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BTC block reward miners hope their current state of unprofitability is a temporary phase, but there doesn’t seem much hope of pulling out of this downward spiral.
A glance at the press releases of the big U.S.-listed mining operators shows they’ve raised over $2.2 billion in new funding since this spring’s ‘halving’event, which reduced the block subsidy to 3.125 BTC. This reduction has put a financial squeeze on miners, who find profits elusive as their costs often exceed the rewards from the blocks they mine.
Bernstein analysts declared public miners’ ability to raise debt/equity to be a significant advantage over privately held miners, particularly those based outside the U.S. BitDeer, which reported a $17.7 million loss in Q2, announced last week that it would raise $150 million to expand its operations and acquire new mining rigs in a bid to improve its profitability.
The mining arms race, where operators dump underperforming rigs for more efficient (and costlier) gear, has pushed mining difficulty to all-time highs. The soaring cost of the electricity required to win the race to mine a BTC block makes mining profits harder to find than a BTC use case (other than financial speculation).
On August 20, the Nasdaq-listed BitFuFu (NASDAQ: FUFU), a mining outfit affiliated with Chinese mining hardware provider Bitmain, reported that its net income fell to $1.3 million in Q2. That’s down from $5.1 million in the same period last year despite a 70% year-on-year revenue rise.
The reduced profits came as BitFuFu’s cost of self-mining a single BTC token rose from $19,344 in Q2 2023 to $51,877 in the same quarter this year. BitFuFu’s cloud mining operations—mining on behalf of third-party clients—showed an even higher cost of $60,534, which is below the token’s current value.
These problems aren’t unique to BitFuFu. Rival CleanSpark’s Q2 cost of mining a single BTC (counting depreciation of mining rigs) was $74,466, while the average Q2 revenue per BTC was only $66,048. MARA (formerly Marathon Digital) showed a nearly $40 million deficit when comparing total revenues to the total cost of revenue in Q2, ‘up’ from a $10.7 million deficit in Q2 2023.
While MARA recently adopted a ‘HODL strategy’ that pledges not to sell any of the BTC it mines—indeed, MARA just raised $300 million and spent $249 million of it buying 4,144 additional BTC at an average cost of $59,500, a price that BTC is struggling to stay above—other miners are selling tokens as fast as they can be mined.
CryptoQuant reported that miners sold a combined 19,000 BTC on August 5, a day on which BTC’s fiat price briefly plunged below $50,000. That was the highest’ miner capitulation event’ since mid-March when BTC began retreating from its year-to-date highwater mark.
Survival of the fattest
Bernstein claimed miners shouldn’t sell any of the BTC they’ve recently mined at a loss; based on the analysts’ projections, BTC would ‘moon’ to around $200,000 per token sometime next year. Uh-huh. Another Bernstein prediction seems far more likely: further consolidation of this already concentrated industry.
Case in point: Riot Platforms (NASDAQ: RIOT) announced plans this month to raise up to $750 million, which will likely help its quest to absorb Canadian rival Bitfarms (NASDAQ: BITF). Despite Bitfarms rejecting Riot’s previous overtures, Riot boosted its Bitfarms stake to 18.9% last week, suggesting a hostile takeover is inevitable.
And Bitfarms isn’t the only meal on Riot’s plate. In July, Riot paid $92.5 million (plus additional consideration) to acquire Block Mining, a private miner based in Kentucky. The deal moves Riot into second place among U.S.-listed miners in terms of mining capacity.
So yes, this herd is indeed thinning, but the concentration that’s really alarming is the dominance already held by the two top pools (AntPool and Foundry USA), which together claim well over half of BTC’s total mining market share (close to two-thirds when you throw in their proxies).
Mining profitability hit an all-time low this month, according to a JPMorgan report. As mining costs continue to rise and more miners switch to serving as data centers for artificial intelligence (AI) systems, BTC’s proof-of-work (PoW) consensus mechanism will become a properly elite affair.
Taking my ball and going, er, offshore
Some of the big U.S. miners are hoping that Donald Trump will succeed in his bid to reclaim the presidency in November. Trump has allegedly become enamored with mining, voicing his desire to see all future BTC blocks mined in America, which reflects Donald’s flawed understanding of how blockchain works (besides lining his pockets).
