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Last year, I proposed that Bitcoin investors consider the best in class domestic publicly traded Bitcoin miners. I now believe that high quality Canadian Bitcoin miners are reasonable additions to a Bitcoin related portfolio. Further, Canadian Bitcoin miners trade at a significant discount that is not wholly warranted. This discount appears likely to shrink in the coming quarters, or rather, quality Canadian miners seem likely to outperform domestic peers if Bitcoin continues to appreciate from here.
Last summer, I began accumulating positions in domestic Bitcoin miners Riot Blockchain (RIOT) and Marathon Digital Holdings (MARA), as part of an initial thesis published last August proposing that these pre-existing publicly traded miners were likely to outperform in reaction to a probable Bitcoin breakout. That theory has since proved reasonably accurate. I have since expanded and diversified mining exposure by accumulating shares in quality Canadian miners, including Bitfarms (BITF) and Hut 8 Mining (HUT).
I believe both HUT and BITF appear similarly valued and watched by the market. I also own both. This is about HUT for reasons including that I believe it is the more differentiated one, compared to MARA and RIOT, and also that it already reported earnings on August 12, while BITF reports this week.
Alberta
HUT's Bitcoin mining operations are located in Alberta, which is an energy producing area. I believe that this is much like locating in Texas or Oklahoma. In addition to access to energy, Alberta also has cold temperatures and wind. That cold wind is also an energy source. The environment is in many ways well suited for crypto mining.
Alberta appears likely to be a friendly jurisdiction for high energy producing entities in the near to mid term. The province is known for natural gas production, as well as the mining of various natural resources. Alberta is likely to continue to welcome this new industry that is paying for locally sourced energy, while also bringing new high tech infrastructure into the jurisdiction. The possible future success of Bitcoin could become a major industry within Alberta in the coming years.
Ethereum mining
HUT also mines Ethereum, which it only started mining within the last year. This is turning out to be profitable as well. Further, HUT indicated it was provided a cutting edge fleet of Nvidia GPUs that could provide it with an edge in Ethereum mining.
Moreover, if it is the case that HUT is establishing a relationship with Nvidia as a quasi beta testing resource, that could become a lasting beneficial attribute to HUT. This is highly speculative, but given the subject matter is cryptocurrency, that is typical. In any case, there is the potential for this to be a meaningful difference.
Continuing benefit from China's takedown
Going forward, I believe all North American Bitcoin miners are likely to benefit not only from Bitcoin's probable appreciation, but also the total takeout of mining power that existed in China. The significant loss of competition from Chinese miners has made the existing Canadian powerhouses more powerful. Also, it reduces their probable future costs of expansion, while improving their near term mining efficiency and profitability.
China's takedown of a significant portion of total Bitcoin mining capacity was a significant occurrence. Suppliers of mining hardware are likely to sustain reduced demand and weaker pricing power. Hut has already indicated seeing a tangible benefit in mining productivity. The company recently provided an update regarding July mining activity. Within the month, Hut mined 300 Bitcoin, resulting in average production of 9.7 per day. The company also stated its new total Bitcoin balance held in reserve, as of July 31, 2021, was 4,123.
Hut noted that, "based on current mining conditions and installed hash rate, Hut 8 projects to mine approximately 910 Bitcoin in the third quarter of 2021, which would bring the Company’s self-mined Bitcoin balance to approximately 4,733 as of September 30, 2021." Jaime Leverton, Chief Executive Officer of Hut 8, also commented that:
"With the recent ban on Bitcoin mining in China, Hut 8 has nearly doubled its market share and is currently producing approximately 10 Bitcoin per day. Reports suggest that the exodus of miners from China may take an extended period to resolve and global network hash rate could remain depressed well into 2022. With 109 MW of installed power in Alberta, and with a third site being stood up in the fourth quarter of 2021, Hut 8 is well positioned to take advantage of favorable Bitcoin mining economics expected to continue into 2022."
This positive effect was also recognized by BITF, which produced a similar July update. Bitfarms increased production from 265 Bitcoin in June to 391 in July. Further, BITF indicated that there is some ability to renegotiate order pricing. All of this bodes well for high quality mining companies with existing productivity, as well as the capacity and intention to ramp productive capacity.
Comparative valuation
HUT's valuation is competitive compared to most large peers. Its access to cheap power and property is likely to be a lasting attribute. The market may prefer models that use hydroelectric power, which could mean that there should be an expected continuing discount to peers, but this is not certain. Nonetheless, it appears HUT's discount to peers should reduce in the coming quarters.
There is also the possibility that domestic miners could suffer from continuing regulation and taxation. It is possible that the United States will implement burdensome taxing and regulatory requirements that could make investors prefer Canadian peers. Regulations could come from local governments too. In this case, Alberta appears a preferable jurisdiction.
HUT is also one of the bigger HODLers of Bitcoin among the large miners, and was also among the first Bitcoin miners to seriously HODL as a strategy. HUT holds the most self mined Bitcoin, as MARA obtained the majority it HODLs through a purchase made in January.
Moreover, HUT is loaning out Bitcoin to generate yield. HUT last indicated having lent to Galaxy Holdings and Genesis Mining each 1,000 Bitcoin, paying interest at 4 percent. I actually do not fully understand Genesis Mining, and do consider it a somewhat risky partner compared to Galaxy at the same interest rate, but that may be my own ignorance on the subject.
Risk
Bitcoin is a speculative asset and any company like HUT that is focused on the mining and/or accumulation of a speculative asset is at best a mere derivative of that speculation. There is the possibility Bitcoin will fail. Any fatal defect to Bitcoin would be terminal to a miner.
Conclusion
I believe that Bitcoin is likely to make a new high within the next 12 months. If Bitcoin can maintain its recent strength, HUT appears likely to be headed for the double digits. If Bitcoin were to make a new high this year, HUT equity appears to have the potential to triple this year. While this is highly speculative, I am a fan of this leveraged bet on Bitcoin's trajectory.
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