The game is on for blockchain in Canada’s capital markets.
Investors are now flooded with a variety of issuers, some more credible than others. There is blockchain for holograms. Blockchain for the banking space. And blockchain for video games.
So how does one determine which companies are worthy of attention in this nascent sector? Two methods jump to mind: first, look at the pedigree of the people involved. Second, look at how much money they have been able to raise.
The seeds of DMG Blockchain (TSXV:AXN.H) began in the spring of 2016, when now CEO Dan Reitzik contacted blockchain pioneer Chris Filiatrault, who was living in Japan. The pair teamed up with Sheldon Bennett and Steve Eliscu, who came from Bitfury, the world’s second largest bitcoin mining company.
Fast forward to the very last days of 2017, when the soon-to-be-public DMG Blockchain Solutions announced it had raised $28-million through a financing led by Canaccord Genuity and Paradigm Capital.
Cantech Letter talked to CEO Dan Reitzik about what came in-between those two events and what’s next for the company.
Dan, can you tell us how DMG Blockchain came together?
In the spring of 2016, I was asked to help fund a blockchain software company. In order to assess the opportunity, I reached out to Chris Filiatrault, a bitcoin/blockchain pioneer living in Japan. We decided to fund the development together and launched the forensic software in Japan first. This made sense given that Japan was the first country in the world to regulate bitcoin as a currency. Additionally, more than half of all bitcoin trading globally happens in Japan.
Chris’ friend and business partner is also the head of a large network of bitcoin buyers in Japan, numbering in the tens of thousands. This network had been purchasing bitcoin for the past 5 years, and consequently asked us to start industrial mining on their behalf, so that they could make bitcoin instead of simply buying it.
At that point we brought on Sheldon Bennett and Steve Eliscu, both from Bitfury, the world’s second largest bitcoin mining company. Our first facility was in Edmonton and we have also launched a second, large scale facility in eastern British Columbia with potential access to more than 40MW of power. With the goal of creating a truly diversified bitcoin and blockchain company, we’ve since put together our software development teams, working out of San Francisco, Vancouver and Japan. The teams are primarily focused on developing two blockchain-based platforms, one for supply chain management, and one focused on fleet management, together with our largest investor, Element Fleet Leasing, the global leader in fleet management.
What do you want people to know most about DMG?
In any emerging industry, a solid management team is key. DMG’s management includes former executives from Bitfury, one of the world’s pioneers in the bitcoin and blockchain space, as well as from PwC, EY, and UBS. We are currently profitable and have been operating industrial bitcoin mining in Canada since 2016. In addition, our software platforms are being built to address real-world problems, for real world existing clients. Our focus is on blockchain-based business models that generate recurring revenues for DMG.
As a truly diversified company, we also have two Certified Fraud Examiners (CFEs) that will work with clients and law enforcement on crypto-investigations, as well as a consumer products division launching next year. We anticipate that our CFEs, overseeing the forensics division, will also provide trust and guidance as we introduce consumer products into the marketplace.
Lastly, we are well funded with a recent subscription receipt financing, with a strong shareholder base (20% held by institutions), and have raised more than $35M since November. We intend to go public on the TSX Venture Exchange sometime in early 2018 via a RTO with Aim Explorations Ltd., a capital pool company listed on the TSXV.
Industrial bitcoin mining is very challenging and requires unique skills and expertise. Immediately prior to joining DMG, Sheldon Bennett built North America’s largest bitcoin mining facility (57 megawatts) for Bitfury, the world’s second largest mining company…
What about the people involved? Despite this being a nascent sector you do have some people with blockchain experience…
I’m very proud of the team that’s been assembled at DMG. Two of my partners, Steve and Sheldon, came from Bitfury, the world’s second largest blockchain and bitcoin mining company. Steve Eliscu was Bitfury’s Head of Finance and Sheldon Bennett set up its industrial bitcoin mining operations. Prior to Bitfury, Sheldon was COO for Cisco Systems in Russia, and Steve was a semiconductor equity research analyst at UBS. Steve has an MBA from the University of Chicago’s Booth School of Business. Our Chairman, Chris Filiatrault, is very influential in the bitcoin space in Japan and has access through his networks to nearly 40,000 bitcoin buyers and influencers. Chris also installed the first ever bitcoin ATM in Japan in 2014. Simon Padgett, a CPA and our Head of Forensics, holds an MBA from Oxford University and was a Director for PwC. I think our shareholders, in fact anyone investing in a new space, will be happy to know we have a proven team of executives and operators guiding the business.
You also mention in your recent presentation that you intend to be a global leader in Bitcoin Mining / Mining as a Service. Can you elaborate as it now seems everyone is calling themselves a miner these days.
Industrial bitcoin mining is very challenging and requires unique skills and expertise. Immediately prior to joining DMG, Sheldon Bennett built North America’s largest bitcoin mining facility (57 megawatts) for Bitfury, the world’s second largest mining company. Additionally, we believe that DMG has a first mover advantage and an opportunity to become the global leader in bitcoin mining and hosting. DMG has a blend of company owned miners, as well as miners owned by third parties. Our Mining as a Service (MaaS) model allows us to scale very rapidly as our customers fund the capex, with DMG providing hosting services. We have direct access to tens of thousands of bitcoin buyers through our Japanese partner Bitmasters, and have already received orders for MaaS in excess of $3M. Cryptocurrency mining requires continuous reinvestment in more powerful computing capacity to meet evolving cryptographic requirements. As a portion of DMG’s business is simply hosting (MaaS), DMG is insulated from these ongoing and substantial capital costs for miners owned by third parties.
