William Szamosszegi : So with all that said, I’d like to welcome you, Jimmy to the podcast.
Jimmy Vaiopoulos: Thank you. Appreciate it.
How did you get involved in Cryptocurrency Mining at Hut8?
Jimmy: I first got interested in cryptocurrency, I remember around 2013 when I was living in Vancouver and the first ever Bitcoin ATM was there. And so there was a lot of commotion and people got a chance to get their hands on Bitcoin and it was quite complicated to get in around that time. So that led me to read Satoshi’s white paper and really understand blockchain. But in my career I hadn’t stepped in at that point very, very early. There weren’t companies the size of Hut 8 or even fractions of that at that time. But generally in my career, I worked in infrastructure, focusing a lot of energy and traditional mining. And so with Bitcoin mining, most costs go towards electricity. So working in energy was very helpful there. There’s a lot of similarities being a public Bitcoin miner and a lot of the public gold mining companies I used to work with. And I’ve traveled to a few of those gold mines in some interesting locations. And so it’s a really good overlap that I would have never guessed would have led me to Bitcoin mining, but ended up being a really good path to get there. So I also enjoy working with early stage companies in early stage industries.
William: Well, in terms of mining companies that everyone sees in the news and in this space and industry, Hut 8 is one of those names that almost every single person who’s a miner knows. And diving into how Hut 8 got to where it is today.
Can you talk a little bit about the backstory of how Hut 8 started and really reach that type of scale that all miners are going for?
Jimmy: Definitely. So Hut 8 started in 2017 which you can imagine if you look at a chart of Bitcoin. It went parabolic. Lots of excitement and around Bitcoin, people want to figure out how they can get in. And so in the Canadian markets, even North American in general, there are a lot of institutions and people that want access. But, they didn’t have the mandate to buy Bitcoin themselves. Of course, it’s complicated setting up a Bitcoin mining system. And there’s a lot of people that just didn’t want to go through the efforts and the constraints of buying Bitcoin through mediums that they didn’t know or trust at that time. And so Hut 8 had figured out how to set up that mining structure, how they made the system in Alberta with cheap electricity. And we hold our Bitcoin in a very safe way. And so what it does is it creates a platform and a structure for people to invest in the public markets and get exposure to Bitcoin. Through both mining and through holding Bitcoin. And so we really leverage that. And people want to have some holdings of a Bitcoin exposure to that in their portfolio. And Hut 8 is the easy way to do that.
William: Got it. So it seems like you really capitalize also on the timing, too, because it happened during that 2017 bull run.
Is that something that you think that a mining company could do today or it was a nature of how the industry was at that time with that big bull run?
Jimmy: A combination. I think in 2017 the size that Bitcoin got to, caught a lot of people off guard. And so there are a lot of people playing catch up and learning and understanding what Bitcoin is, and especially the institution. I think they were caught and realizing, wow, this is a great play and we want to get involved and to compete in a new asset class here. Moving forward. I don’t know if we’re going to see as much of it, it could still go parabolic and all these things could still happen. But I think the knowledge of Bitcoin is definitely at a much higher level through a lot bigger companies now and so there’s still very big opportunities to capitalize again the way that we did. But I think there’s something very special that happened around that time that we’re at the right time and right place.
William: Seemed like there were these institutions. They wanted exposure to Bitcoin and rather than just going and buying exposure, you explained that they could get exposure by investing in actual mining equipment and the cash flow that’s generated from the Bitcoin being mined.
You guys became a public company, right?
Jimmy: The intention, right from the formation of Hut 8, was to take us public. And so what we did, and the way that we sold it, was that it would be public. You can get in and out very quickly. We really focused on that structure, which is what people really wanted. They just want a way to get exposure to adjust their position as they need and that’s what really was the compelling part to a lot of these institutions and individuals as well. It was across the spectrum but really what took us off to a really big start were the institutions that wanted to get involved.
What was it like, raising capital for Hut8?
