The Breakdown - Here Comes Nuclear-Powered Bitcoin Mining

Episode Date: January 26, 2023

Today is a mining day on “The Breakdown” as NLW looks at: News of nuclear-powered bitcoin-mining coming to the U.S. A new report on the state of mining from Galaxy Digital  The impact of Kazakhstan’s miner exodus on the global bitcoin energy mix Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW - Join the most important conversation in crypto and Web3 at Consensus 2023, happening April 26–28 in Austin, Texas. Come and immerse yourself in all that Web3, crypto, blockchain and the metaverse have to offer. Use code BREAKDOWN to get 15% off your pass. Visit consensus.coindesk.com. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsor today is “Swoon” by Falls. Image credit: Photo by Mike Kline (notkalvin)/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big-picture power shifts remaking our world. The breakdown is produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, January 25th, and today we are talking about nuclear-powered Bitcoin mining. A quick note before we dive in, there are two ways to listen to the breakdown. You can hear the show on the CoinDesk podcast network, which comes out every afternoon, and also features other great CoinDesk shows, or you can listen on the breakdown-only feed,

which comes out a few hours later in the evening. Wherever you listen, if you're enjoying the show, I would so appreciate it if you would take the time to leave a rating or review to help new people discover the show. All right, friends, welcome back and listen. Sometimes you read a headline, and you can just feel a group of people getting triggered. And good, golly, did I feel that

when I saw Yahoo Finance drop this little gem. U.S.'s first nuclear-powered Bitcoin mining center to open in Q1. Now, of course, for a certain portion of the environmental set, the combination of nuclear power and Bitcoin mining in one sentence, in one facility, is an unholy alliance from their nightmares. Now, at the same time, there are many environmentalists and ESG advocates who have a much more sophisticated view here, but let's dig into the news. So the TLDR, the first U.S.-based nuclear-powered Bitcoin mining facility, is sent to open this quarter in Pennsylvania. The facility has been completed by Cumulus Data,

a subsidiary of independent power producer Talon Energy, which owns the adjacent 2.5 gigawatt nuclear power plant. Tallinn Energy has been dabbling in Bitcoin mining for some time, opening a zero-carbon Bitcoin mining facility in collaboration with Terawolf in August of 2021. This new facility will operate with a maximum capacity of 48 megawatts, drawing on excess power from the nuclear plant. Locating the mining facility on the combined 1,200-acre campus means, as the release put it, that there is no, quote, intermediation by legacy electric transmission and distribution utilities. In other words, the mining is directly connected to the power station. Cumulus Data CEO Alex Hernandez said, our flagship Cumulus

Susquehanna Data Center campus is positioned to welcome its first tenant and commence commercial operations this year. We look forward to advancing our mission to solve the energy Trilemma, which we define as the rapidly increasing consumer demand for zero-carbon, low-cost, and reliable electricity by data center customers. Cumulus is in the process of building two additional 48-magwatt facilities and has identified 18 additional Talon Energy sites with potential to host data centers directly connected to electricity generation infrastructure. As you might imagine, the Bitcoin community was wickedly excited about this news.

Alex Gladstein from the Human Rights Foundation says there aren't many things cooler than Bitcoin mining, but nuclear-powered Bitcoin mining is certainly one of them. David Shane writes, there has been speculation that a lot of Bitcoin mining will shift to energy production companies who can use, quote, waste energy to do it or otherwise do it cheaply. Well, here is one example of that. Tom Mapes, who looks at Bitcoin mining for the Digital Chamber of Commerce, writes, name an energy source, and Bitcoin mining can help advance the infrastructure, technology, and sustainability. Today's example is nuclear. Now, zooming out, there is a bit of a shift in attitudes towards nuclear in the U.S. in general.

Nuclear went through a long, dark period where people focused more on the risks in the wake of disasters like Chernobyl, but, as the environmental conversation has picked up, so too has the nuclear discussion. Once persona non-grata among climate activists, there has been a new opening of late. Just this week, the United States Nuclear Regulatory Commission approved for the first time ever a small modular nuclear plant, or an SMR. The gist of the approved plan is that it would be a reactor that is about a third of the size of a usual reactor producing 50 megawatts of power. The design was published

last Thursday in the Federal Register and comes from New Scale, which is an Oregon-based reactor company. Being included in this register means that other utilities can select this same type of reactor when applying to build a new nuclear plant. Overall, this is the seventh nuclear reactor design to be approved by the U.S. government. The Assistant Secretary for Nuclear Energy Dr. Catherine Huff said in a statement, quote, small modular reactors or SMRs are no longer an abstract concept. They are real, and they are ready for deployment, thanks to the hard work of new scale, the university community, our national labs, industry partners, and the NRC. This is innovation at its finest and we are just getting started here in the U.S. One of the biggest

