State of the Bitcoin Mining Industry
We are getting healthier as the capitulation phase wears on, and we are building some truly exciting new things
Disclaimer: The views and opinions expressed herein are the author’s alone and do not necessarily represent Talen Energy’s positions, strategies, or opinions.
Below are some thoughts on the state of the mining industry after spending a week in Miami with some of my favorite people and companies in the industry.
The state of the mining industry is getting healthier
The mining industry is getting healthier across a few different metrics. The malinvestment that comes with bull markets has curtailed significantly, and capital is starting to be reallocated to the strongest companies and ideas. From a regulatory perspective, industry trade associations are proliferating and becoming better organized, and we are gearing up to proactively educate policy-makers on the civilizational benefits of bitcoin and bitcoin mining.
The capitulations will continue until value improves
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What I’ve seen in the hashprice bear-market thus far is that the likelihood of raising serious capital without having truly proven your concept or operational chops is low. 12 months ago the first question was how soon can you deploy? Now, the question is how long have you been deployed, at scale? It’s the same for vendors with their clients as it is for those clients with their LPs; “how many widgets do you have deployed in the field” is the same question as “how much hashrate do you have online and how long has it been on?”. A forecast is much easier to fudge than auditable performance data. The cascade of defaults were are currently living through is teaching very hard lessons to people about the risk of relying on hopium-infused economic models in very nascent markets that no one fully understands.
This could be a problem for the side of our space that some of us think needs to continue to really innovate. There are certain nascent technologies and commercial methods (that I’ll talk about in future posts) that are likely to revolutionize the mining industry. These require long-term capital investment at scale, and if the spigots turn off completely, could be jeopardized. These are largely tech-enabled mining/energy methodologies that are going to be the key to hedging regulatory risk in the future because they are so impactful to the energy transition, but they need to be proven at reasonable scale first. Reasonable scale for some of these projects could represent capital investment in 100s of megawatts of power and mining infrastructure, or in a software product roadmap that will cost millions in developer salaries and startup bandwidth. What I took away from Miner Disrupt in Miami last week is that the right companies are still raising capital on the basis of solid teams, real data, analytical rigor, and professionalism - aka Proof of Work (heh heh).
I think a characteristic of this bear market will be a healthy culling of offerings in indefensible or overly saturated business segments. As the realization that we are in a commodity industry truly sets in, inefficient or unnecessary cost centers will be squeezed out of the value chain as we all get better at assessing value through due diligence. We will move a bit slower to make sure that we have as complete of information as is reasonably possible before we allocate scarce capital. Some people eschew a scarcity mindset as anti-growth; to me it just seems like acknowledging reality and trying to plan for it. It’s ironic to me when self-proclaimed bitcoiners criticize others for a scarcity mindset, when scarcity is perhaps the biggest value-prop of bitcoin itself. The market dynamics of mining in the future - to include energy scarcity and intense competition - are going to put a premium on efficiency of energy conversion and reliability of delivery, which is going to require deliberate research and development. It will take time. This is good.
Trade Association Proliferation and Coordination
First came the Chamber of Digital Commerce, then the Blockchain Association, and now it feels like there is a veritable tidal wave of trade associations, lobbying groups, and policy education platforms washing over our industry and spilling into the halls of state and federal legislatures and staff offices. This is a response to the regulatory onslaught that we continue to face, most notably for the mining industry in the form of inquiries into the efficacy of our energy usage. At the state level, organizations like Lee Bratcher’s Texas Blockchain Council are doing excellent work in coordinating with and educating policy makers, and advocating for industry players in the regulatory space. A happy development recently has been the emergence of several well organized bitcoin-only groups, which include the Bitcoin Policy Institute and the Bitcoin Today Coalition, which also houses the Veterans for Energy and Technology Security (BTC VETS), a group of bitcoin-focused current and former public servants.1
Despite the proliferation of so many different trade associations competing for scarce funding dollars during a bear market, I am heartened by the evolution we are witnessing here as our industry wakes up to the fact that we need real intellectual horsepower and capital to advance our interests in DC and beyond. There is currently some territorial in-fighting occurring between some groups, but the smart ones are starting to work together to leverage competitive advantages in capacity and network access for the health of bitcoin writ large. I was happy to see the meeting of the policy minds occurring at Mining Disrupt, and I’m excited to see these partnerships continue to grow as we work to ensure sensible regulation for our nascent industry.
Buzzwords blossoming into viable business lines
There are a few buzzwords floating around in our industry that I think bode well for where we are going. One is “hashrate derivative” and the other is “energy arbitrage.” There are smart, well funded companies building on top of these nascent concepts through this bear market. To wrap up this quick industry update, I’ll provide some thoughts on “hashrate derivatives,” and in my next post I’ll start to unpack some thinking on “energy arbitrage.”
Hashrate Derivatives
Around 2020, “hashrate derivatives” was a poorly understood but widely used buzzword in the mining industry. There was growing theoretical consensus that risk management products were needed to hedge out hashprice risk for naturally hashrate levered-long miners. This became a thing smart people in bitcoin mining started thinking about, but the primitives of this new set of commodity derivatives weren’t profitable to build during a raging bull market (who wants to hedge downside risk when number does nothing but go up?). Now, the bear market miner capitulation phase that everyone has a nice framework for thinking about (h/t Leo Zhang) is being experienced for real (yes OG miners have experienced multiple cycles, but many big operations are experiencing the blow-off top into a deep bear anew).
Now we have data to back-test through to properly price mining market insurance (aka hashrate derivatives), which will start to drive innovation in how to structure products, methodologies for settlement, and multi-leg multi-commodity hedging strategies. As energy companies enter mining en-masse, the natural buyer for these products has just entered the chat - the race is on. These companies have sophisticated Energy Trading and Risk Management desks (many just acquire entire ETRM startups because of how difficult the capability is to develop in-house), and they are very familiar with complex hedging products and strategies. These companies are providing feedback to the various companies in the space trying to build this new suite of products, and this is pushing us into the steeper part of the innovation and adoption curve. My bet is that companies that physically deliver large books of hashrate will be the natural market makers here, and they will innovate entirely new types of derivatives products enabled by hashrate’s unique commodity characteristics. Luxor, with its new and growing derivatives team, is one of the leaders to watch here.2
We shall see, but I’m hopeful these tools help enable productive long term capital formation for the most efficient and reliable miners.
Final Thoughts
Our industry is young but professionalizing rapidly. The OG miners and builders that brought us to this point have created an environment that is attracting some of the smartest minds and biggest companies in the world (look no further than Exxon Mobile for evidence there). As the inflow of talent and capital continues and the stakes continue to increase, the premium accruing to professionalism will continue to grow. Ours will always be somewhat of a counter-culture, but many are waking up to the realization that if we are to propagate our vision for a world of sound money and abundant reliable energy, we need to be able to put on our suits and ties sometimes as well. We are an industry that is changing the world, but we need to be able to meet powerful people and vested interests where they are, rather than expecting them to understand and accept some of our more peculiar cultural norms. In traditionally conservative industries like the energy industry, we will get much further using this approach.
This is happening, and I’m very optimistic for our future.
Disclaimer: I sit on the board of directors for both Bitcoin Today Coalition and BTC VETS.
Disclaimer: I sit on the board of advisors for Luxor Technology Corporation.