BTC miners on uncertain footing after DeepSeek AI launch

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Block reward miners who ‘pivoted to AI’ may be pivoting toward disaster after China’s new AI model claimed to produce better results without the need for huge data center infrastructure. 

• DeepSeek deep-sixes mining stocks
• Riot pressured by new investors to accelerate AI pivot
• BRICS corporate giants mull mining gains
• DCG, Grayscale unveil new mining options
• BTC mining’s future lies in your willingness to bleed money 

Earlier this week, shares in publicly traded mining operators plunged by as much as 30% following reports about DeepSeek, a new China-based open-source AI model that claimed to have achieved more accurate results at a cheaper price than popular Western models like OpenAI’s ChatGPT, Alphabet’s (NASDAQ: GOOGL) Gemini and Meta’s (NASDAQ: META) Llama. DeepSeek also claimed that its model was trained in a far shorter period than those other models.

DeepSeek, founded in 2023 by Zhejiang University alumnus Liang Wenfeng, claimed its model used older/less powerful Nvidia (NASDAQ: NVDA) chips—and fewer chips in general—than its Western rivals. Under America’s export controls, Nvidia and other chipmakers are prohibited from selling their most advanced chips to Chinese firms. 

Not everyone’s buying what DeepSeek’s selling, as Liang appears to have ‘stockpiled’ thousands of Nvidia’s top-line A100 chips before the export controls were imposed and may have acquired even more via indirect methods. Regardless, DeepSeek’s debut caused the single greatest loss in Nasdaq history, as Nvidia’s market cap lost nearly $600 billion in a single day. 

The bad news may only be getting started, as Chinese tech giant Alibaba (NASDAQ: BABAF) announced the release of its own AI model (Qwen2.5-Max) on January 28. Alibaba claims that its product outperformed not only those Western laggards but also DeepSeek’s V3 model. 

All this geopolitical one-upmanship caused tech broligarchs like Andreessen Horowitz co-founder Marc Andreessen to declare that this was “AI’s Sputnik moment,” referencing a different Communist country (Russia) beating America in the race to launch an object into orbit in 1957. Pleas for more corporate welfare are almost certainly to follow, lest those Godless commies keep embarrassing ‘Murica on the global stage.  

While the Wall Street bleeding may have abated, the share prices of miners such as Core Scientific (NASDAQ: CORZ), Riot Platforms (NASDAQ: RIOT), Cipher Mining (NASDAQ: CIFR), CleanSpark (NASDAQ: CLSK), and others have yet to recover their pre-DeepSeek heights. 

Many of the impacted miners were among those who’d most loudly proclaimed their intentions to switch to providing infrastructure for AI data centers. This was viewed as infinitely more profitable than mining the BTC token (even given the token’s currently inflated value) at all-time high network difficulty levels.

With DeepSeek claiming to be using far less infrastructure/energy to deliver results, the merits of these miners taking on new debt to build ever-larger data centers suddenly appears to be a very bad bet. Again, not everyone is convinced DeepSeek’s claims are valid, but the mere fact that it boasted so publicly of such a capacity should—and certainly will—give mining investors pause. 

Or perhaps a giggle.

I predict a Riot pivot

All things considered, this is perhaps not the best time for hedge fund giant D.E. Shaw to have taken an as yet unknown percentage ownership in Riot. Reuters broke the news earlier this week, which followed December’s news that activist investors Starboard Value had acquired a Riot stake and was pushing Riot to get more involved in the AI data center biz. 

Earlier this month, Riot announced that it had launched “a formal process to evaluate the feasibility” of devoting a 600MW chunk of its Corsicana, Texas facility to AI and other high-performance computing (HPC) tasks. This evaluation includes halting plans to devote that same 600Mw capacity to BTC mining. 

Riot chairman Benjamin Yi swore that his company still believes in “the significant upside” of its BTC mining ops but said the company recognized “the value of having long-term, predictable cash flows from a well-capitalized AI/HPC counterparty.” At least, until DeepSeek crashed this party.

Riot’s AI pivot had won plaudits from Wall Street analysts, some of whom believe the recent mining selloff was an overreaction. And if a more efficient AI does exist, it could encourage greater use among the wider public. But if massive data centers are no longer necessary to achieve the same (or greater) results, miners will need to lean harder on their BTC profits, which are anything but assured. 

BRICS = BTC rewards inevitably crap, sorry

Regardless, major entities outside the U.S. with cheap and easy access to electrical power keep throwing their hat in the mining ring, drawn by the newly favorable regulatory situation in the U.S. that has elevated BTC’s price to previously unattainable heights. 

On January 23, Russian media reported that domestic electricity colossus Rosseti Group is “interested in developing mining based on power supply centers with low utilization prospects and may become an operator coordinating the placement of mining infrastructure.”

