The Breakdown - How AI Is Impacting Bitcoin Mining

Episode Date: February 26, 2025

NLW does a check in on the state of Bitcoin mining. AI is having some interesting impacts that could shape how the industry evolves. Sponsored by: Ledger Ledger, the world leader in digital asset security, proudly sponsors The Breakdown podcast. Celebrating 10 years of protecting over 20% of the world’s crypto, Ledger ensures the security of your assets. For the best self-custody solution in the space, buy a LEDGER™ device and secure your crypto today.Buy now on Ledger.com. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

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. What's going on, guys? It is Tuesday, February 25th, and today we're talking about an update in Bitcoin mining. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it. Give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Hello, friends. What's going on? As you know, I am traveling this week, and so we're doing a little bit different of a slate of episodes. And today I'm using it as a chance to catch up on a topic which we cover as frequently as makes sense here, but sometimes gets short shrift because of, I don't know, some crazy exchange hack or the president of the United States saying that he's going to ride a Bitcoin train to the moon or whatever it is. So today what we're doing is doing a catch up on mining. So these are a number of different mining stories over the past month or so, which I think will give you a bit of a sense of where the industry stands more broadly. The plan is currently to be back to our normal episodes tomorrow,

but in the meantime, let's catch up on mining. One interesting thing that's been happening, import issues have started to ramp up, with Bitcoin miners reporting mining rig seizures at the border. During the fall, customs officials began holding shipments of mining rigs. By November, Blockspace reported that some miners had already had their orders held up for two months. It seemed the issue was only impacting Bitmain mining rigs with machines from rival manufacturers are still being delivered. At the time, we had very little information on what was behind the scrutiny. Delays coincided with trade restrictions being placed on Bitmain subsidiary Shopgo, who had recently been accused of circumventing export controls on advanced AI chips. Earlier this month, Bitcoin miner

told Blockspace that Customs had formally seized their shipments of mining rigs. Seizures impacted bitmain machines, as well as imports from MicroBT and Canon. We still don't at this point have a clear understanding of why these mining rigs had been seized. Letters from U.S. Customs shared with blockspace said that seizures had been requested by the Federal Communications Commission. They cited legal code related to unauthorized or non-compliant communications equipment. Now, it is extremely odd that the FCC is getting involved with an issue that doesn't appear to have anything to do with traditional communications equipment. However, this could indicate the order to seize miners as related to concerns of Chinese spying raised last year.

Last May, the Biden administration blocked the construction of a mining facility near a missile base in Wyoming, citing Chinese ownership as the issue. The committee on foreign investment said the reason was the presence of, quote, specialized in foreign-sourced equipment potentially capable of facilitating surveillance and espionage activities. The statement seemed to be referring to the mining rigs themselves. By November, the Treasury issued a rule change to expand their ability to scrutinize land acquisitions by foreign nationals close to military facilities. Surrounding these actions, Senator Elizabeth Warren commented, foreign adversaries are using crypto mines to spy on U.S. military operations. That is an obvious national security risk. At the time, it was generally assumed Warren was simply using the story

to criticize the mining industry, as she had done for years. It's not a stretch to think Chinese own mining facilities could secretly hold spying equipment, but we didn't have or at least weren't presented with any evidence that mining rigs themselves posed a threat. The FCC mandating the seizure of mining rigs could mean they believe the machines contained communications equipment that could be used in espionage, or the agency could simply be responding to the concerns without direct evidence. Either way, the delay in eventual seizure of mining rig imports have seriously disrupted the industry. Mining rig imports for January have collapsed by 65% year-over-year, according to data compiled by the Miner Mag. New York-based Miner Bit Digital recently managed to take

delivery of 700 Bitcoin miners after a delay of several weeks. CEO Sam Tabar noted this supply is, quote, not too much compared to the whole operation. He added that other mining companies are in an even worse situation, commenting, we are one of the lucky ones. One miner reported having $5 million worth of miners seized. And even when miners are being released, the fees associated with inspection and storage can run into the millions of dollars, cutting into already thin profit margins. Difficulty accessing miners appears to be impacting hash rate growth. Over the past two months, hash rate has been largely stagnant and saw a relatively small increase alongside November's Bitcoin pump. A little more hash rate was brought on in February,

but growth is very slow compared to last year. The constraints highlight a long-running monopoly problem in the Bitcoin mining supply chain. Bitmain has a dominant position in the industry, controlling around 80% of the supply of new miners. Their leading model is four times as profitable as the leading micro-BT mining rig, and 28 times more profitable than the top model from Canon. Although other companies are trying to compete, there really isn't a replacement for top-of-the-line Bitmain machines. Another issue on the horizon is looming tariffs on Chinese goods. Taras Kuluk, the CEO of Syntac Digital, a leading mining rig brokering company said, heavier tariffs would essentially halt importation of new generation hardware into the U.S.,

