The rise of major Bitcoin mining institutions is inevitable

0
56


There are very few investments that can provide an infrastructure type downside case with a venture capital type advantage. The combination of energy arbitrage and the accumulation of a Bitcoin (BTC) balance can achieve this. This is why we are seeing a rush of institutions pouring into the Bitcoin mining space and starting to build mega-facilities.

Securing new generation equipment

At its peak in 2018, Bitmain was able to produce over 95,000 platforms per week. However, since then production levels have declined, a partial consequence of its ongoing legal battle. In the other corner, MicroBT is expected to ship 1.3 million machines this year, adding 25,000 platforms per week to the mix.

The West receives only a limited allocation of these new machines, and with 17 publicly traded mining companies, ASIC financiers, and large co-locations announcing purchases every week, you can see how this new equipment offering goes. ‘dries up quickly. Building relationships with manufacturers is now crucial to ensure sufficient allocation of new machines. How do you get into this queue? Have a big checkbook.

Reduce capital expenditure

Economies of scale contrast with decentralization. Yet like most other industries, mining space rewards size. Large mining companies enjoy ASIC retail price discounts. With an average payback time of around 300 days for next-gen equipment, the discount can reduce it by over a month. Large miners also have to pay less down payment, in some cases around 20% versus over 50% for retail. This allows miners to acquire more machines and build faster.

On the infrastructure side, in most cases the construction of a 30 megawatt farm can be done at a cost per MW much lower than that of a 3 MW facility.

Maximize operating profits

If you want cheap electricity, it will cost a lot of capital for things like buying land, building large infrastructure, purchasing generators and other equipment, financing performance bonds, etc. power, on the whole, the most profitable miners are the big ones. They are able to put in place the necessary capital to secure the best locations. And as we know, the cost of electricity is one of the important determinants of success.

Beyond supplying cheap electricity, large miners can negotiate lower pool fees, firmware development fees, and ASIC management software. They can reduce the amount of work required per MW, improve the efficiency of their management and improve the efficiency of their energy consumption.

Related: Profitability of cryptocurrency mining in 2020: is it possible?

Access to superior funding mechanisms

Mining is a capital intensive business. This requires regular equipment upgrades and new purchases. Filing a 10 MW farm with next-generation equipment can cost nearly $ 10 trillion, depending on the purchase price.

Access to various forms of finance such as debt, equity, equipment finance, and ASIC finance is essential for mining operations to remain large and enjoy the benefits discussed above.

From 2018 to 2019, most of these mining operations were funded by a mix of traditional corporate-level debt and equity. In 2020, we saw an explosion of growth in ASIC funding. Large reputable mining operations are now able to raise funds from financiers while using their purchased ASICs as collateral. There are still a limited number of these financiers, so they prioritize the best and least risky operators to lend money to.

Manufacturers put on a tie

One of the first questions boards ask when given the opportunity to operate equipment is about equipment: “Where does the equipment come from?” Who is the manufacturer? Is there a guarantee? What is the price? Why does the price change every day? When are the machines shipped? ”

Manufacturers like Bitmian are the pioneers of the Old West mining industry. In 2016, the arms race to see who could put the most machines on the market began. Company policies, shipping and pricing details, warranties, viable repair centers and transparency have been left behind.

When institutions entered the industry, the production mindset of the manufacturers first and everything in between then started to change. Now, manufacturers need to organize weekly calls with large customers, discuss their production visibility, and provide more transparency in their operations. Most manufacturers now offer warranties on machines, they’ve opened repair centers, and they’re trying to be more transparent about shipping and pricing – although they still have a long way to go.

This trend of professionalization will likely continue with MicroBT, Bitmain, and anyone who wants to compete in the West.

Aligned mining pools

“How are we actually paid?” is another typical question that an institution will ask itself. The answer is by a mining pool. Mining pools are the buyers of the hash rate. The question therefore arises as to who is this counterparty and what are the risks associated with their treatment.

Pools have always been a black box in the mining value chain. The institutions have helped to increase the transparency of mining pool pricing, reduce the number of pools stolen from miners, and incentivize pools to create new feature sets. The mining pool industry is changing rapidly and if companies don’t keep pace, they will be left behind. All of these trends will benefit institutions that demand better and more compliant counterparts.

Industry consolidation

A wave of consolidation is on the horizon for the mining industry. There are hundreds of large companies and teams fighting for leeway, ready to be taken over by the institutions.

The main consolidation will be at the mining level. These mergers and acquisitions are likely to be done on a project basis rather than at the corporate level, as in the real estate industry.

Other verticals such as mining pools, container manufacturers, ASIC management software, mining support, firmware developers and ASIC resellers can also be bundled into broader offerings.

Financial services companies will also be natural acquirers as they seek to create an ecosystem spanning both the mining and financial value chain.

Financialization of the hash rate

In all traditional commodity industries, companies have the ability to leverage financial instruments to hedge their cash flows through futures and options, to forward part of their output in purchase contracts or futures, to maximize their bet, etc.

To date, there are very few financial instruments based on hash rates. The entry of institutions will change that, as they create demand for these types of products. The need of miners must be met by other market players, such as traders, to create liquid and solid markets.

Five-year mining outlook

In 2015, if you had told the miners where we would be today, they wouldn’t have believed you: millions of ASICs securing the grid, gigawatts of electricity used, and institutions like Fidelity with their own mining operations.

It’s hard to predict how the industry will evolve over the next five years, but I think institutions will continue to drive innovation in the space, creating a more secure network for Bitcoin. But it will bring new challenges like censorship at protocol level, more knowledge of your client / anti-money laundering, less decentralization, etc. Former native Bitcoin mining companies must work hand in hand with these new entrants to shape a good future for Bitcoin.

The views, thoughts and opinions expressed herein are the sole ones of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Ethan Vera is the co-founder of Luxor Mining, a North America-based hash rate liquidation platform serving the Bitcoin and Altcoin mining communities. Additionally, Ethan is the co-founder of Hashrate Index, a data website for all areas related to mining. Prior to joining the mining industry, Ethan was an investment banker at Goldman Sachs.

LEAVE A REPLY

Please enter your comment!
Please enter your name here