BTC Miners Making a Mint on Transaction Fees Amid Ordinals Surge

12/18/2023 0 Comments

1. Bitcoin Miners Making a Mint on Transaction Fees Amid Ordinals Surge

The recent surge in ordinal inscriptions on the Bitcoin network has been good news for miners but not so good for users. As demand for block space increased over the weekend, transaction fees skyrocketed, netting miners more money.

Over the weekend, Bitcoin miners were collecting more in transaction fees than in newly generated BTC. Moreover, mining profitability has surged to its highest level since May 2022.

Bitcoin Miners Making a Mint

On December 16, Casa HODL co-founder Jameson Lopp posted an example of a block where Bitcoin miners were making a mint. The block netted the Braiins Pool miner a whopping subsidy and fee of 13.4 BTC worth around $570,000 at the time.

Bitcoin educator Kashif Raza commented that it was more incentive for miners: “Ordinals have turned out to be a blessing for miners but for retail, its a nightmare to send micro transactions.”

“This means that more miners will deploy machines to gain maximum out of block rewards,” he added.

According to BitInfoCharts, average BTC transaction fees have surged to their highest levels since April 2021. It costs as much as $37 for a Bitcoin transaction over the weekend.

“How many people earn less than $37 daily?” asked ‘Kawaii Crypto,’ who added that it was around 5.39 billion people.

“TWO THIRDS of the world’s population are currently excluded from sending a “fast” Bitcoin tx unless they want to spend more than a day’s income.” Glassnode analyst ‘Checkɱate’ opined that the take was ridiculous. “It would take 63 years for all 8 billion people to transact ONCE,” he added. Cryptographer Adam Back said that ordinals were here to stay, so people should stop complaining about them.

“Trying to stop them and they’ll do it in worse ways. The high fees drive adoption of layer-2 and force innovation. So relax and build things.”

Hash Price Skyrockets

Nevertheless, Bitcoin miners are going to have a happy holiday season. Profitability, or hash price, has surged to a 19-month high, even higher than the last ordinals craze in May.

Hashprice is a function of four inputs, network difficulty, Bitcoin’s price, block subsidy, and transaction fees. Bitcoin prices were in retreat at the time of writing, falling 2% on the day to $41,124 as markets continued to pull back.

2. Bitcoin mining’s silent comeback in China, according to industry insider

Bitcoin and crypto going into 2024

Gagnon shed light on the forthcoming Bitcoin halving event and its potential implications for mining operations. His prediction suggested significant industry shifts post-halving, stressing the need for enhanced efficiency and cost-effectiveness but remaining incredibly optimistic about halving economics.

“Just like with all previous halvings, BTC is rising in price leading into the few months before a halving but we’ve never seen hash price this strong going into a halving before.”

The potential of a Bitcoin ETF and its implications for market dynamics driving Bitcoin price was also discussed. Despite rumors of BlackRock’s involvement with Bitcoin mining companies, Gagnon doubted their direct interactions with miners for ETF purposes. Instead, he suggested the investment management firm would likely work with OTC desks for large-scale acquisitions.

“I do think Blackrock is probably accumulating. I think lots of people are probably accumulating in anticipation of an ETF, but there’s no reason to do that through a miner. They’ll just go directly to OTC desks.”

The pair also discussed the escalating miner fees within the Bitcoin network, another significant driver of mining economics. These fees have elevated to levels unseen since May, indicating a considerable increase. This rise in miner fees is considered a positive development for the industry, contributing nearly 10% of all mining revenue now. This is especially important given the coming Bitcoin halving event.

The fee surge, a revenue component for miners unaffected by the halving, could potentially strengthen mining economics post-halving by up to 20% if current trends continue.

Bitcoin mining in China

Gagnon also discussed the possible impact of Canada’s vast underutilized natural resources on the industry and touched upon the global dispersion of Bitcoin mining, highlighting the emergence of new mining markets, including China.

Gagnon, who spent time operating crypto-mining facilities in China, shared his unique perspective on the country’s mining ban and the recent expansion of Bitcoin mining in the nation. Contrary to attributing the ban to environmental or economic reasons, Gagnon suggested the decision was politically motivated.

“When the China mining ban happened in 2021, I really don’t think it had anything to do with Bitcoin itself. I think it was entirely internal politics.”

Gagnon noted that mining is slowly returning to China as a way to recycle waste inputs, notably heat, for residential and office projects. This approach allows for reintroducing mining in China as a net social benefit, balancing business and political interests.