issues with traditional nuclear reactors is their huge setup costs. This includes technical logistics, building processes, legal approvals, and more, and that the net results is that it becomes more expensive in the short term than other forms of energy. SMRs, on the other hand, have many parts that can be fabricated in factories and shipped to site, which helps lower costs and speed up processes. Now, all of that said, a lot of the benefits are still theoretical. New Scale, for example, is working on what is effectively a demonstration plant in Idaho that is slated to be fully operational by 2030. Unfortunately, they've had to increase their cost estimates on the price per megawatt hour by around 50%, which has made some concern that SMRs will

have the same sort of cost ballooning problems that we've seen in traditional nuclear reactors. Now, we might be getting a little deep now into the nuclear field, which is obviously not the subject of the show, but I genuinely think it's pretty exciting to see these technologies align. And also to see that the companies building these new Bitcoin mining facilities are coming to Bitcoin mining on their own from the standpoint of their larger set of needs. Last year, as part of the Masari Theses, Ryan Selkis tweeted Bitcoin mining is still majority dirty. I'm no climate hawk, but I also think we shouldn't reopen coal plants to mine Bitcoin if we don't need to. Bullish on public-private partnerships that lean on miners as a load-balancing money battery,

e.g. bullish-flaired gas mining. Upstream data, Steve Barboor, gave some color about how miners are thinking about these types of issues. He writes, mining does not balance grids. It balances generators. It's important to be accurate else you feed the fudsters. A Bitcoin miner should not be located downstream of generation. It should be co-located at the generation plant or as close as can be. Otherwise, the miner is taking up transmission capacity and losses for no good reason. Part of the magic of Bitcoin as a technology is that proof-of-work mining is a portable, agnostic sink for energy, a flexible load that can capture energy waste that no other technology can. A Bitcoin miner is like a virtual utility.

He is in competition with the utility, or more specifically every part of the utility that exists downstream of a generator, which is why we have seen a lot of political discrimination against Bitcoin miners from utilities. Quebec, Manitoba, British Columbia, New York, Washington, and more jurisdictions have put moratoriums on miners. Bitcoin mining for load balancing belongs upstream at the generating point. Now, one of those locations that he mentioned was Quebec, and we got some interesting updates on an energy story that involved Bitcoin from Quebec last year. Sophie Brochu is the CEO of Hydro, Quebec. That utility company, which is, of course, based in Quebec, suspended new power supply to the blockchain industry last year.

According to recent news, she will now be stepping down in April. The board chair of the company said in a statement, under her leadership a new strategic plan was developed in collaboration with a great many internal contributors and representatives of Quebec society, demonstrating her ability to bring people together. The board did not name a replacement for Brochu who had taken the position in April 2020. Now, last year, the utility firm proposed to Canada's energy regulator that they would suspend the allocation of an additional 270 megawatts in energy supply

already allocated to blockchain industry firms. Their proposal didn't specifically name the segment of the industry that was to be targeted, however, Quebec has been an ideal place for Bitcoin miners due to its cheap and abundant hydroelectric power. Miners who had their operations in the province at the time, including Argo blockchain and Bitfarms, said that they had confirmed their access to power would remain at least temporarily in place. The policy was one of the flashpoints of political debates around Bitcoin mining's use of power. Bitcoin miners had flocked to Quebec to utilize the cheap power, however there was some unease at the idea of relying on Bitcoin miners as a stable customer

to plan expanding infrastructure around. A similar theme has been ongoing across other regions with major Bitcoin mining presence, including Texas and upstate New York, with some residents being concerned that Bitcoin miners will push up the cost of power and could lead to shortages of electricity supply. The end of Brochu's tenor as the CEO of Hydro-Cubeck doesn't necessarily say anything about whether there's been a fundamental shift in how that province will view Bitcoin mining, but it is an interesting note just given how much this has been a focus of that area in the past year.

Consensus 2020, the most important conversation in crypto and Web3, happening April 26th through 28th in Austin, Texas. Consensus is the industry's only event bringing together all sides of crypto, Web3, and the Metaverse. Immerse yourself in all that blockchain technology has to offer creators, builders, founders, brand leaders, entrepreneurs, and more. Use code Breakdown to get 15% off your paths. Visit Consensus.coindex.com or check the link. link in the show notes. Next up on this mining-themed episode, Crypto Infrastructure firm Blockstream has raised $125 million via convertible note and secured loan financing in order to expand their Bitcoin mining hosting services. The firm previously raised $2

million in a series B round in August 2021 at a $3.2 billion valuation. That raise was used in part to acquire mining chip manufacturer spawn dually in order to move towards building out an offering in A6, which are of course the chips used in Bitcoin mining. In a press release on Tuesday, Blockstream said, quote, hosting has remained a resilient market segment as compared with prop miners and their lenders who've been more directly exposed to Bitcoin price volatility and compressed margins. Blockstream currently has 500 megawatts worth of housing capacity under construction and could be taking recent troubles in the Bitcoin mining industry as assigned to press forward in an attempt to gain market share from recently failed companies.

