The Breakdown - The State of Bitcoin Mining Heading into the Halving

Episode Date: January 31, 2024

NLW looks at the growth in hashrate and the state of the mining markets in the lead up to the Bitcoin halving. 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, January 30th, and today we are doing a Bitcoin mining update and more. 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 in the Breakers Discord. You can find a link of the show notes or go to bit.ly slash breakdown pod. Hello, friends. Today we are doing some mining updates along with a quick update on the China story that we've been following. And let me give you a sneak peek of the relevance of this, I think.

It's pretty clear that post-ETF, we are casting around looking for another narrative, but the obvious one is sitting right there and staring us in the face, which is, of course, the upcoming halving. Now, at some point, I will do a whole show about having dynamics and how it does and doesn't work, and when you can and can't expect, price changes because of it and all that sort of stuff, but I have no doubt that a big part of the next narrative will be the halvings reduction in the output of new Bitcoin, and what it means for the overall supply dynamics. But let's get into today's story, starting with Compass Mining. They have published their annual review of the Bitcoin mining industry, highlighting the rapid expansion of hashing power over the

past year. The network's hash rate began 2023 at 266 XA hashes per second, and hash rate more than doubled to 542 X-a-hashes per second over the course of last year, as new mining operations started up in existing businesses frantically scaled. Mining difficulty scaled alongside hash rate to ensure that blocks are added to the blockchain roughly every 10 minutes. Given that, average difficulty also doubled over 2023, ending the year at new all-time highs. Mining difficulty is now at almost three times the level it was in May 2021, when China enacted their mining ban. Iris Energy has had the most rapid expansion of the last year. They grew hash rate by 273 percent, in six months after beginning the year at a relatively modest 1.7 exahashes per second.

Iris is targeting another doubling of mining capacity for this year to reach 11 xahashes per second. The expansion of their site in Childress, Texas, could drive even more growth if options to purchase additional miners are executed. Marathon Digital began last year as the third largest miner in the U.S. behind core scientific and riot platforms. The firm tripled its mining capacity in 2023 through aggressive acquisition of additional facilities. Marathon ended the year with 24.7 X-a-hashes per second, leapfrogging its rivals to become the largest U.S.-based miner. Still, Core Scientific mined the most Bitcoin in 2023, with a total of 13,782, narrowly outperforming marathon. Still, the firm spent the entire year dealing with bankruptcy, so has no retained

Bitcoin on its balance sheet. Earlier this month, Core Scientific emerged from bankruptcy, and its stock has now been relisted on the NASDAQ. The stock has stabilized after a shaky first day of trading, but losing an entire year has now put the firm behind rivals. Bitt Deer, Terowulf, and Bit Digital all managed to double their hash rate to hold their position as mid-sized miners. Riot Platform's year was marred by winter storms in Texas, which hampered expansion. The firm added 27% to their hash rate far below projections. Now, part of Riot's strategy has been to deepen integration into the Texas power grid. Riot, along with Argo blockchain, Bit Deer, and Iris Energy have participated in energy

curtailment programs in Texas, which divert electricity away from Bitcoin mining during peak demand. Curtailment was requested around 10 to 15 times for a month throughout the winter, with mining firms receiving a payment in exchange for shutting down machinery. Riot received 71.6 million in energy credits for their curtailment in 2023, equivalent to roughly a third of the Bitcoin produced by them throughout the year. Now, the evolution of the industry has involved many miners taking control of their facilities and moving away from a hosted model. During the last cycle, many miners conducted operations from leased facilities. This was intended to free up capital to be used for additional mining rigs and increased hash rate. The downside was that mining firms did not control site uptime. Even more catastrophically,

facility owners can experience financial distress, as demonstrated during the compute North bankruptcy in February of last year. Moving forward, mining firms are looking to control their production and the reliability of their operations through direct ownership of facilities. The key example is Bitfarmes who mined 15% more Bitcoin per hash rate than marathon through a focus on site stability and efficiency. So overall, the key takeaway is that Bitcoin miners double down on hash rate expansion in 2023 to position for the halving, which is, of course, expected in April. Although block rewards will be halved, miners are making a large bet that a combination of fees and price appreciation in Bitcoin will more than make up for it.

