Compute North, one of the fastest-growing bitcoin mining companies in North America, has announced the close of a growth capital round that netted $25 million in debt financing and equity, which it will use to expand its operations in light of ongoing demand for its data and colocation services.
The debt capital was raised as a senior secured loan via investment firm Post Road Group, according to a press release shared with Bitcoin Magazine. With this new capital funding, the company hopes to double its current 920 peta hashes per second (PH/s) hash rate to 1,840 PH/s, per the release.
Last month, through its partnership with Foundry Digital, Compute North secured the chance to add 47 megawatts of computing power to its mining operations with the acquisition of 14,000 new Whatsminer M30S rigs from MicroBT.
“We started Compute North because we saw a unique opportunity to bring together our data center and power expertise and offer our customers a better alternative,” CEO Dave Perrill said in the release. “This injection of capital allows the company to meet customer demand, innovate our services and expand our great team.”
The company helped pioneer the TIER 0 data center model, the release noted, which allows for data to be moved at the fastest speed and most efficient rate, outdistancing other tiers of data processing.
Stabilizing The Energy Grid
In addition to decentralizing the share of bitcoin mining hash rate to a new region of the world, Compute North sees itself as helping to solve local energy challenges in the areas where it operates.
Compute North uses a variety of energy sources in its three locations, mostly through what’s available on the local grid. The majority of electricity produced in South Dakota comes from hydroelectric power, while Nebraska and Texas use a mix of wind power, natural gas and coal.
“Most of our facilities are connected to the power grid… the nature of our power usage (load) on the grid allows us to serve as a strategic partner to grid operators with our ability to curtail our power use in order to help stabilize the grid,” Perrill told Bitcoin Magazine in a followup interview. “With the increase in renewable energy as a percentage of overall power production, these intermittent power sources are creating additional challenges to the overall grid infrastructure. We serve an important role in providing a low-cost compute environment for our customers, while also filling a very important need for grid operators.”
With the accelerating interest in the bitcoin mining space — particularly among institutional investors — showing no signs of slowing down, Compute North will be continuing to raise capital for the foreseeable future.
“With Biden winning the election and his economic team assembled, the Federal Reserve will continue to print even more money to stimulate the economy and keep his campaign promise,” Perrill told Bitcoin Magazine recently. “Increased inflation will continue the acceleration of the dollar decline, encouraging smart money to move to digital currencies.”
In a recent announcement, NovaBlock, which launched in 2019, outlined the planned hash migration, which will take place today. According to BTC.com, Poolin manages a hash rate of 21,909.37 PH/s, so the addition could bring it up to around 23,591.2 PH/s. The world’s largest bitcoin mining pool would still be China-based F2Pool, which has a hash rate of 27,918.42 PH/s.
Poolin is headquartered in Hong Kong and has offices in Beijing, Chengdu and Changsha, China, as well as in Singapore and Berlin.
“I’m guessing Poolin forecasts there will be significant hash rate growth here in North America, and they want to position themselves to have exposure to it,” said Ryan Porter, BitOoda’s head of business development, in an interview with Bitcoin Magazine. “Prior to the acquisition, NovaBlock controlled 1 percent of the Bitcoin network hash rate. There is now a growing field of competitors entering the North American mining pool space, and a number of global mining pools that are expanding their product offering, so the acquisition puts NovaBlock into an incumbent that could keep them competitive and bring stability.”
In its announcement, NovaBlock noted that “Poolin is looking to expand their reach into growing regions like North America.”
As the bitcoin mining industry in North America continues to grow (the number of North American mining pools has more than doubled in the last year, growing from three to seven), it’s possible that more major pools in China will follow Poolin’s lead and look to acquire mining participants based in the U.S. and Canada.
There is growing recognition that U.S. regulators may be increasingly turning their attention to the mining space and the role of Chinese pools. Ethan Vera, co-founder and CFO of Seattle-based mining pool Luxor, told Bitcoin Magazine that miners may be looking for more accountability and stability than Asian pools have to offer.
“North American miners will increasingly want to sell their hash rate to a counterparty that is based in the same legal jurisdiction,” Vera said. “Service license agreements, legal recourse, high profitability and good data and stats are top of mind for institutional miners in 2021.”
In a comment on Bitcointalk.org, a member called Newbie expressed a preference for working with a pool closer to home:
“I was going to try NovaBlock out later this year to see what the profit was going to be but now maybe not,” Newbie wrote on February 6, 2021. “I was mainly drawn to the concept of a North American pool with ownership and control centered in North America.”
With bitcoin reaching new all-time price highs, interest in mining is only bound to increase.
Hut 8 Mining Corp. has announced a partnership with financial services firm Foundry Digital to secure $11.8 million in financing, which it will put toward 5,400 new MicroBT Whatsminer M30S mining rigs, adding 475 petahashes per second (PH/s) to its mining capacity over the next six months.
The financing is structured as a 12-month term with an annual interest rate of 16.5 percent.
In the recently-published announcement, Hut 8 CEO Jaime Leverton acknowledged that securing new mining equipment is a big challenge for everyone in the business right now.