Many U.S. miners believe Trump will offer them additional subsidies, including greater access to electricity, which remains their single biggest expense. This led some miners to become vocal Trump supporters and equally vocal critics of incumbent Joe Biden. But Biden’s abrupt withdrawal from the race last month and the ensuing surge of support for Kamala Harris has these miners fearing blowback.
MARA CEO Fred Thiel is one of these pro-Trumpers, declaring last month that mining would “flourish” under a second Trump administration. To further demonstrate MARA’s fealty, the company is now inscribing ‘Made in USA’ onto each BTC block it mines. Subtle.
That said, Thiel and another MARA exec met with Democratic National Committee Chair Jamie Harrison and his advisors on August 5. The discussion reportedly included the Dems’ concerns over the environmental costs of mining utility-free tokens, while the MARA team focused on polling data—much of it highly suspect—showing high levels of ‘crypto’ involvement among Americans.
But just 10 days later, Thiel expressed doubt—correctly, as it turns out—that the Democratic party’s 2024 platform would make any mention of ‘crypto.’ An evidently peeved Thiel said, “Maybe we really should accelerate moving our business offshore” if Harris wins, adding, “All my strategic planning for 2025 right now is looking outside the U.S.”
Everybody hates a tourist
In May, MARA signed a deal to establish operations in Kenya, although one wonders how long MARA will be welcome once the local government fully grasps what it has agreed to. Many other jurisdictions that rolled out the red carpet for miners began having second thoughts once they saw the demands these companies were making on their energy grids.
This week, Malaysian authorities made a public show of crushing 985 BTC mining rigs with a steamroller, part of its ongoing campaign against individuals making unauthorized use of electricity from the local grid. In July, government officials claimed to have lost RM3.4 billion (US$779 million) from electricity theft by ‘crypto’ mining operations since 2018.
Earlier this month, Iranian officials announced bounties for individuals who report unauthorized mining operations. The head of the country’s national utility said “opportunistic individuals have been exploiting subsidized electricity and public networks to mine cryptocurrencies … causing significant disruptions and problems within the country’s power grid.”
There’s enough discontent growing worldwide that the International Monetary Fund (IMF) issued a report this month warning that the combined energy use of ‘crypto’ miners and AI data centers is expected to account for 3.5% of global electricity demand by 2027. That’s the equivalent of Japan’s total electricity consumption.
An IMF working paper from September 2023 warned that ‘crypto’ alone could account for 0.7% of global carbon dioxide emissions by 2027. The IMF noted that many miners “enjoy generous tax exemptions and incentives on income, consumption, and property. Considering the environmental damage, the lack of significant employment, and pressures on the electrical grid… the net benefits of these special tax regimes are unclear at best.”
To rein in this conspicuous consumption, the IMF proposes “a direct tax of $0.047 per kilowatt hour” on crypto miners. “If considering air pollution’s impact on local health as well, that tax rate would rise to $0.089, translating into an 85% increase in average electricity price for miners.”
U.S. states like Texas have become catnip for miners thanks to all sorts of corporate welfare. In the summer of 2023, Riot Platforms earned $31.7 million by temporarily switching off its mining rigs and selling energy back to the state during periods of high demand. For 2023 as a whole, Riot earned credits of $71.2 million against future power costs from these resales.
While there have been furtive attempts to rein in these subsidies, the state’s Lt. Governor recently tweeted his amazement that miners “may actually make more money selling electricity back to the grid” than they do from mining. Small wonder that Riot and other Texas-based miners fought like hell to prevent the Department of Energy from conducting a survey of their electricity consumption.
It would be one thing if all this energy consumption served any purpose beyond enriching a handful of BTC bagholders and the ‘crypto casino’ exchanges that rely on speculative token flipping. But with BTC’s artificially constrained seven-transactions-per-second throughput, the utility has left the building.
BTC’s energy consumption looks even worse when compared to a utility-focused blockchain that puts no upward limit on the amount of transactions that can fit into a block. The net result is an exponentially larger volume of transactions for the same energy footprint. More utility, less guilt. Sometimes, the simplest solutions are the best solutions.
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