William: Got it. And when you were going in trying to raise the capital for Hut 8, what was that process? Because that’s even earlier than where we are today, understanding what Bitcoin is, how the technology is, and how mining is a reliable way to generate revenue. So when you were going into those conversations, what were you pitching to these investors?
Jimmy: The big pitch was you don’t have to go through the steps of buying Bitcoin. There’s a lot of constraints on these exchanges for how much you can buy and we raised over a hundred million dollars when we started this company. So it was hard to mass that kind of exposure to Bitcoin at that time. And anyone who is in the industry prior remembers what the margins were like around that time. Bitcoin taking off and just not that many manufacturers making this equipment. The margins were through the roof. So it was just massive demand. The demand far outstripped how much Hut 8 was trying to raise. We’re talking big scale stuff, right? We’re running 100 megawatts. And we had to limit how much we took in to how much power we had. And that’s how much demand there really was. It was quite an interesting time, that’s for sure.
William: Yeah, that’s incredible. And those investors were people that you just had worked with in the past? Or people that you went online with, you looked through different investment mandates of these different investor funds and then tried to pitch those firms in particular? How did you go about finding those investors who were participating in Hut 8?
Jimmy: So Hut 8, knew a lot of these… The build behind Hut 8, we knew a lot of the folks that ended up getting involved, but these are a good chunk of the funds that were brought in from very large institutions. That’s where the good chunk of the funds came in. Of course, word gets out that these are all public raises. So once word gets out that to start raising money, people don’t want to miss out on the one company at that time that was going to be the Bitcoin miner. There weren’t that many people doing this. There was Hive who did it before us. But they weren’t focused fully on Bitcoin. And so being an early entrant as one of the Bitcoin miners almost sold itself at that time. And so that’s how the demand grew so big.
William: Got it. And after you raise that capital, you have to find a way to actually deploy all of it into mining. So what was your process like when you had gotten the capital in and you’re now delivering on a hundred megawatts of mining that you’re trying to build for these institutions?
Jimmy: Yeah. So it all starts with a couple of things. One very critical item is the electricity that we can consume. And so we ended up with what I think is one of the most unique and better structures that I’ve seen out there. And so our main site, Medicine Hat, they’re one of the unique places that actually the city runs their own grid. So most places you have a really big utility that you can’t even negotiate. And anyone who’s been in the room, there’s very fixed rate structures and all that. And so working with a city that runs its own grid for a generation plant that they had just built, that was new, but they didn’t have someone to take on that energy. So we went in and we said, we’ll take all that energy and we’ll run it 24/7. And they almost didn’t believe us. That’s a dream to a lot of these electricity providers. And so we said, yeah, we’ll come in, we’ll take it all. And we set up a very unique structure, specifically with the utility, which was a city with whom we rented the land off of and paid property taxes to. And we have a whole structure and then built a really good relationship with them. So we had that in place. Second key piece is the infrastructure and the chips. At the beginning, we’re very young and a new company. So we teamed up with Bitfury and they have a really good system for building these sites with just fixing up 40 foot C Containers to put the chips in there. They run. They’re easily movable, mobile, and they run off… So they all get cooled off by a system of airflow. So they have built many of these, we use that insight that they have built. We’ve got used to it. They were partners. They owned a big percentage of our company. So we had the line in terms of equity and we’re able to build ahead of schedule under cost. This site and so we got all off the ground quite quickly. By early summer, we started turning on boxes. So there’s the kind of key pieces. We had the money and before that we had the site and the chips lined up. We had precedent for how these would be built and really tried to build a world class site there, which we think we have.
William: Yeah, that’s great. And that’s a very smart approach to go and leverage the expertise of a company that’s been operating and doing a lot of mining in the space as operational partners as well.
Jimmy: Definitely. It provided a way to invest in an early stage company without some that early stage risk, because we partnered with Bitfury in building it up and they had some of the most experienced in the industry.
