Blockchain Mining Ltd. (TASE: BLCM) has not had an easy time on the TASE (Tel Aviv Stock Exchange); its share price has plummeted almost 90% since the beginning of the year on extremely low turnovers. The company is now changing its name to Bitfarms, the commercial name of the activity of the Canadian company with which it merged, in an attempt to rebrand its activity and overcome the capital market's suspicions and possibly arouse interest in the Canadian capital market. The company's shareholders' meeting approved the name change on Wednesday (subject to approval from the Registrar of Companies, which has yet to arrive), after the company recently changed its ticker symbol from BCLM to BLLCF.
The main challenges facing Bitfarms, however, do not lie in the capital market; they involve the cryptocurrencies market in which the company operates. Bitfarms operates a farm for mining digital currencies in Quebec, the largest province in Canada. Making a profit in the cryptocurrencies market is become more and more difficult, and government policy in Quebec is not helpful, particularly with respect to the allocation of electrical energy required for mining activity.
These challenges are not confined to Bitfarms; the are typical of most of the players in the cryptocurrencies mining industry. Bitfarms is listed on the TASE, but the shares of several of Bitfarms' competitors in the market are listed on other stock exchanges around the world, of which Canadian companies Hut 8 Mining and HIVE Blockchain and US company Riot Blockchain are some of the most prominent.
Doubts about Bitmain's IPO
The leading companies in this industry, however, are private companies such as Chinese company Bitmain, which is reported to be planning an $18 billion IPO on the Hong Kong Stock Exchange. Bitmain is not only active in bitcoin mining through the mining farms it maintains in China and the US; it is also one of the leading manufacturers of bitcoin mining machines equipped with ASIC chips and manages two of the world's largest bitcoin mining pools.
Incidentally, two very large companies, Chinese company Tencent Holdings and Japanese company SoftBank, which according to reports on news websites recently invested in Bitmain's pre-IPO financing round, this week denied any involvement in such an investment. Bitmain itself also failed to confirm that it was planning the reported IPO.
If you ask what bitcoin mining is, the answer is that it is a decentralized calculation process carried out by a network of miners (computers or machines equipped with special mining chips) for achieving two main objectives: a reliable way of confirming bitcoin transactions and creating new bitcoins in each block of transactions. Mining is an essential and integral part of the bitcoin network (and the system in which the network data are stored - the blockchain), which helps maintain its security, reliability, and stability.
A mining pool is a group of cryptocurrency miners (mainly companies that operate mining farms, but also smaller private miners) combining forces and sharing the calculating power of their mining machines on a network in order to benefit from higher success rates in mining currencies, thereby attaining larger returns.
The company operating the pool, such as Bitmain, receives fees from the participants in the pool - a few percent of the total payment received for mining currencies. Bitfarms, for example, participates in Bitmain's AntPool mining pool, for which the fee is 2.5% of the mining payment.
Canadian brain, Argentinian money
Blockchain Mining Ltd. is registered as an Israeli company, but its activity, management team, and employees are all Canadian. For all intents and purposes, it has been a Canadian company ever since it merged (partially, last April) with Backbone Hosting Solutions. Backbone Hosting, which operates under the commercial name of Bitfarms, has 100 employees (earning average of C$55,000 a year - NIS 13,000 a month), and operates four mining farms in Quebect with a total electrical capacity of 27 megawatts.
Bitfarms' farms are spread over four different locations in Quebec. The company also operates a laboratory in Saint Jean-sur-Richelieu that provides repair and maintenance services for thousands of its mining machines. It also recently acquired the Volta company which has 30 employees and provides electricity services to Bitfarms.
Close to the laboratory, the company is planning to set up another mining farm in the future in addition to the two farms to be established in the near future. Together with the three planned farms, the company plans to increase the total electricity capacity of its farms to 135 megawatts.
The selection of Quebec is no accident. Bitcoin mining machines consume a very large amount of electricity and electricity rates in the area are substantially lower than in other places around the world. For large industrial consumption of electricity (over five megawatts), as in several mining farms, the local rate is around C$0.05 per kilowatt-hour. For the sake of comparison, the industrial electricity rate is three times as much in the Canadian capital of Toronto and almost four times as much in Israel (the calculation also depends on the time of day of consumption).