Now, that said, a new report from Cantor Fitzgerald suggests the halving could put a huge financial strain on mining companies if Bitcoin remains at these prices. The research looked at mining costs across 13 different miners and found 11 had post-having mining costs above $43,000 per Bitcoin. If this modeling is accurate, then, then it's a lot of CleanSpark and BitDeer would be the only two major mining firms able to operate profitably, following the halving without a major increase in Bitcoin's price. Cantor believes that CleanSpark would have an all-in cost of $36,800 per Bitcoin, while BitDeer's cost structure is staggeringly low at $18,000 per Bitcoin.

Alongside their U.S. facilities, BitDeer has multiple sites in Norway operating on cheap hydropower. Argo blockchain and Hutt 8 have the highest cost, according to the report, both needing Bitcoin above $60,000 to remain profitable. Dan Rosen, the Associate Director of Derivatives at Bitcoin Miner Luxor, noted that mining firms are using a range of strategies to hedge their operations heading into the halving. Since 2020, Bitcoin derivatives designed for use by miners have become a much more developed market. Alongside traditional options and futures contracts, Bitcoin miners can also purchase derivatives

linked to hash rate to hedge their operations. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been standing still. only on for certain hours. Overly designed for some types of people, but not for others. Crypto, at its best, represents progress. It asks the question, what if? It invites people in instead of leaving them out. It's on 24-7-365 and moves at the speed of real life. Not everyone believes it. We've got our fair share of detractors, but that's the way it always is when you're building something new. Cracken is a crypto company that has been through the highs and lows of the industry,

facing forwards towards progress throughout. And now they're inviting us to see what crypto can be. Learn more at crackin.com slash the breakdown. Disclaimer, not investment advice. Crypto trading involves risk of loss. Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc. PVI, BVA, DBA, Crakken. Now, speaking of BitDear, BitDear founder and chairman Jihon Wu will be taking over as CEO of the company in March. Wu founded the company in 2020 as a sponsor. spinoff from mining rig manufacturer Bitmain, which he also co-founded. Ling Hui Kong, the current CEO of BitDeer, will transition to a role as the firm's chief business officer. Wu said the move would allow

each executive to, quote, focus on their respective areas of expertise and allow BitDeer to, quote, fully capitalize on emerging strategic growth opportunities. Now, aside from BitDeer and BitMane, Wu also founded Crypto Financial Services firm MatrixPort. MatrixPort made headlines in early January after an analyst suggested that Bitcoin ETFs would not be approved, briefly sending the market into a tailspin. Still, aside from its sometimes controversial research, Matrixport offers a range of crypto lending and yield services to both retail and institutional customers. Now, Wu walked away from Bitmain in 2021 after a power struggle with his co-founder and had been one of the most powerful figures in the crypto industry during its early years. His return to a more hands-on

role at BitDeer could signal a return to prominence. Now, one pretty interesting thing, while criticisms of Bitcoin mining typically focus on high energy usage and water consumption, as unavoidable environmental harms, the rise of renewable mining is beginning to catch the eye of scientific researchers. Last year, over 50% of the energy used to mine Bitcoin was from sustainable sources. That figure now sits at 54.5% according to the Bitcoin Energy and Emissions Sustainability Tracker, a model produced by Daniel Batten at Bitcoin ESG Forecast. For years, figures within the industry have been describing how Bitcoin mining could assist with the buildout of renewable energy infrastructure. This narrative is now reaching academic literature, with the latest example being a study produced

by Cornell University scientists. The study found that monetizing the excess power produced by renewable sources of energy could earn hundreds of millions of dollars using Bitcoin mining. The study highlighted Texas as having the highest potential. 32 renewable projects are currently planned across the state, which the research suggested could generate 47 million in combined profits using Bitcoin mining during their pre-commercial operations. Researchers also looked at the ability for Bitcoin mining to provide ongoing stability to renewable heavy grids, acting as a flexible customer for excess energy and making grid operations more profitable overall. The Cornell study identified the most significant risk to the expansion of Bitcoin mining