“This partnership builds on Hut 8’s ongoing commitment to shareholders by mitigating supply constraints and reducing our capital expenditure with a proactive fleet management strategy,” said Leverton.
Once the new equipment is installed, the total hash power coming from Hut 8 (named after Hut 8 in London’s Bletchley Park, where Alan Turing broke the Nazi’s enigma code) is expected to rise from 825 PH/s before the agreement to 1,300 PH/s. Hut 8 has two mining farms in Alberta, Canada, in Medicine Hat and Drumheller. Most of its energy supply comes from natural gas, which is often vented as a byproduct of oil production.
New York State-based Foundry Digital, a subsidiary of Digital Currency Group, partnered with MicroBT in September 2020 to secure access to its mining equipment. As a result, despite a worldwide shortage in new mining equipment that can include months-long waiting times, the parties involved are hopeful that the first of Hut 8’s new machines will arrive by the end of January.
North American Listing Is Good For Business
Hut 8 is one of only two Bitcoin companies and the only bitcoin mining company listed on the Toronto Stock Exchange (TSX) “senior board.” (Financial services firm Galaxy Digital is also listed on the TSX senior board).
Bitcoin mining company Bitfarms is listed on the Canadtian Venture Exchange (CVE), while NASDAQ lists Riot Blockchain, Marathon Patent Group and HIVE Blockchain Technologies.
Hut 8 cofounder and former CEO Andrew Kiguel told Bitcoin Magazine in a phone interview that going public had helped the company in securing capital funding, such as this recent partnership with Foundry.
“Hut 8 is well positioned to attract new investors as a result of its listing on the Toronto Stock Exchange, Canada’s largest senior exchange and that it has cleared the ability to file a prospectus with the Ontario Securities Commission,” Kiguel said. “Hut 8 was the first blockchain entity to obtain a listing on the senior exchange and to use a short-form prospectus to raise capital.”
CoinDesk reported that Hut 8 shares have gained over 190 percent in the past year, but are currently down over 40 percent from their peak near $8.50 in early January. Foundry Digital also recently partnered with another mining leader, Compute North, to help them secure 14,000 new M30Ss through its partnership with MicroBT.
Like a hitchhiker taking to the American highways for the first time, anyone hoping to get a clear picture of the universe of bitcoin mining today might be perplexed at the seeming opaqueness, yet sheer size of the North American mining ecosystem.
As a miner recently advised new entrants into the space on Twitter:
Distinct from China, which leads the world’s mining hash rate with an estimated 65 percent of the total coming from pools headquartered there, the North American mining environment is evolving its own culture.
As the North American bitcoin mining scene heats up with a higher hash rate, and an increase in mining revenues, more investors and interested mining companies are looking for a guide to the new mining Wild West that is the U.S. and Canada.
There are four basic parts that make up the North American bitcoin mining ecosystem: Mining pools, mining companies (collocation and self hosting), financial services firms and firmware (software) providers.
However, sometimes a financial services firm can also be a mining company (as with Galaxy Digital), and sometimes an energy provider can also be a mining company (Greenridge Generation). It’s complicated.
The Rise Of The (Demand For) Machines
Mining equipment shortages, not just in North America but around the world, including in China, is currently a big issue in the industry.
As the price of bitcoin continues to reach all-time highs, there is pressure on ASIC foundries and equipment manufacturers to try and meet the demand from both newly-interested customers and older mining companies that need to upgrade to remain competitive.
Estimated wait times for new mining equipment are at least six months, with leading manufacturers like Bitmain sold out until September 2021. There has also been a significant price increase in the secondary market for used ASICs.
We asked Samson Mow, CSO for Blockstream and Blockstream Mining, how things look for bitcoin miners going forward into 2021. Mow told Bitcoin Magazine that the defining issue going into 2021 is the lack of ASIC-based mining equipment:
“Bitcoin hash rate growth for the next year is likely to be constrained by ASIC chip production,” he said. “This could lead to some very interesting new financial products related to mining… With a shortage of equipment and a booming bitcoin price, a lot of older mining rigs are now profitable to run again for miners that have access to low-cost power.”
Mow confirmed what most experts say about mining equipment — at this point in time, there’s no new technology anywhere in sight to beat the mining power of an ASIC chip.
This is positive news for some established miners with access to cheap power, as the difficulty rate is more favorable without intense competition. There are some of these in North America, even though the region is also attracting new entrants.
“Mining profitability rose this year because the rate that new hardware is being deployed has significantly lagged the price increase of Bitcoin, which means that there has not been an increase in hashpower competition coinciding with the price rise,” Ryan Porter, head of business development for financial services firm BitOoda told Bitcoin Magazine.
Time For Your Own Pool, Kids
Most miners, including North American miners, use mining pools based in China. But this is changing as new mining pools are setting up in the U.S. and Canada to offer miners more regulatory-compliant options.
There are at least seven North American mining pools today, up from only three a year ago.
In the last six months, Luxor, Blockstream and Novablock have been joined by Titan, Blockware, DMG Blockseer and a Marathon/DMG co-op pool.
