1. Bitcoin Mining Industry Is at Crucial Stage: JP Morgan
In a recent report, JP Morgan affirmed that the Bitcoin mining sector is at a crucible stage by highlighting the buzz about a spot BTC exchange-traded-fund (ETF). It could trigger a rally in BTC price.
However, the industry faces challenges because of the upcoming reduction in mining rewards despite having record levels of network security.
JPMorgan kicked off coverage Wednesday by naming CleanSpark its top mining pick, hailing the company’s “A-team” management and fund growth plans.
But it slapped underweight ratings on mining giants Marathon Digital and Riot Platforms, warning of high costs and uncertainty ahead.
“The hotly anticipated approval of a bitcoin spot ETF could light a fire under crypto prices, raining revenue on efficient miners,” JPMorgan said. But gathering storms of record hash rates and next year’s halving have analysts on edge.
“It’s do or die time for bitcoin miners on the knife edge of a crypto winter,” said lead analyst Reginald Smith. “Those who cut costs and lock in funding will be poised to strike if the ETF sparks a bitcoin breakout.”
CleanSpark snagged pole position with JPMorgan thanks to its “lean and mean” operations. But Marathon Digital’s sprawling energy costs could become an “albatross” during the halving, analysts said. Riot Platforms faces integration risks after its blockbuster Whinstone U.S. acquisition.
All eyes are on the SEC’s looming ETF decision that could take Bitcoin mainstream. But JPMorgan sees existential threats if miners can’t survive the approaching halving hurricane. The bank’s initiation of coverage puts an institutional spotlight on crypto miners sailing into the storm of 2023.
2. Bitcoin miners running up Texans’ electricity bills, industry fighting new regulations
Bitcoin miners promised Texans that data centers consuming enormous amounts of energy to generate an imaginary currency would save the electric grid, but instead, they are costing Texans more than $1.8 billion a year in higher electric bills, according to a top energy analysis firm.
The new report adds to a growing body of evidence that cryptocurrency generators exploit the fragile wholesale market operated by the Electric Reliability Council of Texas. Our electric bills will only go up, Wood Mackenzie warned last month, unless state officials step in.
Bitcoin mining in Texas uses at least 1,787 megawatts of electricity — or 2.2% of ERCOT’s baseload — researchers calculated, confirming a report by the New York Times. On a low-demand day when temperatures are cool, wholesale electricity prices are $5 a megawatt-hour higher “due to the need for more and more expensive generators to be dispatched” for crypto mining.
Overall, mining drives up prices by $1.8 billion annually, or 4.7%, researchers concluded.
“These figures are conservative, accounting only for mining during ‘blue sky’ hours when prices are under $15 a megawatt-hour,” the report said. “Bitcoin mining is likely to have stronger impacts on the grid over time as the number of larger and more power-hungry mining facilities is likely to grow.”
Gov. Greg Abbott and U.S. Sen. Ted Cruz have touted crypto mining as a solution to the ERCOT grid’s reliability problems.
Crypto miners, which use energy-intensive computer servers to generate tokens such as bitcoin, have flocked to Texas for cheap electricity after China banned them. Most of the time, Texas has among the nation’s most affordable wholesale electricity rates.
Advocates say miners make the peaks and valleys in electricity pricing smaller.
“Bitcoin miners do increase prices overnight and in times of low demand because they soak up low-cost power when consumers don’t need it,” Lee Bratcher, president of the Texas Blockchain Council, told me. “Bitcoin miners do not increase prices during times of high demand because, as the data shows, they turn off before prices hit their breakeven, which is around $100 per megawatt-hour right now.”
Critics complain new mines are going up faster than ERCOT can add new low-cost generation. The higher demand during temperate periods raises prices for everyone by keeping older and more polluting power plants operating. Generators are not investing in cleaner and more efficient power sources because peak periods are less profitable.
Most miners also drive up costs by demanding multimillion-dollar payments to turn off.
Riot Platforms, a bitcoin miner in Rockdale, took in $31.7 million in August alone for curtailing demand, overshadowing the $8.6 million net proceeds from producing bitcoin that month. The Riot mine consumes enough electricity for 300,000 homes.
“August was a landmark month for Riot in showcasing the benefits of our unique power strategy,” Jason Les, the company’s CEO, said in a statement. This year was the second in a row where Riot made more money from demand response in August than producing tokens.
ERCOT does not pay residential or small business consumers to save electricity, but sent emails and text messages this summer begging for conservation.
Most of the other 30 miners in Texas make money from reducing demand, but few reveal those profits. ERCOT does not release data on specific companies; WoodMac reached its conclusions by examining localized ERCOT pricing data.
