AUSTIN, Texas — Adam Sullivan abandoned investment banking to mine bitcoin at an inconvenient moment. In May 2023, bitcoin was trading at around $21,000, U.S. regulators were cracking down on the sector, and Core Scientific, the company he agreed to take over, was battling angry lenders in a Texas bankruptcy court over tens of millions of dollars in outstanding debt.
But Sullivan was confident that given a lifeline, he could turn the business around. That’s because the halving was on the way, and it was likely to spark a significant spike in bitcoin.
Late Friday night, the bitcoin algorithm automatically reduced fresh issuance of the world’s largest cryptocurrency by half. It occurs every four years, and in addition to helping to prevent inflation, it has historically preceded a significant increase in the price of bitcoin.
The technological event is rather straightforward: Bitcoin miners are paid in bitcoin to validate transactions, and once 210,000 blocks of transactions are computed and submitted to the main chain, the reward granted to bitcoin miners is ‘halved.’
There are over a dozen publicly traded miners on the network, as well as thousands of smaller, private ones around the world, constantly racing to process transactions and get paid in new bitcoin. Because the event leads to a cut in rewards paid directly to miners, they will be the first to feel the impact of the halving.
Typically, when supply is halved, bitcoin rallies significantly.
In fact, the previous (and only) three halvings in the chain’s history occurred before to each bull run, during which the coin reached new all-time highs and a flood of investors joined the market for the first time.
That fast price gain has helped many miners avoid the worst-case scenario by offsetting the impact of having the block prize slashed in half.
“As a company that was already in the process of scaling our infrastructure during the previous halving, we know the toll that halvings can take on a company if it is not adequately prepared,” Sullivan told CNBC in an interview.
JPMorgan analysts tracked 14 U.S.-listed bitcoin miners, representing approximately 21% of the global Bitcoin network, experienced a 28% fall in the first half of April to $14.2 billion, reaching year-to-date lows. Bitdeer was the best-performing stock throughout the period, down approximately 20%, while Stronghold Digital fell 46%.
Some have billed the 2024 Bitcoin halving as a watershed moment for the mining industry. Depending on the amount of preparation miners have done, it might potentially make or break them.
“Being prepared for a halving means evaluating all of your power strategies, all of your software capabilities, all of your operations,” he went on to say.
Others are less concerned, citing recent price movements in bitcoin.
According to a Needham research note dated April 16, analysts expect the halving to have only a little impact on miners’ estimated EBITDA margins, despite the 50% fall in revenue, because the price of bitcoin has been fluctuating between $60,000 and $70,000.
“We expect geopolitical tensions and interest rate policy to be the biggest near-term drivers of crypto price action,” Needham analysts wrote. They added that at a bitcoin price above $60,000, the halving is “derisked for nearly all public miners.”
The bank favored low-cost bitcoin producers, such Riot Platforms, Bitdeer, and Cipher Mining. Meanwhile, if bitcoin prices fall, Needham believes the most significant native impact will be seen by higher-cost manufacturers who are also leveraged to higher bitcoin prices through big treasury holdings.
JPMorgan analysts had a similar attitude, saying in an April 16 research note that they feel “recent weakness offers an attractive entry point” for investors and that they are “especially bullish” on Riot, which they believe has good relative prices.
Years spent preparing for the halving
Miners have had years to plan for the halving, including lowering power costs and upgrading their fleets to more efficient computers.
“Bitcoin’s halving happens like clockwork every four years,” said Haris Basit, chief strategy officer at Bitdeer Technologies Group. “It’s a known variable that is a benchmark for us to remain focused on operational excellence.”
To that purpose, the Singapore-based mining company has invested in additional data centers, but its primary goal has been to deepen vertical integration through R&D. Basit claims that 25% of its workforce is dedicated to research and development, which has resulted in “new innovations and revenue pathways, such as our recently announced 4nm mining rigs and AI Cloud offerings.”
Analysts at Cantor Fitzgerald recently identified Bitdeer as having one of the industry’s lowest “all-in” cost-per-coin.