Luxor Pool is publicly listed and DMG Blockseer is in the process of going public, as is the Marathon/DMG co-op pool (more on this later).
Big Institutions And Energy Companies Are Getting Involved
As with investment into bitcoin the asset — which has enjoyed a price rise widely credited to involvement from major institutions like Square, MicroStrategy and Grayscale — mining has come into the sights of institutions looking to augment their portfolios with some financial hash power.
According to research conducted by Fidelity Digital Assets and Greenwich Associates, nearly 80 percent of institutional investors find something appealing about digital assets, and more than six in 10 institutions believe that digital assets have a place in their investment portfolios.
BitOoda, like other financial services firms in North America, is working with investment companies to help them get set up in mining ventures. Some prefer being directly involved with a specific mining operation while others are only looking for an investment stake for their portfolios.
There are also power providers in the region that are putting the extra power they have in off-peak hours to use in mining bitcoin. Greenridge Generation in New York State is putting its extra power to work through the night and in other off-peak hours mining bitcoin. Crusoe Energy, a Denver-based power company captures waste gas from flaring to create power — much of which is used for mining bitcoin.
North American Mining Companies Want To Go Public
Like bitcoin miners globally, North American miners have preferred to remain relatively anonymous, but there’s a new breed of mining companies and mining pools that are trying to get out into the open, ahead of any government attempts to regulate the industry.
Some of the motivation for getting ahead of the regulators is to become qualified for a public listing on a stock exchange, an effective tool for raising capital.
“The appetite for mining firms to go public has never been greater, as publicly-traded mining companies Riot Blockchain, Marathon Patent Group and HIVE Blockchain have all passed a $1 billion valuation,” Porter said.
And a few regional players are already publicly listed. Canadian mining company Hut8 was one of the first mining companies to be listed on the Toronto Stock Exchange. Meanwhile, NASDAQ lists Riot Blockchain (NASDAQ:RIOT), Marathon Patent Group (NASDAQ:MARA) and HIVE Blockchain Technologies (OTC:HVBTF).
Regulators Enter The Room
Until recently, bitcoin mining was not an issue for government regulators, but increasing attention to regulating cryptocurrencies from government agencies like the U.S. Securities and Exchange Commission, Financial Crimes Enforcement Network and Commodity Futures Trading Commission may soon change that.
It seems inevitable that at some point, a regulatory eye will be cast over mining.
“We feel that companies will be willing to pay standard mining pool fees (i.e., 2 percent) for full transparency and ensuring their servers/miners are not involved in adding North Korean or Iranian or other blacklisted wallets from OFAC in moving Bitcoin,” Sheldon Bennett, the COO of DMG Blockchain Solutions, told Bitcoin Magazinerecently.
When DMG teamed up with Marathon to form DCMNA, it pledged to only process transactions that complied with U.S. laws.
In its announcement, DCMNA said it will be audited by a third-party financial firm and will be using “clean block mining” that adheres to the Office of Foreign Asset Control’s (OFAC’s) compliance standards and reduces the risk of mining blocks that include transactions linked to questionable activities.
Profits from the DCMNA pool will go toward pro-miner lobbying efforts in Washington, D.C. and all of the miners participating in DCMNA will need to submit KYC information, including smaller companies renting space in DMG’s warehouses.
Compute North, one of the largest bitcoin mining companies in North America with mining farms in Big Spring, Texas; Kearney, Nebraska; and North Sioux City, South Dakota, is taking a great leap forward through a new partnership with financial services firm Foundry Digital, a subsidiary of Digital Currency Group based in Rochester, New York.
Through the partnership, Foundry will supply 14,000 new Whatsminer M30S mining rigs from MicroBT to be hosted at Compute North’s North American colocation facilities. Compute North will commit 47 megawatts of power to these rigs beginning in the first quarter of this year. The goal is to provide an avenue for Bitcoin mining investment for more North American businesses.
“After the first batch of procured devices comes online, most of the devices will be available for purchase,” per a press release shared with Bitcoin Magazine. “Investors can either purchase the operating devices directly from Compute North or finance them through Foundry with a down payment at a fraction of the device cost, and get the mining machines running at Compute North’s enterprise-class facilities almost instantly after purchase.”
As the price of bitcoin continues to reach all-time highs, there is pressure on ASIC foundries and equipment manufacturers to try and meet the demand from both newly-interested customers and older mining companies that need to upgrade to remain competitive. Estimated wait times for new mining equipment are at least six months, with leading manufacturers like Bitmain sold out until August 2021.
This partnership could help interested parties realize gains from bitcoin mining more quickly.
“Investors from publicly-traded companies to family offices and more are perking up and realizing that there is money to be made in digital currencies,” Dave Perrill, the CEO of Compute North, told Bitcoin Magazine. “It has been a smaller asset class but continues to build momentum as they see the opportunity to diversify a slice of their assets in this alternative investment strategy.”
The New Face Of Mining In North America
The partnership between Compute North and Foundry is part of a growing trend in Bitcoin mining, particularly in North America.
Financial and advisory companies like Foundry, BitOoda and Galaxy Digital are becoming main players in helping institutions with their financing, staking and operating new mining sites.