Quebec is rich in water resources. More than 90% of the electrical energy produced in it is hydroelectric energy from huge dams built over the rivers flowing in the province. Furthermore, the climate in the region features a long, cold, and snowy winter, so there is no need to install an air-conditioner in mining farms.
Bitfarms says, "Hydro-Quebec (the local state-owned electricity company) produces too much electricity during the year, especially during the winter, in order to be prepared if demand is high. We use the surplus electricity. According to our agreement with the company, we turn off our servers and do not consume electricity when demand is high in order to lessen the burden on the grid."
Nevertheless, it is not definite that the electricity rates paid by Bitfarms in Quebec will stay low in the future. According a report published by the Bloomberg new agency two months ago, Hydro-Quebec has received temporary authorization from the province to raise its electricity rates up to three times as much for new digital currency mining farms (not including active farms like those of Bitfarms) in response to higher demand for building mining facilities in the province.
Roy Sabag is no longer in management
Bitfarms, however is expressing no concern about the measures by the local electricity company. "We have good connections with decision-makers in Quebec, and our professional staff is one of the best in this industry, with more extensive experience than many of the players in the sector," says Wes Fulford, 38, who became CEO of Blockchain Mining two months ago (after being appointed CEO of Backbone Hosting in March). The companies is expressing hope that after the upcoming elections in Quebec scheduled for October, policy on the issue will change for the better.
"We have made no effort to promote ourselves in Israel, nor have we done enough to teach the public about our activity. We have focused on investments in our activity, in setting up our mining farms and the laboratory for repairing and maintenance of the mining machines," says Fulford when I tour Bitfarms' farm in Saint-Hyacinthe, which was formerly used as a warehouse for cocoa beans. "The reports we will publish in late August for the first half of 2018 will show our financial results the public for the first time." Before coming to Bitfarms, Fulford worked 12 years as an investment manager at leading investment banks in the US and Canada.
Blockchain Mining tried to raise money five months ago with an issue of convertible bonds in Canada. The planned issue was for up to C$50 million ($38 million), but the company announced in late April that it had shelved the issue. In addition, as reported in "Globes," the company halted trading in its American Depositary Receipts (ADRs), which was conducted through Bank of New York (BNY) Mellon and its shares began to be traded over the counter (OTC) in the US in the OTCQX Best trading theater in the US under the BLLCF ticker symbol.
The brains behind Bitfarms mining activity are a pair of its Canadian founders, president and board member Pierre-Luc Quimper, 34, and software engineering director Mathieu Vachon, 37. Quimper comes from a small village in New Brunswick, a rather small province in Canada east of Quebec. He started his first computer business when he was 14 - data centers company Globotech, which he still owns and which is still active. In traveling with him from Montreal to tour Bitfarms' farms, he said that he had started mining bitcoin for the first time two years ago in the basement of his home, but after realizing that the home electrical capacity was too small to meet the consumption load of mining machines, he had contacted Vachon, his friend. Together, they founded their first mining farm in the local village of Notre-Dame-de-Stanbridge. This farm, Bitfarms' smallest with an electricity capacity of only one megawatt, is active to this day.
They later started another mining farm in Cowansville on the site of a former plastic containers factory, and were then contacted by two Argentinian businesspersons, Nicolas Bonta and Emiliano Joel Grodzki, who were looking for a place to start farm for Ethereum mining with mining machines based on graphic processors that they bought for the purpose. The meeting between the Canadian pair and the Argentinian pair led to the founding of a joint company called Backbone Hosting, through which they operated a servers farm in Quebec and provided hosting services (website storage services). In 2017, the company began to set up a mining farm operating under the name Bitfarms and terminated its hosting services.
Bonta and Grodzki are currently the largest shareholders in Blockchain Mining with holdings of 30% and 28% of the company's share capital, respectively. Another large shareholder is Roy Sabag (22%), who changed the name of the National Resources stock exchange shell to Blockchain Mining and changed the company's field of investments from metal and gold mines to digital currency mining.
