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February 15, 2021

How the Bitcoin Mining Cycle Has Evolved With CoinShares

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Bitcoin mining is quite profitable again for those miners who survived the last bear market. Chris Bendiksen, head of research at CoinShares, is one of the most active researchers in the space and he joined host Paul Gordon to discuss the state of the bitcoin mining market vs. the last hype cycle in 2017.

The Bitcoin hashrate is currently at an all-time high at 165 exahashes per second on a two-week average basis, while the estimated power draw hovers at 9.6 GW. China leads with an estimated 50% of the hashrate, though it has been on the decline, while the U.S. holds an estimated 14%.

What happened then back then, which was the first full industrial cycle tied to the price, is mirroring what is happening now. We are still in that era, as not much has changed other than scale. What we’re seeing is that the price run-up is much more nimble than the run-up in hashrate can be, Chris said, adding that the price can go up very quickly, while the hashrate can only go up when miners get their hands on gear and deploy it, which requires a lot of capital.

If the price run-up continues, we’ll probably end up seeing something similar to 2017 in that mining becomes uber profitable for probably the remainder of this year and that the hashrate probably won’t catch up with the price until after we have a bit of a blow-off top in this price cycle, Chris noted.

(4:20) “And then the question is, will the same thing happen as last time, where we had this miner capitulation that happened at the final two-thirds of the price bear market, where the hashrate finally caught up with the price, the difficulty brought mining costs up to price levels and there was a bit of a shakeout. So the big question is — is that going to repeat? Maybe,” said Chris, adding that there’s much more of an ability now for large professional miners to use financial products to hedge themselves.

Hardware Shortage

One of the factors that seem to be unique now vs. then is there seem to be some supply constraints among the manufacturers in terms of getting this new hardware. The lead times for new hardware from the three main manufacturers are anywhere from six to eight months amid huge demand. Similar to the way chip designers improved over the first few years, those manufacturers are competing for fabrication space with the rest of the compute industry.

The percentage increase we might see in the number of gigawatts deployed and the amount of hardware deployed will probably be somewhat similar this time around, Chris said, adding that the nominal amount is quite different. While you can probably go out and find five to 10 GW available at prices that are palatable to Bitcoin miners, it’s a bit of an unanswered question if you could go out and find an additional 30 GW at similar prices.

(8:12) “Last time, the amount of hardware that needed to be built wasn’t so large that it had material impacts on the queues at the foundries. Now it does. Not just that. Last time around, you were on a 16nm process, now we’re on the 5-7nm process, which means that your competitors are the Apple’s and Samsung’s of this world,” noted Chris.

It’s not that easy to squeeze your way into the fab queue. The question is are we going to end up with a multi-year lag on hardware post-price, and that is looking quite likely, according to Chris.

(9:10) “Everyone is absolutely sold out. I’m hearing that manufacturers won’t even pick up the phone for some people,” he added.

If prices keep going up like this, retail mining might become a thing again as it did at the last peak. People were paying thousands of dollars for S9s. That could be a thing as well. There is definitely a chance of people getting hurt from overpaying in terms of what ends up being what they should have paid.

S9 Whack-A-Mole

Every S9 that works is probably plugged in right now, even though many people, including Chris, have been prophesying the death of the model for years.

(15:13) “That thing is the AK47 of mining. It just refuses to go away. And with prices where they are right now, they’re profitable in mining terms in modest electricity-cost regions. And so there’s something to be said for playing that game and as well and reselling and stocking,” said Chris.

Being able to predict and ride out these cycles, however, is a hard thing to do and a skill that is likely reserved for the more seasoned players. The main danger is probably for fresh players coming in, even those who come from the commodities space and are familiar with ore mining. Other dangers include being eaten up by the difficulty and mistiming the cycle.

Miner Financing

Bitcoin mining is a capital-intensive business. In previous cycles, early miners financed themselves in the run-up and the balance sheet was there. A big difference this time around has been the introduction of miner financing for equipment and hardware, with a few players coming to market. But if too much financing comes to market at once, coupled with a glut of supply, people could overextend, the hashrate could get ahead of itself and people could make themselves unprofitable.

