There are very few investments that can provide some kind of downward infrastructure with the upward style of venture capital. The combination of energy arbitrage with the accumulation of a balance in Bitcoin (BTC) can provide such an opportunity. It is for this reason that we are seeing an avalanche of institutions entering the world of Bitcoin mining and starting to build mega-facilities.
Securing next generation hardware
At full capacity in 2018, Bitmain has been able to produce more than 95,000 mining equipment per week. From this point on, however, the level of production fell. partly because of an ongoing litigation. On the other corner MicroBT will ship 1.3 million kits this year, adding 25,000 kits per week to the equation.
The West is getting a limited allotment of these new machines, and 17 publicly traded mining companies and ASIC funders, as well as large co-locations, are announcing purchases on a weekly basis. We can see how quickly the supply of new equipment is dwindling. Building relationships with manufacturers is essential today to ensure broad allocation of these new devices. How did you get on this waiting list? With a big checkbook.
Reduce capital expenditures
Economies of scale stand in contrast to decentralization. However, like most other industries, the mining world rewards size. Large mining companies receive discounts on retail prices for ASIC devices. With an average payback period of around 300 days for next-generation devices, the discount can shorten this period by more than a month. Big miners also have less progress to make, in some cases close to 20% compared to more than 50% for retail sales. This allows miners to get more machines and build their facilities faster.
On the infrastructure side, a 30-megawatt farm can in most cases be built at a much lower cost per megawatt than a 3-megawatt plant.
Maximize operating profit
If you want cheap electricity, you will be spending a lot of money on things B. Buy land, build large infrastructure, purchase power plants and other equipment, finance performance guarantees, etc. While there are miners who use small, cheap sources of energy on a large scale, the miners who make the most are the greatest. They can use the necessary capital to secure the best places. And as many of us already know Electricity costs are one of the factors that determine miners’ success.
In addition to looking for cheap electricity, large miners can negotiate lower pool fees, Contracts for the development of firmware and ASIC management software. You can reduce the workload per megawatt, increase management efficiency and improve energy efficiency.
Access to better funding mechanisms
Cryptocurrency mining is a capital intensive business. Equipment needs to be updated and purchased constantly. Filling a 10-megawatt farm with state-of-the-art equipment can cost nearly $ 10 billion. depending on the price at which the equipment was purchased.
Access to various forms of finance such as debt, equity, equipment finance, and ASIC equipment finance plays a vital role in keeping the mining operations large and making the aforementioned profits.
Between 2018 and 2019, most of these mining operations were funded by a mix of debt, traditional equity, and stocks. In 2020, the growth in funding for ASIC devices has exploded. The largest and most famous mining companies can now raise money from funders using their ASIC equipment as collateral. There are still a small number of these funders. When it comes to lending money, they prioritize mining operations that offer less risk.
Manufacturers put on a tie
One of the most common first questions asked when the opportunity presents itself to mine gifts is about equipment: “Where does the device come from? Who is the manufacturer? Does it have a guarantee? What is the price? Why does the price change every day? When is it shipped?”
Manufacturers like Bitmian are the Wild West pioneers of the mining industry. In 2016, when the arms race began, who could bring more machines to market. Company policies, shipping and pricing details, warranties, functioning repair centers, and transparency have been left behind.
When institutions came into industry The “production first, everything later” mentality began to change. Manufacturers today have to make weekly phone calls to their major customers, discuss their production visibility and offer more transparency in their processes. Most manufacturers now offer guarantees for their machines. opened repair centers, and they are trying to make shipping and price more transparent, although they still have a long way to go.
This trend of professionalization is likely to continue with MicroBT, Bitmain, and anyone looking to compete in the west.
Mining pools are starting to follow the rules
“How are we really paid?” is another typical question from an institution. The answer is from a mining pool. The mining pools are the buyers of the hash rate. Therefore, questions arise as to who this counterparty is and what risks are associated with dealing with them.
Historically, pools have been a black box in the value mining chain. The institutions have contributed to greater transparency in the pricing of mining pools, reduced the number of pools miners steal, and created incentives for pools to add new functionality. The mining pool industry is developing rapidly and if businesses can’t keep up they are left behind. All of these trends will benefit institutions that demand better and more transparent colleagues to do business with.
Consolidation of an industry
A wave of consolidation is looming for the cryptocurrency mining industry. There are hundreds of large companies and teams battling to enter space and preparing to be picked up by institutions.
The main consolidation occurs at the mining operations level. These mergers and acquisitions will likely be on a project-by-project basis, rather than at the corporate level, as we’ve seen in the real estate industry.
Other hubs such as mining pools, container manufacturers, ASIC management software, mining teams, firmware developers, and resellers of ASIC devices can also be grouped into a broader offering.
Financial services companies will also be natural buyers, as they are trying to build an ecosystem that covers both the value mining part and the financial part.
Financing with the hash rate
In all traditional commodity industries, companies can use financial instruments to hedge their cash flows through futures and options. Sell part of your production in advance in buy or forward deals, use your bet and much more.
So far, there are very few financial instruments based on the hash rate. The entry of institutions will change all of this as they create demand for such products. The miners’ need needs to be met by other market participants such as traders to create more liquid and resilient markets.
The mining landscape in five years
If you had told the miners where we would be today in 2015, they would not have believed you: Millions of ASIC devices that secure the grid, consume gigawatts of energy and institutions like Fidelity with their own mining operations.
It’s hard to predict how the industry will develop over the next five yearsHowever, I believe the institutions will continue to innovate in this area and create a more secure network for Bitcoin. However, this brings with it new challenges, such as B. Censorship at the protocol level, more requirements for “knowing customers” and “fighting money laundering”, less decentralization and much more. Early bitcoin mining companies need to work hand in hand with new entrants to create a bright future for bitcoin.
The views, thoughts, and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Ethan Vera is co-founder of Luxor Mining, a North America-based hash rate billing platform serving the Bitcoin and Altcoin mining communities. Additionally, Ethan is the co-founder of Hashrate Index, a data website for everything to do with cryptocurrency mining. Prior to entering the mining industry, Ethan was an investment banker at Goldman Sachs.