Sabag's move sent the company's share price soaring many times over in the two months from October to December 2017, propelling its market cap to a peak of almost NIS 1 billion on December 11. This peak, however, lasted for only one day, when then-Israel Securities Authority chairperson Prof. Shmuel Hausner warned investors in shares of companies whose value was based on cryptocurrencies and Blockchain Mining's share price began to fall quickly. Sabag severely criticized Hausner's warning, but this was of little use.
Following the regulator's warning, the TASE decided not to include Blockchain Mining's share in its share indices. The share price briefly climbed again in April when the merger deal with Backbone Hosting was completed, but the downward trend then resumed. Today, with the share price 95% below the peak that it reached in early December, reflecting a market cap of NIS 138 million, Sabag no longer holds any position in the company. The other 19% of Blockchain Mining's shares are held by the public.
"A good time to raise money"
Bitcoin is trading at $6,640 today, reflecting a market cap of $114 billion, nearly 54% of the total market value of the digital currencies, of which there are almost 1,900 types according to the CoinMarketCap website. The price of bitcoin has declined by 52% this year, and its current price is 67% lower than the peak it reached last December.
Analysts throughout the world have tried to analyze what price level is an equilibrium point for bitcoin miners. The CNBC website recently quoted the Morgan Stanley investment bank as saying that the large mining farms were earning money only when bitcoin was trading at over $8,600. In May on the other hand, analysts from the CoinShares investment company estimated the average marginal cost for bitcoin mining at $6,400, close bitcoin's current price.
While the values of cryptocurrencies have been falling this year, mining has been becoming more difficult, requiring miners to increase their calculation power and consume more electricity. Falling revenue and increased expenses have of course been reflected in lower profits in the mining industry.
Mining earnings are constantly falling
A Canadian company name Hut 8 Mining (ticker symbol HUT.V), which began to be traded on the Toronto Stock Exchange last March, and whose activity is similar to that of Bitfarms, focuses on holding and operating bitcoin farms. Hut 8 operates 57 server farms in Alberta Province in Canada with a total electricity capacity of 66.7 megawatts. Hut 8's share price reflects a current market cap of C$256 million ($196 million) after falling 35% from its peak on April 24.
This month, Hut 8 published its reports for the second quarter of 2018, which ended on June 30. According to the reports, the company finished the first half of 2018 with $18.8 million in revenue, and its profits from bitcoin mining, which totaled $13.8 million, amounted to 73% of its revenue (excluding depreciation). Hut 8 reported that in the first eight months of 2018, it had successfully mined 1,614 bitcoin currencies, while the average cost of mining was $2,334 per bitcoin.
In a presentation by Hut 8 to investors in August, the company assumes for the sake of its point that given a fixed price of $6,500 per bitcoin, payment of 12.5 bitcoin for each block in a blockchain, mining fees of 0.5 bitcoin for block, and a period of 700 days (almost two years) before mining payments are cut in half (from 12.5 bitcoins to 6.25 bitcoins for each block according to the software protocol for bitcoin), at the current speed of mining (144 blocks a day), the total value of the bitcoin mining market from now until June 2020 (the date after which payment for mining each block will be cut in half) will be $12 billion ($6 billion a year).
According to these figures, Hut 8 estimates total profits from bitcoin mining in the next two years at $8.5 billion (70% of revenue). This is a purely theoretical calculation, because the actual bitcoin price is far from constant - it is one of the most volatile financial assets in the global economy, the value of which sometimes changes by large percentages overnight. The pie of profits in the bitcoin mining market is currently divided among tens of thousands of miners taking part in the activity, including the mining farms of Bitfarms in Quebeck.
Even though the problems in the market have not escaped them, the Bitfarms founders are talking quite confidently. "We have real activity here and we're looking at the long term," Quimper says. "In the short term, some players in the market will collapse." Quimper does not say much about his long-term plans, but notes that Bitfarms wants to create "broad" activity, rather than focusing exclusively on bitcoin. "In a few years, we'll do other things," he added.
The author was a guest of Bitfarms in Canada and was financed by "Globes."
Published by Globes [online], Israel business news - www.globes-online.com - on August 29, 2018
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