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Paving the Way to Leverage the Benefits of Cryptocurrency

03/07/2018


OTC: HSSHF

Introduced in 2009, Bitcoin was the first decentralized digital currency. One Bitcoin was worth roughly $0.003 in early 2010, according to Coinmarketcap.com data. By September of 2017, the Bitcoin / dollar exchange rate had climbed to over $4,000. Since Bitcoin, other cryptocurrencies such as Litecoin, Ethereum and Dash have emerged. At this point, there are more than 1,000 cryptocurrencies, which in the aggregate command a valuation of over $445 billion, according to Coinmarketcap.com, despite recent volatility. The soaring valuation and perceived potential of both cryptocurrency and blockchain technology have generated substantial interest. 

Cryptocurrency has created tremendous rewards and challenges for investors. Nevertheless, given its early stages, many of the operational functions around these currencies – such as accounting and mining (see below) – are still in development. Canada’s HashChain Technology Inc. (OTC:HSSHF) is an emerging company that aims to build blockchain and cryptocurrency infrastructure to provide related services. Towards this goal, the company has made two significant M&A transactions over the past year. Reflecting its September 2017 acquisition of HashChain Mining, its primary business currently is cryptocurrency mining. HashChain also offers cryptocurrency accounting and tax reporting, as well as node hosting services.

The blockchain market is forecast to grow to $7.683 billion by 2022, up from $241.9 million in 2016, according to a December 2017 study by market research firm Markets and Markets, a compound annual growth rate of 79.6%, reflecting rising demand for blockchain and valuation of cryptocurrencies. Increased regulatory oversight of cryptocurrency could drive demand for cryptocurrency accounting software and services. 

For example, in 2017, the Internal Revenue Service brought suit against Coinbase, alleging that "only 800 to 900 taxpayers reported gains related to Bitcoin” in 2013 through 2015 from a Coinbase user base of roughly six million. This could be an early measure in imposing greater regulatory oversight on cryptocurrencies.

Mining Cryptocurrency

It is difficult for individuals to acquire Bitcoins and other cryptocurrency at the moment for either commercial or investment purposes. Financial institutions such as JPMorgan Chase, Bank of America, Capital One Financial and Citigroup have decided not to process cryptocurrency purchases using credit cards, according to CNBC. One way to acquire the cryptocurrency is to “mine” it. In recent quarters, growing demand for crypto mining has driven revenue advances of technology companies that provide equipment or components to the crypto mining sector.

HashChain is developing cryptocurrency mining services leveraging the use of blockchain. Blockchain is the underlying digital architecture that supports many digital cryptocurrencies including Bitcoin. Blockchain is a decentralized and encrypted ledger that offers a secure method to store records and other information in a way that can be verified. Each block in the blockchain contains a hash – a digital fingerprint or unique identifier – and timestamped batches of prior transactions, as well as the hash of the previous block. The hash connects the blocks and prevents any block from being altered or inserted between two existing blocks. Each new block reinforces the verification of the previous block and therefore the overall blockchain. 

This characteristic is also believed to make it transparent if an attempted hacking tries to alter any part of the blockchain. According to IBM, blockchain architecture gives participants the ability to share a ledger that is updated, through peer-to-peer replication, every time a transaction occurs. Peer-to-peer replication means that each participant (node) in the network acts as both a publisher and a subscriber. Each node can receive or send transactions to other nodes, and the data is synchronized across the network as it is transferred. Blockchain is viewed as a secure option for financial transactions that also provides flexibility and scalability. 

“Blockchain is a public ledger technology that uses digital signatures and cryptographic hashing to provide a record of secure transactions that cannot be altered,” according to Techrepublic. Specifically, blockchain is thought to be safe, immutable and transparent because no single person or party within the chain can alter the record without the agreement of all parties in the chain. 

To mine crypto, special mining software can enable a computer to act as a node on the blockchain in order to validate existing blocks within the chain and create new blocks. In success, miners are rewarded with cryptocurrency tokens for their own use. Mining computers aggregate myriads of transactions. Thus, the computing power required for the verification process exceeds the computing technology generally embedded in most home computers. This has also led to the formation of mining “pools,” in which multiple miners combine their processing power. Moreover, the complexity of the verification process increases as more blocks are added to the chain and more miners enter the mining pool. 

Because only one miner or mining pool can confirm a block successfully, the verification effort has become a competitive process, as miners strive to obtain the crypto token reward ahead of others. Miners therefore are consistently boosting processing power to increase their chances. As a result, prospective miners need to invest in costly mining devices that provide sufficient processing power. Specialized mining computers are significantly more expensive than standard home computers, while at the same time, miners also incur substantial electricity costs to power and cool their equipment.

HashChain Technology Mining Operations

The company acquired HashChain Mining, a cryptocurrency mining company operating in Canada and the U.S, in September of 2017 and subsequently forged an agreement with Uniserve Communications to host mining operations at Uniserve’s Vancouver data center. Crypto mining facilities frequently are located in colder environments because the temperature facilitates cooling the mining rigs. To minimize mining costs and remain competitive with other miners, the company has accessed modern facilities providing low-cost energy, cool temperatures and high-speed Internet. The company notes that its electricity costs range from $0.02 to $0.04 per kilowatt-hour (kWh). By comparison, the U.S. national average exceeds $0.10, according to U.S. Department of Energy data. HashChain can monitor rates, temperatures, the status of its rigs and power consumption remotely via the internet. 