The attitude of Russia’s government toward mining can charitably be described as schizophrenic, having banned or restricted the activity in some regions while opening up the electricity faucets in other regions. Russia’s primary concern appears to be how the state might produce more BTC domestically for use in foreign trade that’s immune to U.S. economic sanctions. 

On the other side of the world, Brazil’s state-owned oil giant Petrobras is launching a “historic” blockchain-based R&D project that will include a mining component. The goal is to redirect gas flares produced during oil production to generate the electricity needed to power BTC mining rigs. This will allegedly achieve a new revenue stream that is arguably more ‘green’ than burning fresh supplies of fossil fuels and won’t place additional strain on Brazil’s electricity grid. 

This isn’t a truly novel approach, as other nations’ state-owned energy firms have embarked on similar schemes in the past with mixed results. More recently, MARA (NASDAQ: MARA) announced a pilot project with ‘natural gas onsite neutralization’ specialists NGON Solutions. 

DCG, Grayscale unveil new mining options

On January 29, Digital Currency Group (DCG) announced the spinoff of a new subsidiary, Fortitude Mining. Fortitude was previously the self-mining division of Foundry, the largest BTC mining pool with roughly one-third of BTC’s overall hashrate. 

Fortitude will be led by Andrea Childs, Foundry’s former SVP of operations and marketing. Childs said Fortitude would focus on “diversified mining opportunities in emerging ecosystems while maintaining our leadership in [BTC] mining.” 

Fortitude’s new X account emphasized this ‘diversity’ angle by tweeting that the company was “return maxis, not bitcoin maxis.” Given the stress levels among BTC maximalists following U.S. President Donald Trump’s decision to pursue a ‘digital asset stockpile’ rather than a BTC reserve, the tweet seems a bit like kicking a puppy. 

Like most operations of the financially flailing DCG, Foundry has undergone serious retrenchment of late, including slashing its workforce by 27% in December. But DCG founder Barry Silbert insisted that the good times will roll for Fortitude in 2025, with a focus on “raising capital, making additional investments, and attracting top-tier talent.”

Silbert’s inept management of DCG in the pre-‘crypto winter’ years nearly sank the company and led to fraud charges against both Silbert and DCG. Last May, New York State Attorney General Letitia James announced a $2 billion settlement with DCG and its now-bankrupt Genesis subsidiary. Earlier this month, DCG reached a $38.5 million settlement with DCG for misleading investors re Genesis’s dire financial state.

All these cockups led to Silbert’s ouster as chairman of DCG subsidiary Grayscale Investments, the issuer of the GBTC trust that converted to an exchange-traded fund (ETF) last year. On January 30, Grayscale announced a new ETF that offers investors “exposure to [BTC] miners and the [BTC] mining ecosystem.”

This new ETF (NASDAQ: MNRS) is based on the collective performance of miners including MARA, Riot, Cleanspark, Core, and Iris Energy (NASDAQ: IREN). David LaValle, Grayscale’s head of ETFs, said miners are “well-positioned for significant growth as [BTC] adoption and usage increases, making MNRS an appealing option for a diverse range of investors.”  

Possibly, but the question remains as to why anyone would opt for a proxy BTC bet like MNRS, or the debt-laden machine that is MicroStrategy (NASDAQ: MSTR), or any of the other dozen-plus BTC-based ETFs out there, when one can just buy the tokens directly, thereby eliminating the fees that these other options impose. Didn’t this sector used to swear by the mantra of ‘not your keys, not your coins?’ Or was that ‘not your fees, but our profits?’

The cure is obvious, but you’ll find it worse than the disease

While miners’ profitability has definitely improved following the rocket ride that BTC’s price has enjoyed following Trump’s early-November election, few publicly traded miners reveal the full cost of producing a single BTC.

When you include the price of constantly upgrading mining rigs because the miner down the road has the new faster rigs with tailfins and rally stripes, few miners are truly profitable. The publicly traded ones also suffer from the need to dispense lavish ‘incentives’ to their senior execs, lest these geniuses up sticks and take their mediocre talents to your competitors.

But fear not, BTC miners! Fidelity Digital Assets issued a report earlier this month that contains the secret sauce that will sustain mining for as long as this planet continues to exist. It’s simple, really. Anyone who stands to profit from BTC’s continued existence—corporations, institutions, governments—simply needs to mine at a loss as an altruistic (but somehow self-interested) gesture.

In Fidelity’s view, exchanges, custodians and state agencies “have a substantial incentive to secure” the BTC network, even if it means operating in the red. What’s required is a mindset shift that views mining as “a liability line item to help secure the network.” Any BTC produced from this activity should be “seen as a bonus, not a necessity.” 

We’ll wait patiently while the queue of altruistic entities forms. 

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