10/18/2023 0 Comments

1. Assessing Bitcoin Miners Ahead of 2024 Halving

Bitcoin is heading toward another halving in April 2024, an event that will bring with it significance for miners of the largest cryptocurrency. That means exchange traded funds, such as the Invesco Alerian Galaxy Crypto Economy ETF (SATO), are pertinent in the halving conversation as well. For its part, SATO is heavily allocated to bitcoin miners.

That makes the fund one of the most relevant assets regarding halving. In simple terms, bitcoin halving makes it more difficult to mine the digital currency, thus reducing rewards to miners.

In a recent note to clients, JPMorgan forecast that the Bitcoin Network Hash Rate will decline by 20% following the April 2024 halving. Investors that are new to cryptocurrency and mining equities are apt to interpret that as gloomy news. But halving also serves the aim of prompting miners, including SATO member firms, to take older software offline, thus making those companies more efficient.

‘Crucible Moment’ for Bitcoin Miners

JPMorgan told clients the bitcoin mining industry is at a “crucible moment.” This is because management teams at these companies consider the positive implications of a spot bitcoin ETF potentially coming to market while balancing the upcoming lower Bitcoin Network Hash Rate. Among the names the bank is bullish on is SATO component Cleanspark Inc. (NASDAQ: CLSK), which it rates “overweight.”

“Not all miners created equal. Miners vary by scale, operating efficiency, access to capital and growth prospects. We believe CLSK, our top pick, offers the best balance of scale, growth potential, power costs, and relative value,” according to JPMorgan.

Shares of Cleanspark account for nearly 4% of SATO’s lineup. The bank also upgraded SATO holding Iris Energy Ltd. (NASDAQ: IREN) to “overweight” from “neutral.”

Cleanspark and Iris Energy could be upside drivers for SATO because crypto mining industry observers are increasingly scrutinizing margins and power costs in the group. On those metrics, those two SATO holdings score well. That implies there’s an element of value with those names. That is a desirable trait at a time when value is hard to come by in this space.

“In this context, the report explains that the market cap of the 14 largest U.S. listed Bitcoin mining companies is 36% larger than what JPMorgan’s research team expects the whole industry can generate in revenues for the next four-year cycle, which is $20 billion,” reported Vinicius Barbosa for Finbold.

2. Bitcoin Miner Using Paraguay Itaipu Dam to Power Its New Facility

Bitcoin mining company Sazmining has opened its newest 100% renewable energy facility in Paraguay.

The company operates customer-owned Bitcoin mining rigs on their behalf, taking a 15% commission for the service. Its new facility will get power from Itaipu Dam, the country’s largest hydroelectric dam. Located on the border of Paraguay and Brazil, the structure has earned itself the Guiness World Record for most expensive object on earth, costing a whopping $27 billion to build in 1984—or $35 billion if you adjust for inflation.

Sazmining President Kent Halliburton told Decrypt that due to Paraguay’s unique hydropower generating dynamics, it was selling 5 Gigawatts of power at a loss to its neighbor, Brazil. That’s why local authorities and communities embrace the company’s presence, he said.

Tapping into Itaipu Dam and buying their surplus power instead of Paraguay exporting at a loss, “turns a headwind for Paraguay’s GDP into a tailwind,” said Halliburton.

Bitcoin mining is an integral piece to the network, but has a somewhat controversial relationship to energy markets. Specialized computers known as ASICs tap into different power generating sources and run the Bitcoin software in order to secure the protocol, earning BTC in return.

The above means that the cost of energy is an important consideration for Bitcoin mining companies. As per Sazmining, mining costs in their new facility will be $0.047 per-kilowatt hour in the new facility–a substantial difference between the world’s leading Bitcoin mining country, the United States.

For the sake of comparison, the latest energy price report from the U.S. Bureau of Labor Statistics found that energy costs sit at $0.17 per-kilowatt hour—although that can vary widely depending on location and across industries.

Halliburton said Sazmining is able to get all of its power from the dam, meaning the new facility runs on 100% renewable energy.

