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FAQ: Hut 8 Expands Mining Capacity with $30 Million USD Purchase of NVIDIA CMPs

Background
On March 26, 2021 Hut 8 announced its purchase of $30 million USD of NVIDIA CMPs, to be delivered starting in May 2021, with full deployment expected to be completed this summer.
Our community has asked us about the purchase. The following FAQ is for information purposes only.

What is GPU mining?
GPU mining involves the use of a gaming computer’s graphics processing unit to solve complex math problems to verify electronic transactions on a blockchain.

What will you use these NVIDIA GPU miners for?
Hut 8 will use the NVIDIA CMPs to mine Ethereum, alternative blockchain networks, and expand its mining business while maintaining the benefit of payouts in Bitcoin. At current network difficulty rates* this would equal an additional 3.357 Bitcoin per day.
*May 6, 2021 https://bitinfocharts.com

Why did you choose to procure equipment from NVIDIA?
The product NVIDIA has developed is compelling. It is their highest performing ETH mining product and is well suited for Hut 8’s expansion and revenue diversification plan. Hut 8 and NVIDIA entered into an agreement for an enterprise-class product that is not available on the open market. To our knowledge, this product was only available directly from NVIDIA, and was sold in limited quantities to an exclusive number of customers globally. The exact specification of the graphics card is confidential as per Nvidia’s request.
We liked the performance we saw from this equipment provider, and the optionality this equipment provides us to mine other blockchains and participate in the growing blockchain application ecosystem.

When will the NVIDIA miners be delivered and installed?
We are on track for the preliminary machines to be installed in June and for full deployment to be achieved by the end of August 2021.

Why did you join Luxor mining pool?
Hut 8 has allocated a portion of its SHA-256 hashrate to Luxor to advance its recently announced expansion into Ethereum mining.
Hut 8 has the ability to mine new currencies including Ethereum. Transaction fees for Ethereum have skyrocketed over the past year and represent a large revenue opportunity for miners. There is also an additional form of revenue for Ethereum miners through Miner Extractable Value (MEV). MEV has ballooned to over $42M of value over the past 30 days, presenting Hut 8 with opportunities to further increase mining returns. Using Luxor’s proprietary technology, Hut 8 plans to earn revenue from the Ethereum block reward, transaction fees, and MEV. In addition, Hut 8 will have the option to receive Bitcoin and/or Ethereum payouts directly from Luxor, allowing Hut 8 to stack sats while earning outsized returns through novel GPU mining.

How will the NVIDIA equipment increase operating rate, and what impact will it have on your total hashrate?
The addition of the NVIDIA CMPs is set to increase Hut 8’s aggregate operating rate by approximately 1600 Gigahash (ETHHASH), which yields similar value as 500P/H (SHA-256) by mid-Q3 2021, in addition to the 1.3E/H announced and projected for mid-Q3 2021.

Using any notable mining profitably website or calculator (such as https://bitinfocharts.com), one can calculate the daily earning potential of 1600 GH of Ethereum mining. Compare those results with the daily profit potential of mining Bitcoin:

As of May 6, 2021
Ethereum
0.1158 USD/DAY per 1 MH
Bitcoin
0.3815 USD/DAY per 1 TH

What are the implications if Ethereum moves to proof of stake, how will we still make income/revenue?
We based our economic modelling and profitability metrics on the upcoming changes to Ethereum 1559. This assumption has been built into our economics and profitability models.
The NVIDIA equipment purchase enables us to participate in the growing Ethereum use case ecosystem and application development. The price of Ethereum is not correlated to whether it is mineable, and we see opportunity to participate in the growing ecosystem.
When Ethereum migrates to proof-of-stake, we will evaluate the best use of our fleet of GPUs. We have the flexibility to allocate these resources to other networks and maintain our payout in Bitcoin, through our partnership with Luxor Mining Pool.

Would you ever Hodl ETH?
This is an option we are exploring, and we will decide once the GPU mining machines are installed. We may consider hodling a portion of total ETH mined per day, however, there are many options that we could explore with mined ETH; participation in stable coin staking, yield farming, back validators with our Ethereum and earn interest etc.

Where will you put your equipment?
Into our Medicine Hat, Alberta facility.

