Bitcoin mining started out as a small endeavor taken on by a few individuals repurposing home computers to mint virtual coins that were, at the time, almost worthless. Fast forward to 2020, and Bitcoin (BTC) mining has become a formidable industry of its own, constantly growing and evolving alongside Bitcoin itself.
Today, the Bitcoin network’s hash rate is sitting at around 129 EH/s, acting in a similar way to the price of Bitcoin, even following the halving in October this year that saw the mining reward cut in half. James Bennett, CEO of ByteTree crypto data provider, told Cointelegraph that the trend is likely to continue: “The investment into Bitcoin’s network infrastructure is clear. You only need to look at the series of all-time-highs of network difficulty to see the rate new mining capacity is being added.” So, here’s how the mining industry is changing and maturing.
Public companies joining in
There has been a trend of high-profile investors, both companies and individuals, investing in Bitcoin and other digital assets. This is also becoming true for Bitcoin mining as public corporations, including Nasdaq-listed Bit Digital and others, venture into the industry and related activities.
As profits from Bitcoin mining rise back to their pre-halving levels, it makes sense why companies and individuals alike would want to invest in Bitcoin mining as an additional income stream, especially given that it proved to be fairly immune to the encumberments created by the coronavirus pandemic and widespread lockdowns. Whit Gibbs, host of the Hashr8 podcast, told Cointelegraph on the matter:
“A number of large companies have been exposed to Bitcoin mining for quite some time. Most notable of these is Fidelity. They have not only established mining operations, they have also been huge proponents of research and education in the industry. Another notable company with active mining interests is Horizon Kinetics.”
Access to capital
With new participants joining the industry, access to capital is imperative, and many digital-asset liquidity companies — such as Blockfills, Nexo and others — now cater to Bitcoin miners. This allows miners to expand their operations and have some wiggle room when they don’t want to sell Bitcoin for a low price.
Blockfills, for example, announced in May that it would be providing financial solutions to mining companies that wish to purchase new-generation ASIC mining equipment in North America. Since then, Blockfills has committed roughly $50 million in financial support to these miners. Neil Van Huis, partner and director at Blockfills, told Cointelegraph:
“Financial support is a primary function of any growing asset class. Our objective is to continue bringing traditional practices to our rapidly growing sector which fill voids and advance the space. $50M is really just the beginning. We have another $50–70M to get finished in the next few months and expect that we could have as much as $250M done by May of 2021.”
In addition, miners have been subject to the volatility of Bitcoin. Hedging options were not previously available, and while Bitcoin derivatives now allow miners to hedge their bets, hash rate derivatives improve on these and give users a miner-specific product that they can leverage.
Sam Chwarzynski, chief financial officer of Blockware Solutions and managing partner of Blockware Mining — a company providing hardware and services within the mining industry — explained that hash rate derivatives are still a new product, with two variations of it becoming popular. There are basic “cloud mining” contracts as well as “difficulty hedge” contracts that enable miners to lock in specific network difficulty rates for a certain time period, usually six to nine weeks. Chwarzynski further added:
“For a slight premium, Difficulty Hedges allow miners to hedge their cost of production similar to the way traditional commodity producers/farmers hedge their production with futures & other derivatives. As the commoditization of Bitcoin mining continues we expect the hashrate derivatives market to mature as well.”
Governments are getting involved
Bitcoin’s reputation has changed tremendously over time, and this has led governments to take either more relaxed or regulated stances toward the cryptocurrency industry. Countries like Portugal and others have cut taxes on activities such as cryptocurrency trading and mining as a means to incentive growth. Gibbs told Cointelegraph that “Aside from self-mining, many nations are actively supporting Bitcoin miners through energy subsidies and tax incentives. I think now they know it is imperative to ensure as much hashrate is within their borders as possible.”
Other governments have started to invest in Bitcoin mining themselves, with Kazakhstan having set up 13 Bitcoin mining operations in the country, and is on track to open four more. However, not all governments have a positive stance toward cryptocurrencies, and mining is still illegal in some countries.
Mason Jappa, CEO of Blockware Solutions and managing partner of Blockware Mining, told Cointelegraph that such scenarios create a lot of risk: “Many farms in China, Venezuela, and other countries face situations where the government may not support their operation. That is, farms operate illegally and if caught may have their operation shut down and miners seized.”
On the other hand, other governments have taken a less-than-conventional approach to BTC mining. While Iran legalized the practice last year, it was recently announced that newly minted Bitcoin must be sold directly to the country’s central bank. Gibbs added:
“The ability to anonymously accumulate Bitcoin through mining is an attractive value proposition for countries who aren’t able to easily transact with other nations due to sanctions, etc. My assumption is that a few nations are already mining Bitcoin for this very reason.”
With all of the new tools, access to new resources, and collaboration and security provided by governments on several levels, it’s likely that mining will continue to be taken over by companies with large sums of capital to invest. However, it will also become more decentralized when it comes to the geographic distribution of mining farms, according to Gibbs.
He added that Chinese miners are now diversifying some of their operations to other countries, but that would not mean that they are losing their dominant position: “As long as 100% of the Bitcoin mining ASICs originate in, or very close to China, they will continue to have an insurmountable edge on the rest of the world.”
As big plates come in with big money, mining is likely to continue to slip out of the reach of the community. What once started out as a few people using their personal computers for mining is now a gigantic industry where specific machines must be purchased along with hosting, maintenance and other expenses. For the time being, however, mining Bitcoin can still be profitable, especially as Bitcoin price continues to reach new levels.