as regulation-associated political risks. The study made a series of policy recommendations including economic rewards for renewable mining, such as carbon credits. The paper said, These rewards can act as an incentive for miners to adopt clean energy sources, which can lead to combine positive effects on climate change mitigation, improved renewable power capacity, and additional profits during pre-commercial operation of wind or solar farms. That's obviously radically different to the punitive mining tax proposed by the Biden administration last year. Ultimately, the Cornell paper came to the conclusion that Bitcoin mining shouldn't be viewed

simply as an energy consumer, but rather as a facilitator for more efficient and sustainable energy use. Dennis Porter, the CEO of Satoshi Action Fund, wrote, Soon it will be abundantly clear that Bitcoin mining is one of the most powerful pro-environment technologies we have ever created. Now, last mining update comes from Grid. Grid has become the latest Bitcoin mining company to go public in the U.S. The firm began trading on the NASDAQ on Monday after completing its SPAC merger earlier this month. The merger deal was initially proposed two years ago, and CEO Trey Kelly said in a statement,

today marks a significant milestone for Grid as we begin to trade in the U.S. market. We believe that our listing on NASDAQ will enhance our visibility, liquidity, and broaden our investor base as we continue to strengthen our market position and reinforce our commitment to delivering shareholder value. Friend of the show, Harry Sidduck wrote, proud to be taking the next step for grid with Trey Kelly and the entire team. Working on Bitcoin with these people really is the joy of a lifetime. TikTok, next block. Now, lastly, today, let's do a quick Evergrand update.

Perhaps not unexpectedly, China has taken the next step in addressing their stock market collapse, increasing limitations on short selling. In a Sunday announcement, the securities regulator said that lending of particular shares would be prohibited, making them inaccessible to short-seller. sellers. Until now, there have been soft restrictions on institutional short selling, but this measure takes that policy to the next level and looks closer to the short selling bans enacted in the U.S. during 2008. Stock lending is already estimated by some to be a relatively insignificant factor,

so it's unclear whether these measures will be effective. Added to that, the history of bans on short selling has never demonstrated them to be a silver bullet for preventing a stock market crash. Willer Chen, senior analyst at Forsyth Bar Asia, said, The move may have limited impact in terms of stabilizing the market. Still, this is a good gesture as market participants had been calling for regulators to step up on this front. Now, the MCSI China Index has lost 60% since its February 2021 peak. Last week's rumors of government intervention in the form of direct stop buying dampened what had already been a tough January.

The index recorded its first weekly gain for the year, but is still down 7% year-to-date. Hebby Chan, an analyst at IG Market said, China's tightening on short-selling is set to trigger a temporary upswing in growth-oriented sectors like new energy and electric vehicles. However, this measure appears to be more of a short-term remedy. lacking any effective medicine to address the root causes contributing to the recent stock meltdown. Now, speaking of which on Monday, China Evergrand Group received a liquidation order from a Hong Kong court, beginning the daunting process of winding up the firm. Evergrand is generally acknowledged

as the most heavily indebted property developer in the world. The firm accrued more than $300 billion in liabilities before it began defaulting on bomb payments in late 2021. Since then, restructuring efforts have been underway, but it appears they are now a foregone conclusion, and creditors will attempt to liquidate the firm. Part of the controversy surrounding restructuring was a belief that international creditors would be shortchanged in any deal with very little recourse. As this liquidation has been ordered by a Hong Kong court, it's unclear which assets creditors will be able to seize and sell. Lance Zhang, restructuring partner at law firm Ashurst, said, the market will pay close attention to what the liquidators

can do after being appointed, especially whether they can achieve recognition from any of the three designated Chinese courts. The liquidators will have very limited powers of enforcement over onshore assets in mainland China if they cannot get such recognition. Evergrand's CEO, Sue said in a statement, the company has made all efforts possible and is sorry about the winding up order. The company will ensure home deliveries and steadily promote normal operations of the group. Evergrand debt is currently trading at around 1.5 cents on the dollar and equity is all but wiped out. Wild, wild stuff. All right, friends, that's going to do it for today's slightly shorter than normal episode of The Breakdown. We'll be back tomorrow with another episode, but for now,

I want to say one more big thank you to today's sponsor, Cracken. Go to Cracken.com and see what crypto can be. Until next time, be safe and take care of each other. Peace.