Raising Additional Capital
William: Yeah, definitely. And then once you went through that initial deployment and had deployed that capital, did you guys go and try and raise additional capital or go through a cycle of upgrading that hardware? How did you approach that next phase after you were up and hashing?
Jimmy: Yeah. So we’re pretty much there now where after the halving we’re looking at modernizing a lot more of our equipment and looking past into the next phase, you know past the next halving now. And so we did a raise recently in June for about 8.3 Million, an oversubscribed deal. And so that fully 100 percent went towards upgrading our site with different suppliers, also dimension. Bitfury is a great partner and getting off the ground. But eventually we saw a lot of value in being autonomous and buying from any supplier and if that happens to be Bitfury that’s great. But it kind of provides full flexibility to Hut 8 to operate in the best way for Hut 8. And so we teamed up with MicroBT on this most recent one. And we found the system that we built, originally Bitfury was flexible. So we were able to use any miners and we have been testing them for quite a bit of time, like MicroBT, purchasing their equipment and we’re going to be installing those here quite soon. So we’re excited to build some diversity within our site and keep growing and modernizing.
William: Right now, you’re the interim CEO of the firm and you’re really making those decisions on how the firm is going to move forward. And any CEO in any industry right now, on top of all the things that they traditionally had to balance, now there is the question of what’s happening with Covid and how this is impacting your industry and your business. So with that said,
how do you think Covid is going to impact the next year of cryptocurrency mining?
Jimmy: So there’s a lot of effects through Covid. At the beginning it was very tough because we saw collapsing capital markets and Bitcoin prices. And we’re all really trying to figure out what’s ahead and what’s going to happen. And so we’ve seen things steady a lot since then. Boom was thrown to us and we saw cheap electricity prices during that time with obviously people staying at home. In Alberta there has been a bit of a tougher time because they were quite reliant on the oil industry. And so we saw demand go down. We saw supply go up, and so prices fall for us, which was quite an opportune time, especially around the halving. But long term, in terms of what this is going to do for the industry, with Covid and people staying at home, we already saw this is progressing e-commerce and digital currencies and at a rate that we thought was going to happen much slower ahead of all this. And so I think in the long run, we can look back at this as a time that people start getting more used to working with digital currencies and working through computers. We’re doing this over Zoom right now and so the amount of that comfort that people are getting with this, I think has been sped up greatly and there’s only positive for Bitcoin embracing a little bit of a run up in the price and so. Who knows what will happen from here.
William: You touched on a couple really interesting points there. One being the change in demand for electricity and how it could actually benefit a miner who’s trying to secure a lower electricity costs, which is very important for a mining operation. And then you also touched on the fact that we’re recording this over Zoom. Remote work is really becoming much more of a norm and it’s something that I think many companies were afraid of initially, just because ‘how are you all of a sudden going to get as much done when no one’s going into the office’ and it’s just a completely different way about thinking how you can operate a company. But it goes to show that really a lot of the work that’s being done nowadays, you can really do remotely.
Jimmy: That’s right. Adoption is just going through the roof for a lot of this stuff and people who may have been reluctant before this, really have no choice now. So it’s just the new world we face. And I’m very happy to be focused on the digital focused part of our society, being in Bitcoin.
William: Aside from the electricity prices and just the norm of working remote.
How do you think all the money printing that’s happening globally is going to end up affecting Bitcoin as it is seen by many to be a store value asset?
There are people who have different opinions on how the way that central banks are acting is going to play out within the price of Bitcoin.
Jimmy: I think these are very connected things. We have seen a lot happen since Covid really hit us and we had shelter in place provisions, all these items. And the money printing is pretty unprecedented at this time. The Fed came out to say they’re going to commit to a plan of higher inflation than they have in the past and we’re going to see that across the world, including here in Canada where I am. Bitcoin mimics a lot of the values and properties that gold has just in a digital form. In doing so, it has a lot of anti-inflationary properties. And so we’ve already seen gold hit record highs in recent days. And Bitcoin again mimics these properties. And as we see more value come into it, the younger generations, we’ve already seen that they would rather have a digital store of value than a physical store of value like gold. And so you see a generational shift there. We’re going to see a shift in just people accepting Bitcoin generally. But it’s a very responsible thing right now to be holding Bitcoin, gold as a part of your portfolio given all the things going on in the world and the Fed just printing money as much as they can. It’s a crazy time but it’s a time that I think shows how important it is to hold something like Bitcoin.
