For an asset class that claims to empower retail investors, cryptocurrencies can be incredibly opaque. The complex and self-involved techno-babble of entrepreneurs and CEOs can easily overwhelm and confuse investors.

The scrutiny of public markets provides clarity and a necessary corrective. That is why Canadian crypto mining company Hut 8’s second quarter results recently are interesting. The Toronto-based firm swung to a profit of $33.7 million this quarter after reporting losses of $6.2 million during the first quarter of 2019.

The state of Hut 8’s finances offers an introduction into the economics of crypto mining and concerns of a crypto business. The company, which describes itself as Canada’s biggest industrial mining operation, reported consecutive quarterly losses during the crypto winter that gripped crypto markets last year. Thawing of that winter began with an increase in crypto prices.

But the correlation between crypto prices and profitability is not a simple one. Hut 8 had to work hard to achieve its gains. It downsized headcount, cut costs and struck agreements with electricity providers to change its balance sheet. As a result, the overall cost of mining a bitcoin came down to $2757 this quarter from $3950 in the first quarter of 2019.

Here are three interesting factoids from Hut 8’s earnings.

Efficient Chips Can Make or Break Profits for Miners

In conventional narrative, energy costs are considered the most important factor affecting mining. But that expense is directly related to the efficiency of chips that power mining machines. In a fast-moving industry, the availability and efficiency of these chips is an important determinant of profits.

Very few manufacturers of Application-specific integrated circuits (ASIC), the chips most commonly-used in mining machines, exist in the world today. With growing prospects for cryptocurrencies, demand for these chips is high from manufacturers of mining machines. In turn, the non-availability of mining machines can affect bottom lines at miners.  

During Hut 8’s earnings call, CEO Andrew Kiguel said the sold-out machines on the website for Bitmain, the world’s biggest bitcoin mining company, were an example of resulting dynamics. According to him, Bitmain is dependent on suppliers and vendors for its final product. The sold-out signs are simply meant to delay delivery dates to ensure that Bitmain does not default on its orders due to its suppliers, he said. Hut 8 sources its mining machines from Bitfury, another maker of mining hardware.

Bitcoin prices determine profit numbers

In an earlier interview, CEO Kiguel explained the company’s strategy to ride out price volatility in crypto markets. As the price of Bitcoin goes up, the company cuts back on its production of the cryptocurrency and induces scarcity in the market. A declining price is occasion to increase production and market supply.

Hut 8 performed regression analysis for the correlation between Bitcoin price and the difficulty levels of its algorithm and concluded that $15,000 is a “great buying opportunity” for the cryptocurrency. “Once it rises above that price point, we see it as a selling opportunity,” said Kiguel.     

Of course, that calculation does not take into account the cost of scaling infrastructure or paring down operational costs. Hut 8 itself is an example of the perils. It laid off workers in January and April this year and has increased the number of operational servers on its farms.

During the company’s earnings call, Kiguel said Hut 8 benefitted from increasing Bitcoin price in the last quarter and a reduction in corporate overhead. Specifically, the rise in Bitcoin prices increased working capital from $8.4 million to $38.2 million.  

The Importance of Bitcoin Inventory

Typical earnings statements have cash holdings. Miners have bitcoin inventories. They have easy access to the cryptocurrency because they produce it. In a crypto winter, however, they might choose to hoard the Bitcoin in reserves to help tide through fluctuations in price. The inventory is a hedge against price and can be used to finance future operations. Hut 8’s strategy of hoarding its bitcoin at the end of last quarter helped the company turn a profit this time around. The company’s reported income of $33.7 million includes a reassessment of its bitcoin inventory to $22.4 million, thanks to an increase in prices.

Renewable Energy May Not Be the Solution to Bitcoin’s Rising Energy Consumption

Bitcoin mining’s energy usage has been widely criticized. Production of the cryptocurrency is estimated to hog up energy as much as is consumed by countries. Renewable energy is often held out as a possible solution to the problem. But Hut 8’s CEO has a different take on the use of renewable energy for mining. Kiguel told analysts that the problem with renewable energy is that it is not dependable. “You can get some very low cost, efficient and powerful wind but if the wind isn’t blowing, you cannot operate your equipment,” he said.