Greg Beard, CEO and Chairman of Stronghold Digital Mining, warns CNBC that miners that rely only on more efficient devices will be at a disadvantage.
“Miners who own their low-cost power are better positioned,” Beard went on to say. “Operational costs will be lower, allowing them to be more flexible with their capital.”
Core’s Sullivan agrees, stating that in the future, bitcoin mining data centers will collaborate with power generators and grid operators to serve as a virtual battery for grid operators, allowing them to increase base load, reduce bitcoin data centers when necessary, and avoid peak generation loads, which he describes as dirty and expensive.
“We own and operate our infrastructure, giving us greater control over operational and strategic decisions, such as the potential to expand into high-performance computing hosting,” Sullivan added.
Core Scientific, which was founded in 2017 and today operates seven mining sites in five states, also owns the entire technology stack. The company has been attempting to expand its revenue streams outside bitcoin. According to Sullivan, existing data centers can be reconfigured to handle new types of high-value computation.
“Certain data centers are located in close proximity to major metropolitan areas, making them candidates for low-latency, high-value compute applications,” said the chief executive officer of Core.
Riot Platforms CEO Jason Les told CNBC that the company’s long-standing commitment on attaining a low cost of electricity, a stable financial sheet, and large operational scale was the driving force for the halving. Les believes that is what has enabled the company to endure the halving with good margins while also positioning itself for upside on the other side.
“Our new Corsicana Facility was energized just this week, and we will be significantly scaling up our hash rate with next-generation equipment at that new site over the remainder of the year,” he stated. “As a result, we are positioned to mine more bitcoin per day at the end of the year than we do today, despite the halving.”
Marathon Digital, which has seen its stock grow more than 70% in the last year, takes a different approach to scaling than its competitors. According to CEO Fred Thiel, the company grew swiftly by taking an asset-light approach, with capital expenditures focused on mining rigs rather than infrastructure.
“In December, we owned less than 5% of the sites where we were hosting our miners,” Thiel went on to say. “Today we now own 53% of our total 1.1 gigawatts of capacity, having purchased it at less than the build and replacement cost.”
Owning sites reduces Marathon’s mining costs by up to 20% on a marginal cost basis. Thiel also stated that by the end of 2024, Marathon plans to increase efficiency by 10% to 15% as they deploy next-generation rigs across new sites.
However, the increase in efficiency is not solely due to new equipment. The company is adopting its own bespoke firmware, which enables it to run more effectively.
Marathon, like other mining organizations, has begun to broaden its business strategy beyond bitcoin mining.
According to Thiel, the company recently launched an energy harvesting division, where they are compensated for converting stranded methane and bio-mass into energy, which they then sell heat back into an industrial or commercial process. The service essentially subsidizes and lowers Marathon’s mining costs significantly, and the company expects this new business line to generate a significant portion of its revenues by 2028, halving them.
Diversifying Revenue
The April 2024 bitcoin halving looks very different from the previous three.
For years, growing competition caused by new miners has reduced profitability, because more miners equals more people sharing the same pool of rewards.
In a research note published by JPMorgan on April 16, analysts remark that network hashrate, a proxy for industry rivalry and mining difficulty, increased 4% in April over the previous month. According to Stronghold’s Beard, the halving is a minor setback when compared to the global hashrate, which has increased nearly fivefold since May 2020.
“Mining is a tough industry, especially because many countries have excess power and are dedicating it to mining,” said Nic Carter of Castle Island Ventures. “It’s a free market, anybody can enter into it as long as they have the basics.”
US spot bitcoin exchange-traded funds have also drastically altered pricing dynamics. Historically, the price of bitcoin did not rise until after the halving. However, following record flows into these spot bitcoin funds, the world’s largest cryptocurrency reached a new all-time high of more over $73,000 in March.
“The recently approved bitcoin ETFs have proven to be huge pipelines of capital into bitcoin and that universe of ETFs continues to grow with the recent approvals in Hong Kong as well,” Les, the CEO of Riot, said. “We think the price action we’ve seen in bitcoin year-to-date reflect that and has us very optimistic on what bitcoin mining economics can look like in the months and years post-halving.”