What are the barriers to entry to becoming an industrial bitcoin mining company?
Industrial bitcoin mining is extremely complex -not all companies can simply purchase servers and start mining for bitcoin. The barriers are not only the high capital cost and complexity of set-up but also the scarcity of the specialized equipment, as the two main mining hardware suppliers, Bitmain and Bitfury, only sell to large, established industrial-scale miners. Additionally, it is very difficult to access large pools of low-cost power in a timely manner. Our CTO, Sheldon Bennett is one of the world’s leading experts in industrial mining. Thus, we have the “know how” and “experience” to build the business on an industrial scale.
Bitcoin mining historically has been the most profitable cryptocurrency to mine, but the rapid rise in ethereum and litecoin pricing make them competitive to mine vs bitcoin. We currently focus on bitcoin but we are keeping an eye on alternative coins as well…
How important is the cost of cheap power to your business model?
Access to large amounts of power is critical to expanding our business. Lowering the cost of power helps us expand our profit margins as we price to market. We view this as one of our competitive advantages, as our CTO, Sheldon Bennett, has scouted and secured large amounts of power in key locations around the world.
With the wild price fluctuations of Bitcoin can you elaborate on the differences between Bitcoin vs Litecoin vs Ethereum mining?
The economics of mining depend on the cryptocurrency price, the number of crypto coins that can be mined per amount of computing power, the cost of mining rigs as well as related equipment and the mine’s operational cost. Bitcoin mining historically has been the most profitable cryptocurrency to mine, but the rapid rise in ethereum and litecoin pricing make them competitive to mine vs bitcoin. We currently focus on bitcoin but we are keeping an eye on alternative coins as well.
How imperative do you think it is for companies today to have a blockchain strategy?
It depends on the use case. Blockchain technology automates trust among multiple parties who don’t necessarily trust each other and enables exchange of value without relying on a central authority. Especially in industries where there is much friction or even fraud, Blockchain technology can have a meaningful impact to lower costs and increase efficiency as well as increase revenue. DMG views supply chain management/logistics to be among the most compelling use cases for blockchain technology, which can increase transparency and reduce susceptibility to losses as goods are moved from the raw material stage to the end customer.
What are the two things DMG does really well (core focus), and how will the company differentiate itself?
In Mining, we will build massive scale while accessing low-cost power. In Blockchain Platforms, we will build deep domain expertise in key vertical markets within supply chain management/logistics.
For Blockchain Platforms, the total value moved through the platforms should be a key metric –to be meaningful, these platforms should be recording and transferring value that is well in excess of a billion dollars per year…
Food safety is a big deal these days. How is DMG’s supply chain management platform addressing this?
The scalability of our blockchain platform and the strength of our developer teams allow us to expand our reach into important supply chain management verticals such as the organic food market. DMG’s platform will guarantee a record of provenance throughout the supply chain, from the original farm source to the end consumer. This is an area of focus as we evolve our capabilities to provide a solution for the greater food industry.
DMG recently presented at the Canadian Certified Fraud Examiners conference in Toronto to an audience of fraud and forensic executives, Government regulators, auditors and compliance specialists. Tell us a bit about this.
DMG’s presentation focused on educating more than 400 attendees on bitcoin, blockchain, and forensics and data analyses for blockchain cryptocurrencies mainly focused on bitcoin, ethereum and ICOs. During the presentation various questions were answered from the attendees on cryptocurrencies and CRA reporting requirements, Fintrac and transferring cryptocurrencies, and analytics behind ICOs and their future as an alternative path to raising funds. Throughout the presentation current and possible future regulations were discussed from a forensics point of view.
With so many new mining companies coming into the blockchain space how should investors evaluate these companies?
For Mining, investors should focus on key metrics including total secured power, deployed power, revenue and cost per megawatt for Mining-as-a-Service (MaaS) and cost per amount of compute for self-mining. For Blockchain Platforms, the total value moved through the platforms should be a key metric – to be meaningful, these platforms should be recording and transferring value that is well in excess of a billion dollars per year. The development of blockchain platforms should be solving real-world problems and ultimately have the ability to be monetized.
You will be focusing initially on Japan. Why there?
The Japanese have embraced bitcoin (think about Satoshi Nakamoto), and the underlying technology known as blockchain. Additionally, DMG has six founders, three of whom reside in Japan, and three here in Canada.
Japan is the first country in the world to regulate bitcoin as a currency, and more than 50% of all bitcoin trading globally is in Japan. The Japanese people have a great way of continuously improving technologies, and we expect the same, as it relates to cryptocurrencies and blockchain technologies. DMG has access to a large network of bitcoin buyers and influencers to which we will sell Mining as a Service. These individuals are all Japanese based, and essentially represent an installed customer base.
What milestones do you want to accomplish by the end of 2018?
Our top priorities for 2018 are to ramp up the first tens of megawatts of MaaS capacity, execute the first blockchain platform pilot program with production platforms already in development and establish the crypto analytics business.