coindesk.com
Mining is critically important in crypto. It’s the financial infrastructure of blockchains, especially Bitcoin. Global networks of distributed “trust machines” ensure decentralization and lay the plumbing for an open internet.
So here’s the good news.
Crypto mining is mostly profoundly healthy.
This story is part of CoinDesk's 2023 Mining Week, sponsored by Foundry.
A quick look at the Bitcoin network’s hashrate, a measure of the amount of computing power committed to running the network, shows a bountiful capacity with which to run crypto’s premier network. As of July 21, Bitcoin’s hashrate was 400 exahash per second, up five-fold from June 2021.
That said, in about nine months time, the entire economics of the mining industry will undergo a profound change, and there’s nothing anyone can do about it. In April 2024, we will see the fourth Bitcoin halving.
Right now, every time a bitcoin block is mined the owner of the machine that mines the block is able to claim the coinbase transaction. The coinbase transaction consists of up to 6.25 bitcoin. These new bitcoins are how bitcoins are minted. After the halving in April, that 6.25 bitcoin reward will become 3.125 bitcoin.
Miners earn money through network transaction fees and through the block subsidy (i.e. the coinbase) – with most earnings coming from the block subsidy. And so the halving means that, all else equal, miners will lose out on 3.125 bitcoin worth (~$90,000) of earnings per mined block.
But the halving is hardly unexpected and it’s something predictable that miners can prepare for, based on their experience from three similar events. Although a big change, it’s a painfully simple one. And, we’ve known it was coming for years. Bitcoin was programmed with these halvings built in at inception and that will never change.
A cyclical business
While the mining industry is healthy now, it has been tough sledding over the last year or so. First off, Ethereum changed its protocol (from proof-of-work to proof-of-stake) earlier this year and so anyone that was mining Ethereum before lost a revenue source.
And then Bitcoin decided it was time for a bear market, which is plain bad for business (especially if your business is mining bitcoin). In March 2022, bitcoin’s price was $48,000. By November 2022, it was less than $16,000.
In 2022, publicly traded mining companies such as Core Scientific (CORZ), Riot Blockchain (RIOT), Bitfarms (BITF), Iris Energy (IREN), and CleanSpark (CLSK) traded down 99%, 85%, 91%, 92% and 79%, respectively.
Core Scientific even declared bankruptcy. CORZ is expected to come out of restructuring by September and is coming into an environment that should be more conducive to profitable operations.
But now miners are back to reporting healthy margins, especially those that have access to cheap energy like TeraWulf (WULF) and CipherMining (CIPHER), whose gross margins in Q1 2023 exceeded 60% (see below).
Anthony Power, a bitcoin mining analyst who writes for Compass Mining, thinks mining companies are going to be just fine. When asked in an interview if miners will survive the halving, he told CoinDesk “they survived the drawdown to [$16,000], so sure they can.”
“You also have to think about the spot Bitcoin ETF applications. If those get approved, just think about how much money will come into Bitcoin.” Power is referring to applications to the SEC from major institutions like BlackRock to start exchange-traded funds for bitcoin; ETFs have long been seen as crucial for getting more retail investors into the crypto space.
Power’s latter point is that miners won’t lose out on revenue if the block subsidy halves and the U.S. dollar price of bitcoin keeps going up.
The public companies have recovered nicely so far in 2023, effectively acting as high beta bets on the price of bitcoin. While bitcoin is up 75% so far in 2023, CORZ, RIOT, BITF, IREN, and CLSK are up 1,042%, 445%, 307%, 468% and 219%, respectively.
Environmental headwinds
Bitcoin mining uses energy and, given Bitcoin’s growth in the last few years, we now operate in a world where energy markets and bitcoin mining are intimately tied. The inputs to a mining operation are deathly simple: hardware and energy. That’s it. If you can get mining machines and energy at a good price, then you can run a profitable mining business.
Many have argued that mining is a way to improve energy grids, especially in states like Texas, since Bitcoin is supposed to operate as a “buyer of last resort” for energy and so provides utilities with some level of a predictable revenue source. Bitcoin miners participate in demand response programs (as do other types of businesses like supermarkets and hospitals), agreeing to help grid operators reduce stress on generators and transmission and distribution lines in exchange for lower electrical rates. This is in exchange for curtailing their energy use when demand for energy peaks.
