory this year mimics that of other publicly listed Canadian crypto miners.

Many have seen their stock prices skyrocket, revenue and profits soar, prompting a healthy inflow of capital that is subsequently deployed into various new ventures in the cryptosphere.

In a way, the maturation of crypto miners makes sense – it corresponds to the explosive, unbridled growth of anything associated with blockchain technology, a mania that some have previously termed speculative, geared just for the rich, and even worthless.

“It would certainly not be a good thing for us if the price of bitcoin falls dramatically,” mused Geoff Morphy, president and chief operating officer of Bitfarms Ltd., another Canadian digital asset mining company. “But really, I believe we are just in the first inning of a long game.”

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Shares of Bitfarms , which trade on the TSX Venture Exchange, have risen about 180 per cent 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 unnamed American institutional investors. And then in November, the Quebec-based company announced its entry into the United States, through a US$26-million acquisition of a hydroelectric power plant in Washington State. The plant’s output is 24 megawatts, which will increase Bitfarms’ mining capacity by about 30 per cent.

The reason why bitcoin miners are able to expand and innovate their businesses is directly related to the price of bitcoin. Electricity is the largest cost for a miner, accounting for approximately 85 per cent of the cost of mining a single bitcoin. If power costs remain the same, and bitcoin prices increase, profit margins for these companies naturally increase in tandem.

“Our cost to mine is about US$6,000 per bitcoin right now. Bitcoin is close to US$50,000 currently. 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 grow from US$12-million to US$127-million. And despite operating expenses soaring from expansion, Riot Blockchain is well 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 approximately US$250-million in today’s prices), and has placed 2,000 bitcoins into a lending pool – half with New York-based Genesis Mining, a cryptocurrency miner, trading platform and broker, and the other half with Galaxy Digital, another crypto company based in New York.

Most of the company’s revenue still comes from mining bitcoin, according to Ms. Leverton. But lending bitcoin to Galaxy and Genesis and getting a yield from it helps the company also generate some revenue in hard cash.

Canadian and American bitcoin miners have also benefited tremendously from China cracking down on crypto mining activity earlier this year. In October, the U.S. overtook China to account for the largest share of the world’s bitcoin mined, according to data published by the Cambridge Centre for Alternative Finance. While China’s share of bitcoin mined (measured by the “hash rate,” or power of computers connected to the global bitcoin network) fell from 44 per cent in May to almost zero in July, Canada’s grew from 1.9 per cent to 9.6 per cent and the U.S. share grew from 6.7 per cent to 35.4 per cent during the same period.

There are macro risks that come with bitcoin mining; it is not inconceivable that some jurisdictions will ultimately take a harder stance on cryptocurrency altogether and follow China’s lead by effectively banning the digital asset. More urgent however, are the environmental concerns around the mining of bitcoin, given its immense electricity consumption. (Some miners, such as Bitfarms, only use hydroelectricity to generate power, in line with environmental, social and governance goals the company has committed to.)

There is, ironically, a certain predictability to being in the bitcoin mining business, despite the volatility of bitcoin itself. The cryptocurrency is programmed such that there can only be 21 million bitcoins in existence, all of which will be produced by the year 2140. As of February, 2021, miners gained 6.25 bitcoins for every mathematical problem solved (or every block on the blockchain they add to).

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

The robustness of the bitcoin-mining business has prompted a slew of new companies to enter the space. Griid Infrastructure LLC, an Ohio-based bitcoin miner announced that it would be going public on the New York Stock Exchange through a merger with a special purpose acquisition company early next year – securities filings show Griid is valued at US$3.3-billion. Core Scientific Inc., another bitcoin miner, announced in July it also planned to go public through a SPAC. The deal valued Core Scientific at more than US$4-billion.

“A year ago, there were only 10 publicly traded mining companies but recently we have seen a proliferation of new entrants” through initial public offerings and SPACs, Mr. Morphy said.

That could fundamentally affect Canadian bitcoin miners, Ms. Leverton warns, emphasizing the value of diversifying Hut 8′s revenue stream.

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

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