making it completely cost-prohibitive. There will be a ton of projects that will cease construction because they wouldn't be able to get the hardware. Bitmain is attempting to deal with the issue by bringing their supply chain onshore. In December, they announced they would establish a production facility in the U.S., but obviously, it takes a little time to do that. There's still a lot of confusion about exactly what's going on and how intentional this all is. Matthew Pine, the National Security Fellow at the Bitcoin Policy Institute, noted that this flies in the face of the Trump administration's desire to mine Bitcoin in the U.S.

He added, It's kind of hard to keep the U.S.'s share of hash while Customs is interdicting A6 being delivered to American Bitcoin mining companies. Seems like some folks at Customs didn't get the memo. Magnanimus Maxi wrote, Interesting story. If nothing else, it shows how seriously chip flows are being monitored. This is most likely crossed wires for AI equipment, but is intriguing from a Bitcoin and national security perspective. The Bitcoin mining industry should have plenty of political capital

to get this issue sorted, but it's been dragging on for months. Indeed, to many people, the fact that seizures are happening under the Trump administration is curious given their pro-Bitcoin stance. It could be a simple oversight considering how many priorities the administration is juggling in their first 100 days. Or it could be a sign that there's genuine security issues with Chinese sourced miners. That does create a huge opportunity for U.S.-based manufacturers to compete. They'll need to match the performance of Bitmain rigs first. And indeed, miners are feeling the pinch as profitability declines. After a short-term peak in late January, hash price is heading lower. Hash price is a metric that measures the return for each unit of hashing power deployed to the network while taking

Bitcoin price into account. Current levels are below anything that was seen across crypto-winter, even as Bitcoin hit 16,000 in late 2022. This halving cycle has been brutal for Bitcoin miners so far. Even the run-up to $100,000 didn't see a meaningful jump in profitability. Peak cash price since the halving was still 25% lower than averages from a year ago. Adding to the trouble, transaction fees recently hit their lowest levels since 2012 in BTC terms. Network activity is weighed down with about half the number of transactions from last November. Coin desk analyst James Van Stratton believes this is due to a migration to the Bitcoin ETFs, stating, let's be honest, this is a concern. Bitcoin rappers are killing on-chain fees.

According to Glassnode data, the period of minor capitulation began in early February. The metric, known as hash ribbons, triggers when short-term hash rate growth overtakes the longer-term trend, squeezing profitability. In this case, a small spike in hash rate earlier this month overtook the two-month trend, which has been even weaker. Hello, friends, I am thrilled to share that Ledger is once again partnering and sponsoring with the breakdown. Many of you know, but for those of you who don't, Ledger is the most secure hardware

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making it easier and safer to manage your transactions and assets. Alongside Ledger Stacks and Ledger Flex, the company also launched the Ledger Security Key app, offering a sense of safer alternative to traditional passwords and enhancing your digital security. If you are in this space, you owe it to yourself to at least check out Ledger and their ecosystem what they have available to you. So thanks once again to Ledger for sponsoring the show. The good news, at least for Bitcoin holders, is that hash ribbon triggers almost always signal a bottom in price. On the CryptoQuant platform, Dark Frost wrote, the hash ribbon's indicator, which evaluates the health of Bitcoin's mining ecosystem by tracking hash rate fluctuations, has historically been a reliable signal. Notably, it has only

missed once due to the unprecedented impact of the COVID-19 market shock. This indicator consistently highlights optimal entry zones, both for midterm positioning and long-term accumulation. These metrics line up with reports from publicly listed U.S. miners. None reported a month-on-month increase in Bitcoin produced in January other than riot platforms. Curiously, Bitcoin miners have actually been adding to their Bitcoin stacks in aggregate over recent weeks. This followed a drawn-out period of selling stretching back to last September. Charles Edwards, the founder of Capriola Investants, believes were still in the early innings, commenting, a new capitulation event has just started. We all know what it means when a hash ribbon buy signal eventually follows. A lot can happen

between now and then, but we're entering a window of opportunity. With profitability trending down, we could see some weaker miners struggle to make it through what has been a tough start to the halving cycle. Another phenomenon that continues is the pivot to AI, with another publicly listed minor looking to make the change. Riot platforms has added three new board members, each with experience in AI data center buildout or investing. They've also retained investment banks Evercore and Northland Capital to lead engagement with potential AI partners. Riot is currently exploring the conversion of more than half of their Corsicana facility in Texas for AI workloads. Construction on this site began in 2022, with plans for it to become the largest Bitcoin mining

