Globe In­vestor

The Globe and Mail (Ottawa/Quebec Edition) - - REPORT ON BUSINESS - NATALIE OBIKO PEARSON BRANDON KOCHKODIN

In an era of low yields, bit­coin is draw­ing lots of in­vestors: It has surged more than five­fold this year. And as the cryp­tocur­rency tops the $5,000 mark, it seems in­creas­ingly im­per­vi­ous to bad news

Frank Gius­tra, the Cana­dian min­ing mav­er­ick who amassed a for­tune build­ing what would be­come one of the world’s largest gold com­pa­nies, is dig­ging for an­other kind of gold: cryp­tocur­ren­cies.

The com­pany he’s backed, Vancouver-based Hive Blockchain

Tech­nolo­gies Inc., is among the first pub­licly traded stocks to pro­vide ex­po­sure to crypto-min­ing – the vast data crunch­ing needed to ver­ify the blockchain and the volatile cur­ren­cies they pro­duce, such as bit­coin and ether.

So far, his de­ci­sion to dig for data servers has paid off. Hive’s shares have soared about 633 per cent, giv­ing it a mar­ket value of $553-mil­lion, since it took over the list­ing of Leeta Gold Corp. and be­gan trad­ing on Sept. 18. Af­ter only three days, the com­pany raised $30-mil­lion in a share sale led by GMP Se­cu­ri­ties LP.

“We’re quite lucky to be first out of the gate,” said Hive chief ex­ec­u­tive of­fi­cer Harry Pokrandt, a for­mer Mac­quarie Group in­vest­ment banker who bought his first bit­coin for $100 in a Vancouver cof­fee shop on his iPad. Speak­ing from a makeshift of­fice ad­join­ing Mr. Gius­tra’s Fiore Group, which is listed as an ad­viser to Hive, he said, “We’re a unique way to get into the space.”

Mr. Gius­tra helped build the com­pany that would be­come Gold­corp Inc. then founded film stu­dio Lions Gate En­ter­tain­ment Corp. He counts Bill Clin­ton and Ge­orge Soros among his close pals. Those con­nec­tions may po­si­tion him to grasp a nascent cor­ner of fi­nance and nav­i­gate bit­coin’s un­cer­tain reg­u­la­tory wa­ters. Mr. Gius­tra didn’t re­spond to a re­quest for an in­ter­view.

Blockchain is the tech­nol­ogy used to ver­ify and record trans­ac­tions on a pub­lic, on­line ledger. “Min­ers” use com­put­ers to solve com­plex math prob­lems to ver­ify trans­ac­tions, earn­ing a re­ward of a newly is­sued coin, such as bit­coin or ether. Hive paid Hong Kong-based Ge­n­e­sis Min­ing Ltd., builder of the world’s largest ether min­ing fa­cil­ity, $9-mil­lion and gave it a 30-per-cent stake to ac­quire a new data cen­tre in Reyk­janes, Ice­land.

There, Hive plans to mine dif­fer­ent cryp­tocur­ren­cies, de­pend­ing on which ones of­fer the best mar­gins and build an in­ven­tory of coins on the ex­pec­ta­tion they’ll ap­pre­ci­ate.

Hive said it plans to buy a sec­ond Ge­n­e­sis data cen­tre next door for $5-mil­lion and has the op­tion to buy more in Ice­land and Swe­den, cold coun­tries which can keep power and cool­ing costs down.

In­sti­tu­tional in­vestors have largely watched bit­coin’s devel­op­ment from the side­lines, put off by the dif­fi­culty of buy­ing dig­i­tal coins, their volatil­ity, and the crim­i­nal ac­tiv­ity the mar­ket’s anonymity can draw. Gov­ern­ments are strug­gling to reg­u­late the industry, with China clos­ing all cryp­tocur­rency ex­changes and at least 13 other coun­tries tight­en­ing rules. Hive is listed on the TSX Ven­ture Ex­change, no stranger to volatile stocks. Hive jumped 28.4 per cent to $2.49 in Toronto.

Hive may make in­vest­ing in the mar­ket eas­ier, but “I sus­pect the vast ma­jor­ity of ac­counts aren’t con­tem­plat­ing an in­vest­ment in vir­tual cur­ren­cies right now,” said Jeff Klin­gel­hofer, man­ag­ing direc­tor of Santa Fe, N.M.-based Thorn­burg In­vest­ment Man­age­ment Inc.

Still, in an era of low yields, bit­coin is draw­ing many in­vestors. The mar­ket value of the world’s roughly 1,000 cryp­tocur­ren­cies, led by bit­coin, surged more than eight fold this year to top $150bil­lion (U.S.). Bit­coin has re­turned 445 per cent and set a record above $5,000 on Thurs­day. Ether has gained an even more dra­matic 3,600 per cent this year.

Be­ing first out of the gate has its chal­lenges. “Do we rec­og­nize rev­enues the moment we mine it? Do we rec­og­nize it when we ac­tu­ally sell it and con­vert it into fiat? What hap­pens in the mean­time?” Mr. Pokrandt said. “There are a lot of is­sues we haven’t solved yet.”

Only a few ve­hi­cles are avail­able to in­sti­tu­tional in­vestors seek­ing ex­po­sure to cryp­tocur­ren­cies and none of them are pure min­ers. Bit­coin In­vest­ment Trust, for ex­am­ple, in­vests ex­clu­sively in bit­coin and trades over­the-counter. It with­drew an ap­pli­ca­tion last month to list on the NYSE Arca mar­ket. It’s cur­rently trad­ing at a 75-per-cent premium to the coins it holds as as­sets.

The high-risk, high-re­ward men­tal­ity of those who back hard-rock min­ing ex­plo­ration eases the leap from phys­i­cal to dig­i­tal gold, said Mr. Pokrandt, who’s fo­cused on min­ing and re­sources for more than two decades. But there’s some­thing else, he says.

“I’ve dis­cov­ered that crypto cul­ture and gold bugs are the same sort of thing: you’ve got mis­trust of gov­ern­ment, mis­trust of fiat, you want a de­cen­tral­ized ecosys­tem,” Mr. Pokrandt said. “The dif­fer­ence is that gold bugs tend to all be 60 years old and crypto guys are 20.”

Do we rec­og­nize rev­enues the moment we mine it? Do we rec­og­nize it when we ac­tu­ally sell it and con­vert it into fiat? What hap­pens in the mean­time? There are a lot of is­sues we haven’t solved yet. Harry Pokrandt Hive CEO

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