Mining is also coming into the purview of bigger institutions as institutional investors also become main players in larger and more sophisticated mining operations.
“Another driver for diversification with cryptocurrency is a result of the recent economic challenges and election results,” noted Perrill. “With Biden winning the election and his economic team assembled, the Federal Reserve will continue to print even more money to stimulate the economy and keep his campaign promise. Increased inflation will continue the acceleration of the dollar decline, encouraging smart money to move to digital currencies.”
Foundry And MicroBT
In September 2020, Foundry negotiated a partnership with equipment manufacturer MicroBT in order to gain priority access for North American institutional buyers to new M30Ss as they came off the production line. (MicroBT is gaining ground as a leading ASIC manufacturer, although Beijing-based Bitmain is still the number-one manufacturer of mining equipment. According to CoinDesk, MicroBT sold 600,000 Whatsminer units, worth more than $500 million in 2019.)
As part of its partnership with Foundry, MicroBT set up shop in a country in Southeast Asia to act as a supplier and avoid the U.S. tariff of 25 percent on equipment imported from China. Bitmain also avoids U.S. tariffs by using a production facility in Malaysia.
North American bitcoin mining farms all use mining pools to ensure steady block rewards, compiling hash power from miners operating remotely to compete with the industrialized farms based in China. Most of these mining farms use China-based mining pools (pools whose headquarters and, perhaps, servers for collecting hash power, are located in China) because the fees that they charge for collecting and distributing hash power are the lowest in the world.
However, the days of unregulated mining pools serving the North American market may be ending. And hoping to fill that potential void is DMG, a diversified mining services business headquartered in Vancouver that is opening a new pool for North American miners emphasizing full compliance with all regulations.
In a recent newsletter, Bitcoin media company HASHR8 described the change:
“… huge amounts of hashrate is coming offline due to the end of rainy season in Sichuan. That means miners are enjoying both greater revenue and will have a significant reduction in their input costs once the difficulty level adjusts to represent the hashrate drop.”
A recent report based on BTC.com data noted that this drop in mining difficulty includes the largest percentage drop (at 16 percent) since the first miners with ASICs were brought online in 2012.
The HASHR8 report also noted that, thanks to this drop and recent bitcoin price increases, miners are entering “an extremely lucrative” mining period. This would be the continuation of a trend, as Coinmetrics reported that in October, bitcoin miners generated an estimated $353 million in revenue, up 8 percent from the month before.
DMG Sees A Golden Opportunity In Compliance
With the landscape this ripe for lucrative mining, Vancouver-based blockchain company DMG has announced its new mining pool, Blockseer, which is “dedicated to transparency and good governance” for the North American market.
In its announcement, DMG added:
“Blockseer’s new Bitcoin mining pool will be North America’s first bitcoin mining pool that will not only meet, but exceed the U.S. Government’s Office of Foreign Assets Control (OFAC) compliance for BTC addresses, as well as providing the utmost level of transparency, auditability and corporate governance.”
Sheldon Bennett, COO of DMG Blockchain Solutions, told Bitcoin Magazine that the firm knows it is competing against Chinese pools that can offer lower fees for its member miners.
“We are not trying to compete on price,” he explained. “Instead we are providing better value to companies that care about fair billing and clean mining blocks (i.e., not supporting crime by putting known nefarious transactions in a block our pool mines).”
Bennett added that farms will be willing to pay a premium for compliance.
“We feel that companies will be willing to pay standard mining pool fees (i.e., 2 percent) for full transparency and ensuring their servers/miners are not involved in adding North Korean or Iranian or other blacklisted wallets from OFAC in moving Bitcoin.” he said.
DMG is fully regulated as a public company listed on the TSX Venture exchange meaning it must follow all relevant regulations, including independent third party audits, IT audit standards and internal controls.
Ethan Vera, cofounder and CFO of Seattle-based mining software provider Luxor, which currently operates the only mining pool based in North America, sees big changes coming to the North American mining landscape, which will ultimately require the presence of regulation-compliant pools.
“I believe we will start to see a change here for a few reasons; miners are becoming more institutional and require a compliant hash rate counterparty, profit-switching could allow North American pools to become more profitable for miners and mining pools will get further integrated into larger products offerings like ASIC financing, exchanges or hosting services,” he told Bitcoin Magazine. “The benefits of working with a U.S.-based mining pool is that you can form a contract with a company operating in the same legal jurisdiction with real recourse in the case that something arises.”
Ryan Porter, head of business development for BitOoda and a keen observer of the North American crypto scene, also sees a growing acceptance among miners that some regulatory compliance may be necessary going forward.
“In terms of the differences between off-shore and North America, I think what we’ve seen lately with the U.S. regulators action against BitMEX for not having anti-money laundering (AML) and know your customer (KYC) policies could serve as an indication of the issues in using offshore service providers,” Porter told Bitcoin Magazine. “It’s my view that there will be a demographic of miners here in North America that will opt to use a mining pool that checks those regulatory boxes.”
Despite the difficulty in competing with the fees offered by China-based mining pools, Porter is not surprised by DMGs venture into the space.