Republican state Sens. Lois Kolkhorst, Donna Campbell and Robert Nichols sponsored Senate Bill 1751 earlier this year to force crypto miners to register with ERCOT and would have limited their participation in paid demand response programs. The bill passed the Senate unanimously, but the House never took it up.
ERCOT is required to serve any large facility that safely hooks up to the grid, whether there is enough power to support it or not. Texas summer demand jumped 8% this year, far faster than officials anticipated.
Some analysts predict crypto miners could grow electricity demand by 50% over the next few years, far faster than generators can build new power plants.
ERCOT proposed a new rule in August requiring companies that need large amounts of electricity to apply before connecting. The companies would also have to declare whether they could curtail demand when needed. Industry groups, however, are trying to kill the proposal.
Texas needs a law to ensure a stable electric grid and prevent bitcoin companies from gaming the wholesale market for profit. Anything less, and our electric grid will keep teetering in extreme weather.
3. From cyberspace to outer space: will flat imperialism push mining off-planet?
FROM CYBERSPACE TO OUTER SPACE
Tension is building in the mines. As the 4th Halving nears and the block reward trims to 3.125 bitcoin per block, miners must not only adapt to a significantly diminished reward, but contend with an increasingly profit-hostile future which might have surprised even the prescient Nakamoto. Indeed, despite widespread hope that fiat states will come to accept peaceful coexistence with bitcoin—I, too, would prefer this outcome—and despite some modest grounds for optimism, history would remind us that kings and emperors do not willingly relinquish power. This is no less true of modern fiat empires, as Lyn Alden’s survey of U.S. fiat interventionism explains.1 History, coupled with ongoing observation of federal actions—foreign and domestic—will be sufficient to calibrate our expectations and help guard us against understandable, yet self-deceptive naivete. Accordingly, of all the imminent mining challenges, the most formidable might well be increasing state opposition. If accurate, then conditions may rapidly deteriorate such that off-planet mining might merit serious consideration.
THE MINERS’ EARTHLY DILEMMA
As the Halvings inexorably march on, the mining equation keeps changing. For example, in 14 short years mining has evolved from enthusiasts on personal computers to mammoth structures housing thousands of water-cooled Antminer S19s with 5nm chips pulling over 750 MW of electricity.
Each stage of mining evolution has faced unique challenges. Those anticipated with the 4th Halving this April will include, among others: assured access to cheaper energy, acquisition of more efficient ASIC chips despite a global shortage and shipment delays (exacerbated by U.S.-China-Taiwan animus), the possibility of 3nm chip miners, hashrate increase, hashprice decline, the impact of AI, environmental propaganda attacks, and maddeningly-inscrutable bitcoin value projections made no less easier by the advent of large investment firms in the bitcoin ecosystem—all within the context of a frangible, debt-bloated, de-dollarizing economy.
Were these the only issues to resolve they’d be sufficiently daunting. However, a more problematic attack vector, as I’ve presented previously,2 is the possibility of the fiat-empowered superpower and its retinue of dollar-subservient vassals hindering free market bitcoin activities.
Logically, the character and magnitude of state friction would be correlated and proportionate to bitcoin popularity over fiat’s existing sphere of influence and control. If the U.S. monetary system, reaping the ill effects of decades of manipulation and recent global de-dollarization, begins imploding while bitcoin strengthens, federal response will be strong. It will be unlikely to accept contraction of its fiat power and be open to a bitcoin standard. Rather, it will cling to the legacy system from which it so easily accumulated its power and attack the emergence. In so doing, upon realizing that it can’t kill bitcoin, it will first seek to isolate it from its owners in cyberspace.3 A complementary line of attack would then be to neutralize mining. With bitcoin isolated and mining disrupted, in their view, public trust in bitcoin would dissolve; the threat would be neutralized.
Elements of a mining attack might include two elements: First, a propaganda operation: facts notwithstanding, miners would be slandered as shadowy crypto profiteers irresponsibly increasing CO2 emissions and consuming vast stores of finite energy while driving prices up and diverting energy from socially-beneficial uses. Second, a bureaucratic operation: miners would face a torrent of regulation, from licensing and zoning requirements, environmental restrictions, energy and CO2 quotas, to unreasonable reporting requirements replete with unprecedented KYC intrusions, and punitive taxation. In short, the combined economic, regulatory, and propaganda challenges of such an attack would be near insurmountable.
In recent years, when a jurisdiction became inhospitable—one is reminded of China’s mining ban still in effect since mid 20214—the conventional playbook offered but two options: attempt to go underground (risky), or relocate to a bitcoin-hospitable jurisdiction (disruptive and costly).