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BT Daily News: TeraWulf Starts Nuclear-Powered Bitcoin Mining With Nearly 8,000 Rigs at Nautilus Facility


1. TeraWulf Starts Nuclear-Powered Bitcoin Mining With Nearly 8,000 Rigs at Nautilus Facility

TeraWulf (WULF) has begun operations at its Nautilus Cryptomine facility – the first nuclear-powered bitcoin mining facility in the U.S. – with nearly 8,000 mining rigs online representing computing power, or hashrate, of about 1.0 exahash per seond (EH/s).

The company expects to have about another 8,000 rigs energized in coming weeks, bringing capacity at the Pennsylvania-based Nautilus facility to 1.9 EH/s by May, according to a Monday press release.

Nautilus will significantly lower TeraWulf's energy costs, with the company having secured a power agreement for 2 cents per kilowatt hour (kWh) of power for five years, which will bring its average energy cost down to about 4 cents/kWh across its two facilities. That's much lower than the U.S. industrial average of 9 cents/kWh that the Energy Information Administration reported in December 2022, as well as the variable rate TeraWulf pays at its New York site, which averages 5 cents/kWh.

Along with its mining peers, TeraWulf has struggled mightily during the crypto winter as declining bitcoin prices teamed with rising energy costs. The Maryland-based company had to embark on a series of cost-cutting initatives in November and raised $10 million in new capital in December to repay some of its debt. However, both crypto and energy markets have improved somewhat in early 2023, and the mining industry is showing early signs of recovery.

The Nautilus mine is "the first behind-the-meter bitcoin mining facility of its kind, directly sourcing reliable, carbon free, and 24x7 baseload power from the 2.5GW Susquehanna nuclear generation station in Pennsylvania," according to TeraWulf. It is a joint venture with Texas energy producer Talen Energy, in which TeraWulf has a 25% interest.

The company said Monday it expects to reach 5.5 EH/s of computing power by early in the second quarter.

WULF stock is down 2.5% to 64 cents in recent Monday trading.

2. How Bitcoin Mining is Adapting to the Energy Transition

Today, developed economies consume as much energy as 12 times the average in some of the developing economies. There are over 900 million people who do not have access to electricity but we flare enough gas every year to power entire sub-saharan Africa. In other words, we burn enough gas (emitting carbon dioxide, or CO2) to provide energy for millions of people without creating any economic value, as we do not have the necessary technology to profitably transport the energy where it is most needed.

Innovative monetization of stranded or excess energy resources will create positive economic opportunities and drive bitcoin mining’s growth.

Every energy producer, regardless of the carbon intensity of the energy they produce, has to deal with surplus energy which cannot be monetized. As hydrocarbon production increases, reservoir pressure drops and producers inadvertently end up producing gas which is often costly to transport and therefore they do not have a choice but to burn/flare it. In fact, according to a recent article, the amount of gas flared globally is equivalent to Europe's total natural gas import from Russia before the sanctions imposed over its invasion of Ukraine.

According to the IEA, we need to curb the gas flaring by over 90% to meet its net zero target by 2030, as shown in the figure below. Similarly, renewable generators would often have to curtail their energy production to match the demand from the grid, and in the absence of a battery, that often means wasting the energy.

Many energy producers lacking capabilities in bitcoin mining are partnering up with bitcoin miners to efficiently monetize such otherwise wasted or stranded energy in the absence of transmission infrastructure. Oil giant ExxonMobil has already started a pilot project with Crusoe Energy to mine bitcoin. Similarly, renewable giant Nextera and bitcoin miner Marathon run a joint facility in King Mountain, Texas.

Perhaps the only thing better than a joint venture is a vertically-integrated mining company.

To minimize some of these uncertainties with the energy price and availability, we are observing bitcoin mining companies who own the energy production source, i.e., they produce and use their own energy by cutting out the middlemen. Examples range from companies owning natural gas (such as 360 mining and Canary Mining), to hydropower (Bitfarms), to solar energy (Viable Mining) assets and many others.

While there are previous instances of bitcoin accelerating otherwise expensive firm renewable energy (such as OTEC) development in the U.S., we are more likely to see similar instances in countries with favorable bitcoin mining policies. For example, El Salvador, which currently produces over 50% of its electricity from renewable energy, has huge geothermal energy potential as shown in the picture below. Currently, there is a huge push from the El Salvador government to develop these geothermal resources for sustainable bitcoin mining.

The specialized optimization software category could be an attractive investment for investors hesitant about capital-intensive digital infrastructure companies.