The string of bankruptcies in Bitcoin mining last year included the second largest mining hosting provider in the world, Compute North. Blockstream President and Chief Financial Officer Eric Svensson said, quote, this fundraise allows us to accelerate the year-over-year revenue growth we created with our 2021 Series B and continue to build infrastructure for the future Bitcoin economy. We remain focused on reducing risk for institutional Bitcoin miners and enabling enterprise users to build high-value use cases on the most secure, robust, and scalable blockchain in the world.

Bitcoin. Putting a little exclamation point on the story, Kevin Rook writes, Don't sleep on Bitcoin builders. Four Bitcoin companies have raised a combined things. $310 million in the last year. All of them are working on Lightning, too. Now, it was clearly meant to be something of a Bitcoin mining day, because as I was preparing this show, Galaxy released their 2022 mining report, which they called appropriately surviving the perfect storm. Their summary puts it pretty bluntly. They write, if 2021 was the big

breakout year for mining, then 2022 can easily be thought of as the reversion to the mean, as miners face the perfect storm of headwinds, a backdrop of eroding economic. economics, rising energy prices, and constrained access to capital markets with already high volumes of debt, have resulted in miners finding themselves in a precarious position for the second half of 2022. Survival is now the name of the game, and growth is secondary. Many miners have been here before trying to build in a bare market, but what they have not faced are the broader macro trends in crypto affecting their growth. Amanda Fabiano, who's the head of mining at Galaxy, wrote a threat about this as well,

with a couple future forward notes to close. where do we think hash rate will go, she writes. Overall, given that miners are operating very close to break even, and there is uncertainty looming around the next halving, we believe that 2023 will ultimately show smaller growth for hash rate. What are we bullish on? As miners continue to look for ways to earn additional yield on their Bitcoin holdings, they could consider the Lightning Network as it presents the opportunity

to generate Bitcoin-denominated yield. These are definitely themes that I think we're going to return to frequently throughout this year. Finally, one more story for this mining show. has published a new piece in Bitcoin magazine today about how a mining exodus from Kazakhstan has changed the overall profile of Bitcoin mining energy consumption. At its peak, Kazakhstan was the second largest Bitcoin miner in the world. This was following China's mining ban, which saw hash rate flow all over, but especially to the U.S. and to Kazakhstan. Over the subsequent year,

however, mining had been largely pushed out of the country. MIT Tech Review summed it up this way. The gold rush was doomed from the start. Kazakhstan's miners, both white miners, who took advantage of tax breaks and cheap power, and illegal gray miners who exploited Kazakhstan's crony politics and lax governance to operate below the surface, overloaded the country's energy grid. By the end of the year, the mining industry was consuming more than 7% of the entire generating capacity of Kazakhstan, a country of 19 million people. The surge tipped the grid over from surplus into deficit. Power shortages led to localized blackouts and parts of the country, exacerbating existing tensions over corruption, nepotism, and the rising cost of fuel. In January 2022, these issues boiled over

into mass protests. Within weeks, the government effectively cut miners off from the national grid, bringing the boom to an abrupt end. Now, in the context of this show, I'm not going to get into the problems of the analysis of effectively blaming those protests and the country's problems entirely on Bitcoin, which is a classic media overreach right here. I'm just using this as a rough timeline of events for you to get an understanding. Anywho, as Daniel rightly points out, while the media was quick to discuss Bitcoin abandoning the country, they didn't seem to want to cover how it impacted the clean energy mix of Bitcoin mining. A huge, huge portion of Kazakhstan's mining was done with coal-powered energy, which means that a shift in hash power away from

the country could have some positive environmental effects in terms of the overall energy mix. Now, a few key numbers. At peak in October 2021, Kazakhstan had 18.3% of global hash rate. By January 22, it had fallen to 13.2%. And now Daniel argues that, quote, even with the most bullish upper threshold, it represents at most 6.4%. Daniel's calculations suggest that without the Kazakhstan exodus, the network would have been about 15.7% powered by fossil fuels versus 49.3% zero net emission. With the exodus factored in, however, the network flips majority zero emission at 52.2% versus 47.8% fossil fuel. He also calculates that current emissions levels show a 10% reduction thanks to the shift. As he puts it, 10% emission reduction is significant

There are a few industries in the world that have achieved this within a year. And if there were, you would have likely heard all about it. He concludes, According to my model, the Bitcoin Network uses 4.7% more clean energy now than it did even just a year ago. The factors that have led to this are, one, the exodus from Kazakhstan, two, the migration of marathons remaining coal-based mining onto renewable supply, three, continued migration towards mostly renewable-based off-grid mining.

This trend shows no signs of abating. Based on the trend line, the network is set to use 4% more clean energy every year for the next three years. As far as I'm aware, this is the fastest transition rate to renewables of any industry in the world. So there you go. It has been undeniably a tough year for Bitcoin mining, but there are reasons to be optimistic heading into 2023. Until tomorrow, guys, be safe and take care of each other. Peace.