facility in the U.S. The first stage was completed in November, and mining rigs were powered up. The second stage, which is currently underway, will now be built out to support AI infrastructure. This is just the latest in a series of Bitcoin miners taking advantage of the AI boom. Hutt 8, Core Scientific, and Hive Digital have each pivoted the focus of their business to AI. while others are taking more tentative steps. One of the interesting stories to emerge out of the pivot to AI has been Crusoe Energy. The company began as a Bitcoin miner with specialization in constructing portable mining facilities alongside oil wells to mitigate gas flaring. They're now almost entirely focused on AI data centers paired to more permanent gas power plants. The startup has also been

tapped for their data center construction skills. Cruceau has been engaged by OpenAI's project Stargate to build out their first AI training cluster in Abilene, Texas. Once constructed, this will be one of the largest and most advanced AI data centers in the world. Basically, what we're seeing here is that the mining industry's experience with energy-efficient designs has a lot of crossover with AI. Now, how this all plays out in terms of Bitcoin mining, I think is notable and worth paying attention to. One has to think ultimately that the game theory kicks in, and as more companies race to the AI opportunity, that becomes overcrowded, to the extent that it's even possible for that to be overcrowded, which I'm not sure how much it is. But even if that opportunity isn't overcrowded,

There will be people, presumably, who step in to take advantage of the Bitcoin opportunity, which will continue to remain. Plus, according to a new study, Bitcoin mining has a very positive impact on local economies that host facilities. A report published by the Texas Blockchain Council and the Digital Chamber claimed that 31,000 U.S. jobs have been created due to the presence of the mining industry. This includes secondary industries supported by increased economic activities in local economies, sectors like retail trade, construction, and business services. Overall, the study found an annual GDP contribution of $4.1 billion associated with mining. Texas was by far the last largest beneficiary with over $1.6 billion in GDP contributions. Reasonably large effects in the order

of several hundred million in GDP were reported in Georgia, North Dakota, and New York. Aside from economic benefits, the report also claimed that miners can help stabilize electric grids due to their flexible power needs. Finally, one more story on a similar theme. A new report from Duke University has urged adopting Bitcoin miners as a tool for U.S. energy infrastructure. Conducted by researchers from the Nicholas Institute for Energy, Environment, and Sustainability, the report highlights that adding Bitcoin miners can reduce the need to build more power generation. In brief, the report explains that flexible energy customers that can shut down during peak demand are highly desirable. It found there's a lot of headroom to add more energy consumption to major

grids, provided they have a sizable portion of flexible customers that can curtail their use. Typically, curtailment is only required for a small portion of the year, but it often comes on very short notice. Importantly, this report wasn't particularly focused on Bitcoin mining, but rather it was a holistic look at grid balancing from the perspective of energy experts. Still, they couldn't look past the dramatic performance of flexible Bitcoin miners over recent years. They highlighted riot platforms for achieving 95% load reduction during curtailment, a figure completely unmatched by any other flexible customer. The reason these findings matter so much is that they reduce the need for costly and

heavily polluting capacity expansion. In practice, to meet peak demand, energy providers add gas power plants called peaker plants. These only deliver power during peak demand, which might only happen a few days out of every year. However, due to the time taken up to power up a gas generator, these plants are idling year-round and producing continuous emissions. As long as Bitcoin miners don't add to peak usage, they improve utilization and therefore cost of existing infrastructure. The report stated, quote, flexible loads can mitigate peak increases, optimize the utilization of existing

infrastructure, and reduce the urgency for costly and time-consuming capacity expansions. Long-time environmental Bitcoin researcher Daniel Batten wrote, Waited 34 months for this moment. In March 22, I said that Bitcoin mining rigs help avoid expensive grid upgrades and decarbonized grids. A lot of non-bitcoins were skeptical. Now, a Duke University report confirms all this in more. The report written by independent energy experts tells us what Bitcoin mining experts have said for years. The more flexible the load, the more you reduce cost, strain, carbon intensity, and capital investment on grids. And Bitcoin mining is the Rolls Royce of flexible load. So, friends,

that is the update on Bitcoin mining. It's a quiet time, but also a very interesting time. The relationship with AI obviously is something that everyone's keeping an eye on, and it feels like it will have a big impact on how Bitcoin mining plays out over the next couple of years. For now, though, hope you feel like you've got a good update in the sector. Appreciate you listening as always, and until next time. Peace.