“And I think we’re gonna see a lot more of that. It’s a way for China to bring back mining indirectly and improve the cost efficiency of infrastructure and residential developments.”

While Bitcoin mining might seem insignificant regarding China’s overall GDP, Gagnon observed that it holds significant potential at the individual business level. Entrepreneurs might see it as an opportunity to improve business efficiency, recycle resources, and diversify revenue streams. This is particularly relevant in China’s real estate sector, which has faced challenges but remains a significant part of the economy.

Gagnon suggested that real estate developers could find significant value in integrating Bitcoin mining into their operations to economize on heating costs, diversify revenues, and explore new business synergies.

In September of 2022, Ethereum, citing similar environmental concerns, completed its transition to Proof of Stake. Gagnon also expressed skepticism about the impact of Ethereum’s transition from Proof of Work to Proof of Stake. His concerns about the implications of this shift and questioning its motives offered a nuanced viewpoint on its potential impact in the broader crypto ecosystem.

“I think it is a nail in the coffin for Ether. I don’t think it’s a nail in the coffin for Bitcoin… they’ve now gotten rid of, fundamentally the best quality that I thought Ether had, which was being a second Proof of Work chain.”

Economics of mining

When the conversation switched to the economics of mining, Gagnon provided an analysis of the variables that determine mining profitability. He emphasized hardware costs and energy efficiency as primary factors in the success of mining ventures.

“We’ve fully taken advantage of the opportunity to acquire equipment at some of the lowest prices in years. While we never know what will happens with the market, our goal is to try and time purchases leading into bull markets.”

He emphasized the disadvantages of investing in a downward market trend, noting how quickly the value of mining hardware can depreciate in a bear market.

In 2023, Bitfarms adopted a cautious approach, focusing on infrastructure rather than expansion due to unfavorable market conditions for growing its hash rate. This strategy allowed them to build a “solid foundation” and capitalize on opportunities when the market shifted. Gagnon believes the recent purchase of 64,000 new-generation Bitcoin miners from Bitmain exemplifies this approach, enabling a “complete fleet upgrade.” Gagnon highlighted the importance of timing in investment decisions to maximize efficiency and avoid market downturns.

“Last week we put out our announcement that we bought nearly 64,000 Bitcoin miners, the newest generation Bitcoin miners from Bitmain and that’s gonna allow us to do a complete fleet upgrade and transform the company.”

He explained that the key to competitiveness in mining is managing direct operating costs, which depend on electricity price and the miner’s efficiency. Gagnon noted that as long as energy prices are fixed, these costs remain constant regardless of market fluctuations.

He anticipates resistance in the market if mining revenues drop to 4.5 cents per terahash, predicting changes in mining strategies like underclocking, higher curtailment, and reduced miner purchases. Bitfarms has positioned itself with an upgrade, which it expects will achieve a direct operating cost of 2.5 cents per terahash, significantly lower than the anticipated pressure point in the market.

Gagnon is optimistic about 2024, predicting it will be a transformative year for the entire mining industry.

3. BITCOIN MINING CAN HELP FIGHT METHANE EMISSIONS

Traditionally, the mining industry has been vilified for its environmental impact and energy use. This article describes the industry where mining can have an immediate positive impact – fossil fuel operations.

BACKGROUND

The run-up to November 2023 COP28 in Dubai has seen a flurry of activity from the world’s three largest economies on the question of energy sector methane. That month, China published its long-awaited Methane Emissions Control Action Plan, followed by the China-US Sunnylands Statement on Enhancing Cooperation to Address the Climate Crisis and the European Council and Parliament announcing a deal on new rules to cut methane emissions in the energy sector. Prolific emitters, like Kazakhstan and Turkmenistan, added themselves to the 150 signatories of the Global Methane Pledge.

The momentum continued, with 50 oil and gas companies that represent 40% of global petroleum production signing the Oil and Gas Decarbonization Charter and committing to end methane emissions and routine gas flaring by 2030.

Finally, the world is waking up to the fact that if we are to have any chance of limiting global warming to 1.5 degrees by 2050, we must act decisively to stop the venting and flaring of methane from the global oil, gas, and coal industries.

But amongst the excitement, it is forgotten that reducing the flaring and venting of methane necessarily involves capturing and utilizing it. A question no one seems to be asking is what to do with all this methane.