Initially, HashChain Mining used its proprietary mining rigs to mine Dash tokens. The company started with 100 rigs mining Dash tokens at the Universe facility. According to the Dash website, the Dash token network is among the fastest growing crypto networks in the world, reaching 4,100 masternodes since its initial introduction in 2014. According to Dash, this makes its peer-to-peer network one of the largest in the world, which in turn implies greater security and more capacity for end-users to access Dash at their convenience. Moreover, because Dash was launched well after Bitcoin, Dash believes that it has solved some of the problems that Bitcoin can encounter. Specifically, Dash believes it provides greater security and faster completion of transactions. With a market capitalization of $4.6 billion, Dash is the world’s 12th largest cryptocurrency, according to coinmarketcap.com.

HashChain bought 1,000 Dash tokens In October 2017, for $280,000, which qualified the company to run a masternode. With a Dash masternode, HashChain is qualified to vote on budget proposals paid for by Dash's treasury or other important decisions that impact the Dash currency. The company recently voted yes on several proposals designed to promote Dash globally in order to expand its prospects. HashChain views Dash as advancing towards mass adoption, with ease of use comparable to digital payment mechanisms such as PayPal.

Another element of HashChain’s strategy is to mine other cryptocurrencies such as Bitcoin, as well as Dash. At this point, HashChain has roughly 870 rigs in operation, up from the original 100 rigs with which the company launched its mining operations. These 870 deployed rigs equate to about 1.3 megawatts (MW) of cryptocurrency mining. One hundred of the company’s cryptocurrency mining rigs are located at the original Vancouver data center and the incremental 770 rigs have been installed at its 20-megawatt plant in Montana. 

Moreover, the company has an ambitious expansion schedule for its mining operations. The company has acquired another roughly 3,000 rigs for approximately $12.4 million. HashChain expects to put these into operation in Montana over the next few weeks to achieve a total of 5.8 MW of mining by mid-year from 3,870 deployed rigs. HashChain aims to reach 20 MW of mining capacity by year-end 2018, 40 MW or about 26,500 cryptocurrency mining rigs by the end of first quarter 2019 and 70 MW by year-end 2020. Another potential element of HashChain’s strategy is to acquire other data centers over time.

HashChain Technology Cryptocurrency Accounting and Tax Reporting Services

To diversify its business, another element of HashChain’s growth strategy is to provide crypto accounting and tax reporting, as well as node hosting services, as noted. Last month, HashChain acquired blockchain technology company NODE40 for roughly $8 million in cash plus three million shares. NODE40 has two primary operating units: a SaaS solution, NODE40 Balance, to simplify the tracking and reporting of cryptocurrency trading capital gains and losses for tax reporting purposes and a masternode hosting service. Specifically, NODE40 is a leading masternode server-hosting provider for the Dash network.

Given the expanding cryptocurrency market, it is generally expected that a growing number of countries will impose or tighten regulations, including improved tax reporting. For instance, the IRS is conducting an investigation of customers who traded Bitcoins on Coinbase, according to Fortune magazine. The Coinbase cryptocurrency exchange has been ordered to provide the IRS with information on all customers who engaged in transactions valued at $20,000 or more from 2013 to 2015. According to Forbes, this likely impacts an estimated nearly nine million transactions made by more than 14,000 different account holders. Fortune notes that the IRS opened the investigation partially because only 802 people had reported their bitcoin gains or losses in 2015, despite the soaring price of Bitcoin over that period. Specifically, Bitcoin went from a value of about $100 in early 2013 to a peak of nearly $1,150 in 2015. In 2014, the IRS stated that virtual currency should be treated as property for federal tax purposes and that “General tax principles applicable to property transactions apply to transactions using virtual currency.” 

According to Forbes, “The IRS is concerned that many U.S. taxpayers may not be accurately reporting the gains or income they have generated from their cryptocurrency transactions. Since the majority of cryptocurrency transactions have likely resulted in significant gains due to the surge in value in most cryptocurrencies, coupled with the fact that the gains are likely short-term capital gains (subject to ordinary income tax rates) since the cryptocurrencies were likely held less than 12 months, the IRS has good reason to be concerned.” 
NODE40 can analyze the blockchain for a user’s Bitcoin, Bitcoin Cash, Ethereum, Litecoin and Dash trading history to determine capital gains or losses for tax purposes. The company also recently announced that it has expanded NODE40 to make it available to cryptocurrency users worldwide.

Masternode Hosting Services


With NODE40 Hosting, NODE40 also provides Dash masternode hosting services. Masternodes are full blockchain nodes that run the Dash blockchain and provide services to the network, such as locking transactions with InstantSend and voting on budget funding. Masternodes require collateral of 1,000 Dash tokens. In addition, masternodes must be capable of running all day with only a maximum one-hour connection loss. Masternodes are rewarded, as an inducement for providing services to the network. Specifically, masternodes earn 45% of the monthly block reward. As noted, HashChain runs a Dash masternode and expects to earn 880 Dash coins annually. At the current Dash value of about $510 per token, this equates to roughly $450,000 per annum for three years. HashChain has indicated that it does not intend to convert the coins. In addition to Dash, NODE40 is also analyzing other cryptocurrencies that use masternodes to expand its hosting platform.

It is still early days in the company’s development, although HashChain strives to be an early mover in the blockchain space. HashChain shares trade on the TSX Venture exchange under the ticker KASH and the OTCQB under the ticker HSSHF. The company declared a 2-for-1 stock split last month to improve the trading liquidity of its shares.

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