“Mining pool companies are needing to find new ways to differentiate themselves to attract new business rather than just competing on fees,” he explained.
The Long Road Ahead
Still, DMG will face a long road in benefitting from a fundamental change to the way that mining farms have selected pools up to this point. U.S. and Canadian mining farms usually choose to sign up with pools in China which offer the lowest fees.
“The reality is that the majority of miners are agnostic,” John Lee Quigley, head of research for HASHR8, told Bitcoin Magazine. “A consideration like the location of the mining pool is low in the pecking order of priorities. Most miners will make their decision based on factors directly relating to profit margins. Factors like fees, add-on services, and industry connections are much more important to miners [than transparent regulatory compliance].”
In his interview with BItcoin Magazine, Vera echoed that standpoint.
“The majority of new miners in North America continue to join the large mining pools in China,” he said. “In most cases, profitability triumphs over all other considerations, and the Chinese pools have historically offered the lowest fees.”
And even if mining farms defect from China-based pools, DMG won’t be the only North American option available. An industry insider told Bitcoin Magazine confidentially that more mining pools will soon be announcing North American operations.
“As more Northern American miners accumulate hashrate in 2020 and 2010, I would not be surprised to see new North American mining pools established to target this growing market,” Thomas Heller, the COO of HASHR8, said in a conversation with Bitcoin Magazine.
At one of the most interesting junctures in the history of Bitcoin mining, a significant change to the distribution of mining pool operations appears imminent. Whether farms are willing to concede lower fees in exchange for regulatory compliance is an open question, but one that DMG could soon answer.
Bitcoin’s underlying computer network is the largest, most sophisticated computerized system in the world with working units in almost every part of the globe, from China to Kazakhstan to Venezuela to the U.S.
And with recent all-time highs in hash rate and difficulty level, the Bitcoin mining industry is more competitive than ever. Meanwhile, there are questions about whether efforts toward its decentralization are enough to combat China’s dominance in the sector.
An important element to Bitcoin mining’s overall growth as well as its decentralization is the network of mining pools that bring miners together to pool their resources to more strategically wrestle block subsidies from an increasingly competitive system.
The Role Of Mining Pools
Bitcoin mining is becoming increasingly competitive, with higher-than-ever difficulty rates, producing higher-than-ever hash rates.
But even with the best available equipment, miners today need a sophisticated strategy to be successful; as well as a bit of old fashioned luck, according to Ryan Porter, head of business development for BitOoda.
“There is the concept of ‘luck’ that you need to factor into mining,” Porter told Bitcoin Magazine. “If you contribute 1 percent hash rate to the network, you will generate 1 percent of the blocks over time, but in the short run your rewards can be very inconsistent depending on how lucky you are. For example, one week you might win 5 percent of blocks, then you may not win any blocks for two weeks.”
And this inherent felicity is what motivates many miners to pool their hash power together.
“The key role a mining pool plays is smoothing out the revenue stream for miners,” Porter added. “A lot of the mining pools will take on the risk of ‘luck’ and will pay the miners based on the expected bitcoin production of their hash power, in exchange for a fee from the block rewards the pool wins.”
John Lee Quigley, head of research for bitcoin mining media company HASHR8, which is dedicated to Bitcoin decentralization and security, is seeing things getting tougher for miners — which could also be motivating the growth of mining pools.
“Many large-scale miners operate just above the margin and they can’t afford to take on the variance of block-finding by themselves,” he said. “They have expenses to meet and they need a regular payout. Mining pools take on the variance for them. They play an essential role in the industry.”
Not only do mining pools provide equipment and advice, they are better able to operate a sophisticated mining strategy using algorithms like profit switching to maximize every profit angle.
With the notable exception of the first ever created pool, SlushPool (headquartered in Prague), all large mining pools are based in China, reflecting the current concentration of global hash rate (with anywhere from 50 to 65 percent of all the world’s hash rate concentrated in the country, depending on source).
Hash Rate By Mining Pool
Large-scale mining operations have grown faster in China than they have in other parts of the world, and pools have been a major part of this development. In a recent interview, Porter noted that fully 55 percent of Bitcoin’s global hash rate comes out of just four large mining pools in China: F2Pool, Poolin, BTC.com and AntPool.
But as mining becomes increasingly competitive with new iterations on technology and soaring difficulty rates, even miners in China, who leverage some of the cheapest power rates in the world, are still seeking the help of pools.
Individual miners join pools because they can operate with sophisticated strategies like profit-switching algorithms, gain insight and help from pool operators and find ways to secure equipment.
Can North America Catch Up?
In our conversation about the concentration of mining pools in China, Quigley highlighted just how far off North America — the next-largest region for Bitcoin mining — is from truly competing with the epicenter.
“North America is playing catchup but they haven’t left the starting blocks when it comes to mining pools,” Quigley said. “It will be difficult for North American pools to compete. We will likely see more emerge over the coming years, but how they will fare is questionable. The mining pool business model already has extremely low margins and North American businesses will face far greater overhead than their Chinese counterparts.”
In addition to this difference in overhead, Quigley noted that China-based pools already have a near-insurmountable advantage in their relationship with the industrial mining hardware operations.