We are probably at the foothills of that, said Chris, adding that this development of financing markets is particularly interesting in the Western jurisdictions. That’s because it’s one of the key drivers that will give the West an upper hand to the East, where Chris would like to see more hashrate.

(20:27) “I think it’s much less likely that we’ll see any type of tomfoolery with other people’s mining gear in our Western jurisdictions due to our much stronger laws and legal systems. And so with these financing markets propping up now, I really hope it’s going to give an edge to Western miners and bring more hashrate over to this side of the world,” said Chris.

Whether this can be done with the silicon constriction remains to be seen.

Retail Mining

There has been some innovation around retail mining, for instance in the DeFi Space with the introduction of some tokenized hashrate contracts. These types of cloud-mining contracts, however, are notoriously difficult to price. The structure hasn’t always been the best, and there has been uncertainty about the physical hashrate on the other end.

24:24 – “Cloud mining contracts aren’t very different from hashrate derivatives as we would like to see them in terms of larger-scale professionally or institutional built products for larger miners to take advantage of to derisk their exposure to difficulty. So I think letting retail be a part of the liquidity provision is probably a good thing because…who takes the other side of that contract has been a large outstanding question. And retail punters represent a pretty solid pool of liquidity out there. If they’re interested in doing it even if it’s purely as a speculative Yolo bet, then fine. It still achieves the same outcome for the miners that need to derisk. So if they want to be a part of that, I think that’s excellent. Do they need to be careful? Absolutely. Are they likely to get burned? Yeah,” said Chris.

Nation States & Energy Companies

There has been some innovation around retail mining, for instance in the DeFi Space with the introduction of some tokenized hashrate contracts. These types of cloud-mining contracts, however, are notoriously difficult to price. The structure hasn’t always been the best, and there has been uncertainty about the physical hashrate on the other end.

24:24 – “Cloud mining contracts aren’t very different from hashrate derivatives as we would like to see them in terms of larger-scale professionally or institutional built products for larger miners to take advantage of to derisk their exposure to difficulty. So I think letting retail be a part of the liquidity provision is probably a good thing because…who takes the other side of that contract has been a large outstanding question. And retail punters represent a pretty solid pool of liquidity out there. If they’re interested in doing it even if it’s purely as a speculative Yolo bet, then fine. It still achieves the same outcome for the miners that need to derisk. So if they want to be a part of that, I think that’s excellent. Do they need to be careful? Absolutely. Are they likely to get burned? Yeah,” said Chris.
Nation States & Energy Companies

Nation-states have been making moves toward bitcoin mining, with Iran having committed energy firms to mining bitcoin and requiring those companies to sell the bitcoins through the central bank. Macro geopolitical plays are something to look for as countries look to bitcoin to circumvent U.S. sanctions. Ukraine announced it is looking into dedicating its nuclear power to mining. There is also a lot of activity in former Russian states and Russia itself.

Another trend that is emerging is partnerships, such as the deal between U.S.-based Crusoe Energy and Norweigian energy firm Equinor. The Norweigan state is now deep into mining. There will probably be more partnerships at least at first, said Chris, adding:

(30:03) “I think nation-states are going to get involved here. It’s just too good of an opportunity to pass on, which I think is exactly what’s driving the Ukrainians in particular. And nuclear power is very interesting…It’s a typical bitcoin mining region that they’ve got going.”

The big question, Chris added, is what are they going to do with the coin? Will they take it on board as part of their reserves? It is a question of time — how many cycles does it take? A lot of these things need to build on each other over time for this to become robust enough to be the large global future that the market is hoping for. All these incremental steps play into that, Chris said.

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Gerelyn Terzo
Gerelyn caught wind of bitcoin in mid-2017 and after learning about the peer-to-peer nature of Satoshi's creation has never looked back. Previously she covered institutional investing and fintech for several major trade publications. Gerelyn resides in Verona, N.J.

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