William: It seems like a lot of the trends happening today are actually beneficial for the people who are participating in this industry. But again, on the other side, there are also many challenges and things that might have changed the way that a miner or any other person building in the space might approach their business. So with that said,
what are some of the biggest challenges that you’re seeing today among cryptocurrency miners?
Jimmy: The biggest thing that we have always facing us is just the volatility. It’s the new asset class. We see people stepping in, in a big way, and stepping out in a big way at different times based on different items and just the nature of Bitcoin mining. You have these fluctuations in Bitcoin price, but you have difficulty, network difficulty adjusting every two weeks. And so you have these mismatches. Mismatches, is that it’s much that can occur and what happens is Bitcoin drops very rapidly like it did in mid-March this year. It’s very hard to run a profitable operation. And you have to think to yourself, is it going to rebound? How do we adjust our mining? So that we can react to this. And beyond that, on the other side. If Bitcoin takes a complete run, which it has many times over its history, it’s very profitable for a miner because it takes time for the network difficulty to adjust. And so we have to prepare ourselves for the worst in these scenarios, which means keep a little bit more buffer, set up our contracts that we can stay flexible and manage. And you saw a downturn, but we also have to make sure that we’re locked and loaded ready for any bull run and to capitalize on those short periods of time that we can make a significant amount of money. And so preparing for the best and worst and staying on your toes between that is always a difficult thing for a Bitcoin miner. That’s number one. The other thing right now is the manufacturers of this equipment. As you can, if everyone remembers, at the end of 2017, we saw a big shoot up in Bitcoin price and it was great margins for a good amount of time for Bitcoin miners. So now the manufacturers try to make as many of these miners as they possibly could and just completely flood the market. And the way that these miners work is you have to buy space in Taiwan, semiconductors or Samsung to actually make these chips. And so they overloaded in terms their anticipation of everything. And they got burned because they ended up with a bunch of equipment that they couldn’t sell at that time. So it’s a lot more of a steady hand moving forward with these equipment manufacturers. And so what we’re seeing is the equipment that they make goes into the few hands that have those relationships but there are delays. It’s very hard to get your hands on the latest equipment because they’ve limited their production to ensure that they can manage their cash flows as well. A lot of nuances in this industry to kind of always stay on top of.
William: That first topic that you talked about creating a buffer.
Are you going to buffer for when times are tough and how are you going to allocate those additional resources when times are good to make sure that you’re ready when times go south again. Do you guys have any sort of protocol for how you’re planning that or is it something that is just kind of how you’re feeling and the trends that you’re seeing in that moment?
Jimmy: I can’t get into all the specifics on it. But it’s a conversation that is continuously ongoing. It’s very important for us to make sure that we’re thinking through that buffer at different times in our history. And so the result is quite simple. We just have to make sure we’re holding enough cash in our bank account to make sure that we have X amount of days that we can handle our expenses. And so as long as those X amounts of days are far longer, that we can handle expenses than what we think, a downturn could be. We’re talking a month, two, three months depending on the timeframe. That’s the core of the way we think about it from a buffer and we’re obviously always holding Bitcoin and setting up our contracts that allow some level of flexibility so that we can push out things by a month if need be and we also have a very lean team as well. We make sure that we want to be as low cost of a Bitcoin miner as you can. Kind of similar to the gold industry. You want to be a low cost producer. And so what that allows you to do is during tough times, you find ways to toggle up and down as needed and your core expenses remain very low.
William: That’s a smart approach and it’s interesting to see how you guys build in that buffer and have that timeline so you’re able to weather any sort o