“Moreover, most miners are based in China and many deals are carried out on a face-to-face basis,” he explained. “In the major hubs like Beijing, there will be many secretive meetings that only those in the mining industry will attend. The hash rate that gets negotiated at these meetings is virtually exclusive to Chinese companies and it will be almost impossible for North American pools to compete for the majority of it.”
Governments Get Involved, Some With Their Own Mining Pools
As far as mining pools go, 2020 has been the year governments joined the club.
Venezuela has set up its own national mining pool. Iran has introduced a new mining strategy and licensed mining farms, which now come under government regulation. Kazakhstan’s government is investing in and promoting bitcoin mining to help diversify its oil and gas sector.
But do these new players make a difference to the decentralization of mining?
Quigley of HASHR8 weighed in on these surprising developments in the bitcoin mining sector.
“It’s difficult to assess how various governments will respond as the Bitcoin mining industry continues to grow,” he explained. “Different governments will react in different ways. From Venezuela, we have recently observed authorities seizing rigs from citizens. Now, they request that all miners register with the government and use a national mining pool. Iran has taken a more friendly approach and encouraged investment in mining infrastructure. They have licenced some mining operations and also provided subsidies on electricity in some cases.”
And there’s a good chance that these three examples are just the beginnings of more governments formally entering the bitcoin mining space by pooling hash rate. But that may not prove to be a good thing for Bitcoin’s decentralization or security.
“Mining will always have a precarious relationship with government,” Quigley said. “Governments getting closely involved in the mining industry will certainly raise red flags among those that are aligned with the Bitcoin ideology. In the case that all hash rate was directed at government-owned mining pools, they would hold the ability to censor certain transactions which is similar to our current financial system.”
Pools, Institutions And Bitcoin Mining Decentralization
With the current landscape of bitcoin mining pools assessed — including the industry concentration in China and concerns around government-sponsored pools — it’s worth asking how one of the critical goals of Bitcoin is being affected. Specifically, is the current trajectory for mining pools making Bitcoin more centralized?
According to a recent Coinmetrics report, the mining industry is becoming somewhat more decentralized overall as new areas around the world open up for mining, though China’s role is also continuing to grow.
Samson Mow, CSO for Blockstream Mining is sanguine about the future of mining decentralization and predicts steady growth in mining pools in North America. He envisions increasing decentralization via mining pools and noted that, while there may still be some risk of a power grab by a centralized power, it’s not likely.
“Pooled mining is always a potential risk as an attack vector, but fortunately it’s relatively easy for miners to switch pools, so it only constitutes a short-term threat,” he told Bitcoin Magazine.
For his part, Porter sees some decentralization coming with increasing institutionalization.
As new companies, including exchanges, offer mining services to clients, they will work with a pool or create their own. Porter cited the examples of Binance, Huobi and OKEx, which, in addition to exchange services, now operate mining pools so that miners can collect their block rewards and seamlessly exchange in the same transaction.
“I think you’ll see the same thing develop in other markets as hash rate continues to expand outside of Asia,” Porter said.
While hash rate expansion out of China would go a long way in decentralizing Bitcoin mining, it may not necessarily occur via mining pools. More institutional mining operations are springing up in North America, for instance, raising questions about whether hash rate decentralization will occur via these operations or mining pools.
The ability for institutions outside of China to secure and operate mining equipment is key to decentralized growth, according to Mow.
“Things are much better now that we have multiple ASIC manufacturers, hosting providers like Blockstream and hash rate being more evenly distributed amongst pools,” he said.
But, when asked if he thought institutions like Core Scientific could replace mining pools in North America, Poolin Vice President Alejandro De La Torre demurred.
“No, Core Scientific will need to connect to a pool to have the best chance to find blocks,” he said. “There is no way they can compete against us, for example, when Poolin has around 16 percent (in the past year) of the hash rate.”
Bitcoin miners have successfully survived the 2020 Halving and COVID-19, and the network is now seeing some of its highest hash rates ever as these operations power up new equipment and reach new levels of decentralization going into the second decade of bitcoin mining.
Bitcoin Mining Is Decentralizing
China still dominates the bitcoin mining space, although the percentage of the hash rate coming from the country has dropped recently, from around 65 percent in early 2020 to about 50 percent more recently as Chinese mining farms are weathering a particularly difficult monsoon season and the government is sending mixed signals that Bitcoin may be under attack as part of a campaign to promote the new digital yuan.
Meanwhile, the U.S., Russia, Iceland, Central Asia and South America, among other regions, are all seeing continued growth in mining as miners benefit from plentiful, cheap, stranded energy in these regions — principally hydroelectric power, wind power or oil and gas, depending on the location.
In addition, Kazakhstan has been in the news lately as its government partnered with miners through a $715 million investment fund.
The following graph from a report prepared by BitOoda for Fidelity Digital shows an estimated breakdown of hash power around the world, indicating that China contributes 50 percent of the world’s hash power, while the U.S. is in second place with 14 percent.
It should be noted though that other analyses have placed China’s share as high as 65 percent of the total hash rate, with the U.S. at 7.2 percent and Russia at 6.9 percent.