Within a few months of its inception, Blackrock’s ETF had accumulated net assets worth $17 billion. Stronghold’s Beard tells CNBC that if Blackrock added even a billion dollars more bitcoin to its ETF in April, it would create demand for more coins than the mining industry could produce after the halving.
What’s new this time is that the block reward is no longer the primary source of miner money. Bitcoin’s recent programming advances have resulted in a blossoming ecosystem of projects built on top of the blockchain, which has translated into more transaction fee revenue for miners.
There is a limit to how big the blocks may get, but the value of those blocks is about to skyrocket, according to Bill Barhydt, CEO and founder of Abra. From Barhydt’s perspective, he provides miners with a variety of services, including auto liquidations, so he has access to a wealth of macro data on the industry.
“The math is simple,” says Barhydt. “Bitcoin blocks are fixed in size, and the demand for data within those blocks will increase significantly for several reasons, including more retail wallet holders moving their bitcoin into and out of storage, new use cases like Ordinals (NFTs for bitcoin) and DeFi on bitcoin, institutional settlement requirements for exchange traded products in theLightning settlement transactions in Hong Kong, Europe, and other locations.
At the current rate of adoption, Barhydt estimates that transaction fees in this cycle will likely peak within 24 months at ten times the cost of the last cycle peak, due to a combination of increased bitcoin prices and increasing demand for the space inside each block.
Carter of Castle Island is skeptical that fee-based revenue would fully compensate for lost revenues following the halving.
“It’s not entirely clear that fees are fully offsetting the lost revenue, and in fact, I don’t expect that to happen” Carter said.
Fees tend to be extremely cyclical. They spike dramatically during periods of congestion and then decrease back to near zero during other regular periods. Carter warns that miners will face charge increases, but there is not yet a consistent, powerful, and robust fee market most of the time.
Swapping ASICs for AI
In the last year, there has been an increase in demand for AI computation and infrastructure capable of handling the large workloads required to power these revolutionary machine learning applications. In a new analysis, digital asset fund manager CoinShares predicts that more miners will transition to artificial intelligence in energy-secure regions because to the possibility for increased revenue.
Mining companies such as BitDigital, Hive, Hut 8, Terawfulf, and Core Scientific already have AI operations in place or plans to expand.
However, transitioning from bitcoin mining to AI is not as simple as repurposing existing infrastructure and devices. The criteria for data centers and data networks varies.
“AI presents several challenges, notably the need for distinct and considerably more costly infrastructure, which establishes barriers to entry for smaller, less capitalized entities,” the paper goes on to say. “Additionally, the necessity for a different skill set among employees leads to increased costs as companies hire more AI-skilled talent.”
Bitcoin mining rigs are known as ASICs, or Application-Specific Integrated Circuits. The “Specific” in that abbreviation indicates that it cannot be utilized for other purposes, such as providing the underlying infrastructure for AI.
“If you’re a bitcoin miner, your machines can’t be repurposed,” Carter says. “You have to buy net new machines in order to do it and the data center requirements are different for AI versus bitcoin mining.”
Sullivan claims that Core Scientific, which has been mining a variety of digital assets since 2017, began diversifying into additional businesses in 2019.
“The company has owned and hosted Nvidia DGX systems and GPUs for AI computing, having built and deployed a specialized facility specifically for high-value compute applications at our Dalton, Georgia data center campus,” he went on to say.
Core Scientific has also teamed with CoreWeave, a cloud company that offers infrastructure for use cases such as machine learning.
According to Sullivan, the combined capabilities will support both AI and High Performance Compute workloads, resulting in an estimated $100 million in revenue, though he believes the total potential revenue is much higher given their significant infrastructure footprint, which can host some of the most advanced GPU compute coming to market.
“Bitcoin mining is an early example of high-value compute, attracting significant capital and a number of companies scaling their operations to support the Bitcoin network,” he said.
However, Sullivan believes that only a few operators will be able to make the shift to AI.
Sullivan stated, “Bitcoin mining sites may only be repurposed if they match the requirements for HPC. Many current locations in North America do not meet these requirements.