THE BAD AND THE UGLY OF FOSSIL FUEL METHANE

The atmospheric methane emissions have tripled since the start of the industrial revolution, believed to be responsible for 0.5 degrees of the 1 degree warming we saw to date. The International Panel on Climate Change states that if we are to have any chance of limiting global warming to 1.5 degrees by 2050, we must act decisively on methane.

The International Energy Agency’s (IEA) Methane Tracker estimates that one-third of man-made methane emissions comes from the production, transportation, and use of fossil fuels. This totals around 120 million tonnes of methane annually, evenly split between the oil, gas, and coal industries. The impact is equivalent to 10 billion tonnes of carbon dioxide – more than the United States’ and EU’s CO2 emissions combined.

The IEA’s Net Zero by 2050 roadmap states that in order to limit the rise in global temperatures to 1.5 °C above pre-industrial levels, the energy sector must reduce its methane emissions by 75% by 2030, predominantly through the “the rapid deployment of measures and technologies to eliminate avoidable methane emissions by 2030.”

The Methane Tracker shows that 75% of global fossil fuel methane emissions come from 10 regions:

THE POTENTIAL ROLE OF BITCOIN MINING IN GREENHOUSE GAS REDUCTION

In September 2022, White House Office of Science and Technology Policy published a report on Climate and Energy Implications of Crypto-Assets in the United States. One of the report’s conclusions was that “crypto-asset mining operations that capture vented methane to produce electricity can yield positive results for the climate, by converting the potent methane to CO2 during combustion…; could potentially be more reliable and more efficient at converting methane to CO2 [than flaring]… and …is more likely to help rather than hinder U.S. climate objectives.”

The IPCC estimates that over 20 years, a tonne of methane has a climate change impact equivalent to 80 tonnes of carbon dioxide. Hiveon, a top-rated suite of mining products, calculates that using otherwise vented methane to generate the electricity needed to produce one Bitcoin would lead to reductions in greenhouse gas emissions equivalent to 6’000 tonnes of CO2, or the annual emissions of 1,400 passenger cars in the US.

“We acknowledge the crypto industry’s carbon emissions, but also believe in its ability to act as an important tool in combatting climate change. That’s why we launched Hiveon Energy, a project in the intersection of the blockchain field and traditional energy industries. It’s our contribution to making mining more sustainable while also helping reduce greenhouse gas emissions,” – Andrii Garanin, VP of Hiveon Energy.

Just 1MW of Bitcoin mining equipment could destroy over 800 tonnes of methane annually, providing greenhouse gas reductions equivalent to a typical 140 MW solar facility in the US. With just the global Bitcoin industry requiring 10-15 GW of power generation capacity, it has huge potential to reduce methane emissions.

WHY MINING

The IEA estimates that it’s possible to capture and use 75% of the methane vented from oil and gas production and about 50% from coal. Methane is a valuable commodity, but there is a reason why so much of it is vented rather than sold or utilized.

This is because the majority of vented energy sector methane is almost by definition stranded gas. Fossil fuel operators are profit-driven, so if they had a way to monetize the wasted methane, they would have used it.

Vented methane comes from regions like Shanxi, Inner Mongolia, the Middle East, Caspian, etc. These regions are already massive producers of fossil fuels, so they have few customers for natural gas. It needs to be transported to customers as LNG, through pipelines, or as electricity, which involves extensive investments in infrastructure, as well as substantial legal, regulatory, and commercial barriers.

These investments have long payback periods, making them challenging in the current context where the world needs to rapidly ramp down its production of fossil fuels.

The mining industry can act as a global buyer of stranded natural gas. Miners require no access to the grid or power markets – just the gas supply, a plot of land, and an internet connection.

Most importantly, because such projects can use modular, mobile solutions, the equipment can be moved easily and cheaply in case of localized issues around gas supply or power demand.

WHAT’S NEXT?

Undeniably, the global crypto industry is a large consumer of electricity, part of which comes from the burning of fossil fuels. But it’s also a major potential customer for otherwise vented methane, providing an enormous opportunity to reduce methane emissions globally.

The major barrier is a lack of knowledge from global policymakers and the mining industry about the workings of such an enterprise. Despite the challenges, we need policies that will promote the use of vented gas, or at least not hinder it by regulations such as blanket bans on mining.

As stated by Dr. Sultan Al Jaber, “The world will break down if we don’t fix the energies we use today. The world will break down if we don’t mitigate the emissions on a gigaton scale.”