Chinese Operations Are Looking Westward
The U.S. and Canada make up 21 percent of the global hash rate, at least in BitOoda’s analysis, second only to China. And that share is expected to go up by many in the industry.
In an announcement officially coming soon, the company, second only to Bitmain in its singular ability to influence bitcoin mining, will offer details about its new mining equipment manufacturing plant planned for the U.S..
Bitmain, a Chinese operation that is still the largest mining equipment manufacturer in the world, is weathering its own storm: a company feud between co-founders Micree Zhan and Jihan Wu that may split the company in half.
Bitmain has two manufacturing locations — one in China for the Chinese market and one in Malaysia for international sales. As far as it’s mining operations, Bitmain seems poised to continue its expansion into the U.S.
In a recent interview with Bitcoin Magazine’s John Riggins, Bitmain’s head of operations for North America, Raymond Walintukan, said that he sees more decentralization out of China in Bitmain’s future, with the company building on its current operations in North America.
Walintukan works from a mining farm in interior Washington State, where stranded hydroelectric power is plentiful and cheap. Bitmain also has mining farms in Texas and Tennessee. He stressed that Bitmain is now an international company, as much as it is a Chinese company.
Ryan Porter, head of business development for mining consultants BitOoda, told Bitcoin Magazine in an interview that more investors, including some from China, are inquiring about new mining opportunities in North America.
“We certainly see a reason to believe that a significant portion of hash power will migrate to North America,” said Porter. “The existing infrastructure, cost of power and regulatory stability here is competitive globally.”
And the decentralization of hardware manufacturing could become a major factor for continued migration in the near future.
“China has been a real industry innovator in producing the leading ASIC manufacturers,” Porter added. “However, with TSMC (Taiwan Semiconductor Manufacturing Company) planning to build a plant in Arizona, there could be domestic hardware manufacturers that emerge, which would also be a catalyst for hash to migrate outside of China.”
So, despite more expensive power pricing — averaging from 3.5 to 4 cents per MW, which is higher than in places like Central Asia and South America — North America is still considered a desirable hub for bitcoin mining because of the relative stability of the political environment and the ability to lock in multi-year power contracts (China averages just under 1 cent per MW).
The Importance (And Ongoing Challenge) Of Bitcoin Mining Decentralization
In a recently released Coinmetrics report, researchers noted that the distribution of mining and hash rate is the most important factor in “sustaining a secure, censorship-resistant payments and savings system.”
It noted that mining is the anchor and the “effective decentralization” that provides security for the Bitcoin network. The report uses a metric it called the “Nakamoto coefficient,” which measures the number of pools that would need to collaborate to launch a 51 percent attack on the network. For instance, iIn 2014, mining pool GHash.io controlled over half of the network’s hash power for about a day, giving Bitcoin a Nakamoto coefficient of 1.
The researchers concluded that bitcoin mining has become increasingly decentralized, with a Nakamoto coefficient of four.
Like most profitable enterprises within the legacy financial system, the natural pull of bitcoin mining is toward more control and organization by one or a relatively small number of controlling bodies.
At this point in the early history of Bitcoin, it is inevitable that a small and informed group of early adopters, like Bitcoin Core developers, will move the system forward in an organized fashion.
But, as Coinmetrics’ researchers argue, it’s important to have significant bitcoin mining take place in different parts of the world.
And even though there are some signs that Bitcoin mining is becoming more decentralized, especially with Chinese operations moving some of their has power to North America, there is still a long way to go before this industry can be considered truly international.
Coinmetrics noted that, even as hash power migrates from China, Bitcoin mining is still at risk of centralization through possible state level coercion and vertical and horizontal integration.
“While Bitcoin mining is distributed, it’s still at risk of centralization through state-level coercion and vertical and horizontal integration. Several exchanges, including Binance, OKEx, and Huobi, operate mining pools. BitMAIN, a hardware manufacturer, owns both BTC.com and AntPool, and is the only investor in ViaBTC,” noted the report.
And, in China, mining pools continue to grow despite a particularly difficult year. As long as there is cheap power, the incentive to build economies of scale in China will grow.
New China-based mining pool Lubion, which has China and Iran as its principal sources of hash power, only came onto the scene in March 2020 but is already in the top-ten of pools by hash, rivalling longer-standing pools like F2Pool (also based in China).
Still, there is reason for mining decentralization advocates to remain optimistic.
CoinShares, a New York-based cryptocurrency service that provides advice and other services for investors, released a statement on the state of Bitcoin mining during the global uncertainty caused by the coronavirus, ahead of a planned, more thorough June 2020 mining report.
In it, CoinShares’ research director Christopher Bendiksen wrote that the current talk of a possible mining “death spiral” due to coronavirus-based lockdowns makes for dramatic reading, but is not at all based in reality.
“‘Mining death spirals’ do not actually happen in real life,” Bendiksen wrote in the statement. “They are highly theoretical edge cases without any historical real-world precedent … Mining is here to stay.”
Confidence in the mining space and in bitcoin generally, despite economic uncertainty around the world, is high at the firm.