Bitcoin mining is a highly-efficient capital allocation mechanism and as close as it gets to the invisible hand of the free market. In the past year, several bitcoin mining companies such as Core Scientific, Celsius, Compute North and Butterfly labs declared bankruptcy, while a couple others like Argo Blockchain and Iris Energy were on the verge. The price of energy and being able to efficiently capitalize on the energy demand of the grid have a huge effect on the operational profit margin of a bitcoin mining company; this problem creates a need for energy optimization and efficient usage.

I have created a separate category in my market map for companies which solves these optimization problems for bitcoin miners. Additionally, some mining as a service (MaaS) companies like Lancium offer a bundled software solution to manage computing/mining operations as well optimize energy usage.

But building the infrastructure for bitcoin mining is a major investment and involves risk due to the volatility of the price of bitcoin and the cost of energy needed. To de-risk these investments (to a certain extent) by diversifying their offerings, many MaaS companies are building data centers for low-latency computing. With the astronomical rise of cloud computing, the demand for latency-agnostic computing has significantly increased in the past decade and is projected to increase by 10% year over year until 2030.

MaaS companies are well positioned to build data centers as this resonates with their existing capabilities of building efficient computing infrastructure solutions, thereby significantly increasing their total addressable market.

Just like a Swiss Army knife, bitcoin mining incentivizes energy-efficient decarbonization in many ways. Repurposing coal refuses and sustainably combusting them, utilizing natural resources to preserve key wildlife habitats, capturing methane from landfills and using that energy to mine bitcoin creates positive economic value for the society. In fact, there are over 120,000 orphaned wells in the U.S. alone which emit methane equivalent to producing seven million to 20 million metric tons of CO2 per year and threaten lives in surrounding communities.

Assuming an average cost of $100,000 to plug such a well and that only 10% of such wells would be suitable for repurposing using bitcoin mining, that’s a $1.2 billion market!

Bitcoin mining uses electrical energy and is therefore as clean as the source of the electricity. However, as we integrate more intermittent renewables to the grid, the need to balance the grid increases, which could be addressed by a flexible load like bitcoin mining and data centers in certain locations.

The electrical energy used in bitcoin mining is converted to heat. Just like the energy producers trying to monetize their excess energy with bitcoin mining, bitcoin miners can monetize the wasted heat by capturing and repurposing it. Here’s a great example of how bitcoin mining can incentivize waste heat recovery.

In creating my market map, I have seen companies repurposing heat from bitcoin for agricultural purposes such as greenhouse chambers to grow tulips, distill whiskey or for heating homes. In addition to a resilient revenue model, efficient users of wasted energy and heat will be the winners.

3. Bitcoin Miners Prepare for Upcoming Difficulty Increase in the Face of Market Uncertainty

Bitcoin (BTC) miners are preparing for another difficulty adjustment this week, as the computational power required to mine new coins reaches its highest level in history.

The next difficulty adjustment, which is expected to occur on Friday, March 10, will take the difficulty level from 43.05 T to 44.46 T, according to estimations from the crypto mining data provider CoinWarz.

The expected increase will take the difficulty of mining new Bitcoin to yet another all-time high. This is despite the fact that it is already at a record-high level after a consistent rise in the difficulty level since the second half of 2022.

Hashrate continues to rise
Increases in the difficulty level of Bitcoin mining generally follow increases in the hash rate on the network – the amount of computational power dedicated to mining Bitcoin globally. When the hashrate rises, difficulty also rises to ensure the blockchain maintains an average time of 10 minutes between each block mined.

Since June of 2021, the Bitcoin network’s hashrate has risen consistently. It first crossed the 300 EH/s mark in late January this year, and then reached another all-time high of close to 400 EH/s in late February.

As recently as on March 2, the hashrate once again got close to its all-time high, reaching 385 EH/s, data from CoinWarz showed.

A rising hashrate is viewed as a sign of network adoption and increases the Bitcoin network’s security and resilience against various forms of attacks. Bitcoin is, for this reason, considered by far the most secure cryptocurrency in the market.

Struggling miners
As a direct result of the increase in difficulty, miners will necessarily get their margins squeezed even more. Not surprisingly, this could be difficult for many of the largest mining firms after a bear market that has now lasted more than a year.

Earlier this month, the major publicly listed Bitcoin miner Riot Blockchain reported earnings that revealed the firm lost more than half a billion dollars on its mining operation in 2022. The loss was much larger than the $15.4m loss the firm reported for 2021, despite the fact that it produced far more BTC in 2022.

It remains to be seen how Riot and other major mining firms will deal with the continued rise in the Bitcoin mining difficulty this year and the rising cost of energy.
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