How much power will the NVIDIA equipment use?
These GPU’s are quite efficient in our view with a total power usage between 3-4 megawatts for the entire fleet. Overall, we expect to achieve approximately 1600 GH with 4 MW of power usage.

Why did you choose to order NVIDIA GPU’s when you have been traditionally Bitcoin miners?
Starting a relationship with NVIDIA goes beyond this one purchase; we are at the beginning of a great partnership that will extend into opportunities beyond mining. Hut 8 is in the business of converting electricity into digital assets. We are constantly evaluating hardware opportunities from different vendors and we remain confident in the evaluation of this opportunity with NVIDIA GPUs.
With this move, Hut 8 now has the opportunity to pursue additional computationally intensive applications in the high-performance computing space. This transaction serves to strengthen Hut 8’s objective of increasing revenue diversification and to drive immediate short and long-term revenue growth objectives forward in FY 2021.

Do you still believe in Bitcoin?
We are incredibly bullish and hold long positions in Bitcoin. However, we are in the business of converting electricity into digital assets and making strategic business decisions that are accretive to shareholder value. We believe in the strength of not only Bitcoin, but the blockchain ecosystem as a whole and want to ensure we are making the right business decisions to grow shareholder value and capitalize on opportunities in the growing sector.

Why would you order GPU miners ahead of ETH-1559?
There are several reasons why we believe that EIP-1559 is good for the price of ETH:
● First, the improved transaction fee mechanism improves the overall experience of using Ethereum and could lead to higher adoption at the margin.
● Second, there is the argument that burning the base fee internalizes some of the revenue (in ETH) that is currently earned by miners. This turns ETH from a non-productive asset into a productive asset.
● Third, if inflation lowers (possibly even making ETH deflationary), we believe ETH becomes more attractive as a storehold of wealth and could vastly expand its target market.

Why would Hut 8 spend money on GPU miners if it will no longer be profitable to mine ETH?
Ethereum continues to be the most profitable GPU minable network. Changes to the network, with EIP 1559, will have a direct impact on transaction fees earned by mining, however, in our view, there are other mechanisms that will make up the difference, especially when using NVIDIA’s highest performing ETH mining product.
As per research done by Uncommon Core, it is not clear if miners will earn less money after EIP-1559 has been deployed. Accounting for MEV, researchers found that as little as 20% of current miner revenue could be burned. Notably, that number doesn’t account for a potential ETH price increase as a result of EIP-1559.

Furthermore, EIP-1559 does not affect the ability to mine the protocol or use it to participate in the growing use case and application development e.g. the Decentralized Finance ecosystem that currently has $76.73 Billion in locked value USD.

How will an increase of the Bitcoin network difficulty impact this project?
These GPUs are suitable for mining Ethereum and other networks, so the difficulty of the bitcoin network does not negatively impact our economics.

What happens if Ethereum price goes down after 1559?
The market value of Ethereum is reflected in its utility as a world computer, as well as its ease of use. EIP-1559 improves usability of the platform and will lower the complexity for users. Updates, such as EIP-1559, will impact miners operating with the least efficient hardware. There will be some miners that exit the network because their own economics are no longer viable. We benefit from a reduction in miners on Ethereum and are operating the most performant and efficient GPU miners available.

 

Forward-Looking Statements:
Statements made on this webpage and elsewhere on this website that relate to future plans, events or performances are forward-looking statements. Any statement containing words such as “may”, “would”, “could”, “will”, “believes”, “plans”, “anticipates”, “estimates”, “expects” or “intends” and other similar statements which are not historical facts contained in this release are forward-looking, and these statements involve risks and uncertainties and are based on current expectations. Such statements reflect Hut 8 Mining Corp.’s (“Hut 8”) current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause Hut 8’s actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward looking statements, including among other things, those factors which are discussed under the heading “Risk Factors” in Hut 8’s Annual Information Form as filed with applicable Canadian securities regulatory authorities and available on SEDAR under the Hut 8’s profile at www.sedar.com and elsewhere in documents that theScore files from time to time with such securities regulatory authorities. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results could differ materially from the expectations expressed in these forward-looking statements. Hut 8 does not intend, and does not assume any obligation, to update these forward-looking statements except as required by applicable law or regulatory requirements.
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