“Bitcoin is arguably the only financial asset that can operate remotely — nobody needs to go to work to make bitcoin work,” Danny Masters, executive chairman of CoinShares, wrote in a supplementary statement sent to Bitcoin Magazine. “Nobody needs to fill an ATM machine. While things look bleak for everything, I can’t think of a better asset to buy than bitcoin.”
Difficulty, Block Frequency and Hashrate
The cost of Bitcoin mining is largely a function of the difficulty — a dynamic metric determined by the protocol itself that can adjust both up and down to keep block times at 10 minutes on average.
The difficulty has reset downwards many times — sometimes dramatically as the result of a pullback in price, as in November and December of 2018 — but the network has never ground to a complete halt or even come anywhere close to doing so.
“There is no price level that could cause Bitcoin’s emission rate to increase,” reads Benedickson’s statement. “When the dust settles on the current financial crisis, the Bitcoin monetary system will have created exactly as many bitcoins as originally intended.”
In essence, the Bitcoin mining difficulty adjustment keeps Bitcoin block frequency steady, no matter the amount of total network hashrate.
What About the Halving?
“If prices do not recover, the hashrate will fall — and when the halving hits, it will fall again,” wrote Bendiksen. “This is not a problem for Bitcoin, nor is it unprecedented.”
And it’s not always the biggest bitcoin mining groups that will survive a major bitcoin price recession, contrary to what you may be hearing. It will be the groups that have the cheapest energy costs and the newest, most efficient hardware.
“The halving is still a couple months away and many miners are already closing up shop,” Bendiksen said in a follow-up interview with Bitcoin Magazine. “So, at the time of the halving, we will likely be in a completely different difficulty environment than now. Recent estimates show that as much as 25 percent of the peak-level hashrate may already have been turned off.”
While CoinShares suggests that post-halving mining will be different than the current and near-future mining environment, Bendiksen does believe today’s status offers an insightful window.
“For all of those who are worried about the halving, this is a perfect prelude because the end effect on miners is the exact same,” he wrote in his statement. “Hence, the hashrate dynamics we’re likely to see in the upcoming weeks will be an excellent parallel to those we might also see after the halving in May.”
Bendiksen acknowledged that some of the higher-cost miners may drop out after the halving, but he also sees mining companies stabilizing and building for the foreseeable future.
Building the Mining Infrastructure of the Future
Meanwhile, Blockstream Mining is quietly building its mining business with facilities in Quebec, Canada and Georgia, USA, with over 300 MW of energy and a thriving colocation service offering equipment, space, bandwidth and power rental for miners who can benefit from inexpensive energy without needing to negotiate separately with local authorities.
According to Blockstream CSO Samson Mow, the company has taken steps to be ready for the halving, come what may. Despite the current turmoil, it is focused on the long term.
“For Blockstream’s mining operations, our electricity and operational costs are low enough that we can outlast most miners and be the last ones standing,” Mow told Bitcoin Magazine in an interview. “Also, we’ve mined bitcoins for quite some time and we HODL for the medium term, so a price drop during the halving would actually have no impact for us.”
Mow noted that, while it’s hard to predict the price, he believes some inefficient miners may need to shut off, while most miners will be fine through the halving.
“I think the bitcoin price will recover to a point where, post-halving, it will still be profitable to mine BTC,” Mow said. “Even if that doesn’t happen, it’s not likely we will see a massive drop in hashrate. Many miners are already on the latest generation of equipment and have already recouped those costs, so they only have to deal with opex [operational expenditures].”
Investors Are More Cautious But Still Interested in Bitcoin Mining
Now, he said, he’s still getting inquiries but potential mining companies are more cautious and want to lock in competitive energy pricing.
“Overall, what we’re seeing is the miners that were well positioned to be profitable after the halving are still well positioned now, where the miners that would have needed to shutter operations have had to fast track those plans,” Porter told Bitcoin Magazine in a phone interview.
“We’ve seen hashrate fall precipitously as now unprofitable mining rigs are being taken offline, and conservative operators who were thoughtful about managing their bitcoin price risk are now looking to purchase hardware at distressed prices.”
Porter is confident that the best-managed mining operations that have inexpensive power sources and efficient computers will survive the halving. What he’s seeing is the next stage in the evolution and maturation of the mining industry.
“Where we are starting to see a change in planning for miners is how they’re approaching risk management,” he added. “We had previously engaged with miners on implementing BTC price-hedging programs, and we’ve had quite a few of those firms reach out to us over the past week to start a meaningful risk management engagement.”
The CoinShares team is confident that bitcoin and its critical mining industry will ride out the coronavirus storm. In his interview with Bitcoin Magazine, Bendiksen noted that, unlike the fiat monetary system, the bitcoin system is “run coldly and unemotionally by a network of computers according to pre-set rules.”
“These computers never need to work from home, never get sick, scared or panicked and can not be influenced to print money by charismatic or powerful politicians, even in the most challenging times,” he said. “They simply execute their code as prescribed, no matter what is happening in the world.”
SEO Headline: Bitcoin Mining, Coronavirus and the Halving
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