Bitcoin crested above $50,000 on Monday, benefiting from simultaneous supply chain shortages and a crackdown from Chinese regulators – putting bitcoin mining on par with profits near the coin's April all-time-high.
Now, building infrastructure for the energy-intensive business poses the greatest challenge for companies and individuals hoping to reap big money. That means finding cheap and reliable energy sources, striking deals and building out mining facilities.
“Throughout the summer, we saw a lot of fear and uncertainty. People were selling and now we’re seeing inflows again," Meltem Demirors, chief strategy officer of CoinShares, told Yahoo Finance. "A lot of firms and investors are looking to get long in what we anticipate will be a very active fall."
One major reason behind the price halving of bitcoin, the largest cryptocurrency, at the beginning of the summer came from concerns around its energy-intensive impact on the environment. Following the trend, Chinese regulators banned cryptocurrency mining, causing a large portion of the industry, at least temporarily, to cut operations.
While the immediate reaction to the news created uncertainty and major selling pressure, the crackdown reduced competition for mining bitcoin. As the cryptocurrency’s price recovered in mid-July, less intense competition meant higher profitability for remaining participants. At its current price, profits from mining bitcoin are close to its all-time highs.
That's according to the hashprice index, an indicator created and tracked by the crypto mining analytics company, Luxor Technologies.
“I can't help but think that we're going to look back on these days as wildly profitable for miners. We definitely are in a golden age of [crypto] mining,” said Gerson Martinez, a former derivatives trader and market maker for Morgan Stanley. Martinez left the bank in 2013 to work in education and nonprofit. Since 2014, he’s held an ever-increasing interest in bitcoin. He owns the asset and also mines it through the retail-focused firm called Compass Mining.
Bitcoin mining is the number-crunching process that makes the digital currency secure. By rewarding miners for collectively validating transactions, bitcoin’s underlying blockchain has proved exceedingly costly and, perhaps impossible, for any one entity to garner majority control of its network. For contributing computing power to the blockchain, miners are rewarded for their work by collectively earning pay in bitcoin, which is called the block reward. Currently, that total pay out is 6.25 bitcoin every 10 minutes. With less miners currently in operation, the pay out gets split between fewer parties.
While the process is complicated, most bitcoin mining operations look like a specialized type of data server farm.
Martinez’s current interest in bitcoin mining lacks no ambition. As a dual citizen of El Salvador and the U.S., he’s also working with a company called CLM21 Ventures to build the first geothermal “pilot” mining operation in El Salvador. Martinez said the “proof of concept” project faces hurdles related to the “supply chain issues that everyone else is facing" such as sourcing the hardware and equipment. The country's relatively hot climate also makes building the right cooling system essential for not overheating the miners so they can continue to operate.
The Canada-based blockchain technology company Blockstream is also ramping up its focus on bitcoin mining and its utilization of renewable energy. Major companies such as Fidelity Investments and more recently BlackRock, the world’s largest asset manager, have also taken large stakes in the publicly traded bitcoin mining firms, Marathon Digital Holdings (MARA) and Riot Blockchain (RIOT), this summer.
Blockstream has acquired the Israeli crypto miner manufacturer, Spondoolies. The acquisition runs in tandem with its $210 million Series B raise, which will be used to ramp up hiring for its cryptocurrency mining division as well as a new financial arm.
The firm’s decision to start making its own bitcoin miners, or ASICS, stems from the fact that the current global market for bitcoin miners is far outstripping supply, according to Blockstream Chief Strategy Officer Samson Mow. (An ASIC is a customizable integrated circuit chip that manufacturers design to specifically mine bitcoin. They're the most important component of a crypto mining rig.)
“It can be difficult to procure ASICS. Having our own ASIC manufacturer will alleviate that supply constraint,” Mow told Yahoo Finance. Despite reports that cryptocurrency miners compete with other companies that use microchips, bitcoin ASICS require much more powerful chips than other crypto mining computers, which earlier this year contributed to supply constraints for graphics card producing technology company Nvidia.
Blockstream will use the miners first and foremost to shore up its own products. Last week the firm announced its new modular mining unit (MMU) product. These are self-contained and remotely controlled mining facilities that can be deployed near energy production sites, such as hydroelectric dams and power plants, to make use of otherwise unusable electricity. Additionally, the company offers a securitized bitcoin mining financial asset, the Blockstream Mining Note, and partnered with Square June to build a $5 million solar-powered bitcoin mining facility in Georgia.
Before China banned the industry and Tesla CEO Elon Musk backpedalled on accepting bitcoin as payment for electric vehicles, bitcoin mining companies sought renewable energy sources aside from environmental benefits, because they're cheap and reliable, according to Mow and Martinez. Blockstream hasn’t published its energy mix breakdown for mining operations on its website, but Mow said the company's mining is “mostly zero emissions” with the U.S. and Canadian sites balancing around “80% zero emissions.”
All experts agree that bitcoin miners flow to cheap and reliable power. The crux of the energy-consumption debate boils down to how miners will find cheap and reliable energy. While not an even comparison, the energy bitcoin consumes is approximately the same as the country of Kazakhstan (91.7 TWh) over the course of a year, according to 2019 data from the Cambridge Bitcoin Electricity Consumption Index.
Alex de Vries, founder of Digiconomist, an economics blog and creator of the Bitcoin Energy Consumption Index, remains skeptical of the industry’s possible green shift.
“The thing is miners need both cheap and stable power; and (obsolete) fossil fuels are simply better at delivering both – allowing investors to maximize their profits,” said de Vries.
David Hollerith covers cryptocurrency for Yahoo Finance. Follow him @dshollers.
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