Bitcoin miners are especially well fit for this because they can turn off their energy pull instantaneously. It seems like a win-win and bitcoin mining companies tend to point to this as a merit for encouraging Bitcoin mining. Take GRIID, a bitcoin mining company, which during Winter Storm Elliot last December used demand response to help keep power on for households in East Tennessee during rolling blackouts. The company reduced total energy grid demand by 32 megawatts.
“The 2022 and 2023 story is that demand response is working at scale. Miners have touted this benefit for a long time and now we have the track record to point to,” GRIID’s Chief Strategy Officer Harry Sudock told CoinDesk. “Operations across the board continue to scale capacity – just look at the hashrate – but the benefit to electric systems is undeniable.”
However, environmentalists argue that miners are using more energy than would otherwise be the case, and unnecessarily, and perhaps there’s merit to that argument, but predictable demand for energy should be preferred to outright wasting it.
Miners respond by saying that they use up energy that’s normally wasted. Take how miners are working with oil & gas producers to take off their “associated gas” (which is normally flared, or burned, on-site). Bitcoin miners set up in oil fields where natural gas is typically vented into the atmosphere because it is cost-prohibitive to transport it. Some bitcoin miners have set up operations at the oil fields and used that natural gas to mine bitcoin, which reduces greenhouse gas emissions.
A very mobile industry
This type of stuff is actually important is that it illustrates something fundamentally great about Bitcoin mining: It can be done anywhere.
Like in, say, rural Kenya, which is what microgrid developer Gridless is doing it. Gridless, a startup backed by ex-Twitter CEO Jack Dorsey, has brought electricity to people in Kenya and Malawi who are otherwise excluded from the grid. They have set up hydropower microgrids and are mining bitcoin with the energy the people don’t use.
The regulatory aspect
Greenpeace is an environmental nonprofit and they’re not big fans of Bitcoin mining. And to bring awareness to how much they hated Bitcoin mining they commissioned an art piece of a huge skull urging people to come together to protest for a code change to Bitcoin so that it doesn’t require energy to work anymore. It didn’t exactly work as planned, since the Skull of Satoshi became an unintentional mascot and, ultimately, the code change would never go through. Bitcoin will always be a proof-of-work blockchain network.
The attention Greenpeace is giving Bitcoin is also coming from regulators and governments for basically the same reasons. China banned crypto mining in 2021 due to its environmental impact, although that lasted all but two seconds, and the White House came out swinging earlier this year proposing a punitive tax on crypto mining operations for “the harms they impose on society.”
And then there’s Sen. Elizabeth Warren (D-Mass.) who routinely critiques crypto mining for its energy use and even created her own “anti-crypto army.” She also has come out against the fraud and crime crypto enables, zooming in specifically on suppliers of fentanyl precursors.
Political grandstanding aside, most of the national rules targeted at miners don’t really exist. Where they do exist is at the state level, albeit not to a fatal extent.
“Arkansas is a good example,” Luxor’s Head of Content Colin Harper told CoinDesk. “Miners are regulated as much as they are subject to the same constraints as other power consumers. Of course there’s the moratorium on fossil fuel-based miners in New York, but really the over-regulation that some states have tried to push through have ultimately fallen through.”
Harper was alluding to Texas whose state Senate passed a bill which would have limited bitcoin miners’ ability to participate in demand response programs only for it to be shot down in the state House.
As for the U.S. losing its foothold on bitcoin mining with all the regulatory crosshairs aimed at crypto, CleanSpark’s VP of Mining Technology Taylor Monnig thinks the opposite.
"I think the U.S. will actually increase its foothold in the mining space, even with regulatory uncertainty we continue to see companies scaling in the US at larger and larger scales. It will take time for the U.S. to fully understand the benefits of Bitcoin and Bitcoin mining, once that happens we will see even more expansion," he said.
The unpredictable aspect
The mining industry has many inputs which are more or less predictable (or at least, logical). That said, there are many potential unpredictable factors which could crop up and turn it all on its head. We’ve already touched on the price of bitcoin. That’s unpredictable – who knows what the mining world would like if bitcoin hit $1.48k or $148k or $1.48 million. But there are many other potentially unpredictable things.
Just take Ordinals, Bitcoin’s answer to NFTs, which have mostly been created on Ethereum. Ordinals were incredibly popular earlier this year and they ushered in a huge spike to miner fees for a few months. While the Ordinals spike in miners fees has mostly fallen away, there’s always potential for innovators to create new ways to use the Bitcoin network, creating new demand for the services that miners provide.
Mining is still a young industry, and it's ripe for change.