Texas is often highlighted as one of Bitcoin’s strongest mining sectors, with sophisticated programs to help the grid in times of stress, but also make use of their excess power. For Halliburton, Paraguay is poised to become “the new Texas”—but he admits the grid there is still much less developed than the lone star state.

This offers an upside with a caveat, he told Decrypt. By agreeing to 95% power uptime instead of 100%, he said, the company was able to take advantage of lower rates. That said, Halliburton is confident the grid will continue to develop and import some of the programs currently present in Texas. For instance, miners in Texas are given energy credits in exchange for turning their rigs off during times of high demand.

Paraguay is a proverbial bit in the overall mining bucket, however. As of September 2021, the Cambridge Center for Alternative Finance (CCAF), placed Paraguay’s hash rate production at 0.15% of the entire Bitcoin mining network. The Center has updated its index earlier this year, but did not immediately respond to a request from Decrypt about its map data.

Sazmining’s President likes this number, however.

“I see it as an opportunity for those of us that understand the dynamics in Paraguay,” he said, adding that they are positioning themselves ahead of the “seemingly inevitable rush of Bitcoin miners.”

3. Harder than ever: This is how difficult it is to mine Bitcoin now

Bitcoin (BTC) miners are constantly generating Proof of Work (PoW) in a highly competitive business to discover the next valid block. Recently, Bitcoin mining difficulty was adjusted to its all-time highs, which hardened the competition and business profitability.

In this discovery, the miner gets the right to collect the block subsidy of freshly created 6.25 BTC, add Bitcoin transactions to this block, and broadcast it to other nodes, confirming these transactions — including the one from the block subsidy.

Interestingly, the more work (or hashrate) a Bitcoin miner has on the network, the higher their chances of finding a valid block. In order to keep the block discovery in a 10-minute interval, the Bitcoin mining difficulty is adjusted every 2,016 blocks (around two weeks).

This creates a dynamic where in an increased hashrate environment, the protocol will require that even more hashrate is deployed in order to find the next block, making it more difficult to mine BTC. While a decreasing hashrate scenario will do the opposite, decreasing the mining difficulty.

In particular, the Bitcoin mining difficulty reached a new all-time high of 61.03 trillion hashes needed to mine a block, in the most recent difficulty adjustment on October 16.

Meanwhile, the current average daily network hashrate is at 450 EH/s, according to data retrieved by Finbold from mempool.space on October 17.

Notably, Bitcoin mining is becoming more difficult over time, as the largest pools continuously increase their hashrates — which also makes Bitcoin more centralized in a few mining pools, as exclusively reported by Finbold.

Additionally, part of this recent growing hashrate comes from AntPool, the second-largest Bitcoin mining pool fighting against Foundry USA to become the first in block discovery. Antpool is owned by Bitmain, the largest Bitcoin mining ASICs producer in the world, based in China.

Also noteworthy is the fact that the Bitcoin mining adjustment is happening in less than a 2-week period year-to-date, which is the expected outcome for an aggressive upward trend in hashrate, as seen so far.

Bitcoin mining gets more expensive as mining difficulty increases

The effects of an ongoing hashrate and mining difficulty increase can be seen in the Hashprice Index coined by Luxor. This index is also highly affected by the Bitcoin block subsidy halving every four years, but it is also possible to identify the Hashprice decrease in between each halving.

Hashprice measures the expected return in BTC for each TH/s of PoW (or hashrate) a Bitcoin miner contributes to the network. It can also be used to measure the value in U.S. Dollars (USD), which is volatile due to considering the Bitcoin price in dollars.

Particularly, the Hashprice Index in USD has reached a 5-year low in November 2022, due to what is now considered the local bottom for this Bitcoin market cycle.

Nevertheless, the index is revisiting its lowest values after the constant increase in mining difficulty, at $0.06 per TH/s daily, and Bitcoin miners are again underwater.

This scenario creates more challenges for Bitcoin miners trying to compete in the mining industry and favors the already largest players or the ones with easier access to capital, ASICs, or cheap energy.

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Harvey CHEN

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