A startup called Core Scientific announced this week that it is raised $ 23 million to expand cryptocurrency mining operations. The Bellevue, Washington-based company already operates crypto mines in North Carolina, Georgia, and Kentucky and plans to open more soon.
It’s not hard to see why. Currently, a single bitcoin – the digital mining equivalent of a gold nugget – is worth around $ 20,000. Mining a single block of Bitcoin brings a reward of 6.25, or around $ 125,000.
If Core Scientific’s mining companies are successful, the company won’t just make big bucks. It will also help repatriate crypto production to the US, where Bitcoin began.
The recent resurgence in crypto mining seems like good news. Mining companies like Core Scientific are able to make money and create jobs in rural areas while ensuring that more bitcoin – which is becoming a strategic asset – gets into American hands.
But there are also reasons to be careful. The last crypto mining boom promised similar benefits, but it resulted in night-time businesses flying a trail of fraud and environmental degradation. Will the result be different this time?
Digital picks and shovels
Cryptocurrency mining differs from traditional mining in some obvious ways. No ore is excavated and transported. And the tools of the trade are not pickaxes and dynamite. Instead, crypto miners rely on two things to make a living: bespoke computer chips and a stream of electricity. A crypto mining process looks like this:
To find a digital nugget, crypto miners pit their computers against others around the world to solve complex math problems. The computer that solves the problem sends the solution to others on the network, adding a block in the process the blockchain– a tamper-proof ledger that serves as a public record of transactions. For their problems, the owner of the victorious computer pocketed the “block reward”, which for Bitcoin amounts to 6.25 Bitcoins plus transaction fees. The process is repeated about every 10 minutes.
In the early days when it was still possible to mine Bitcoin with a home laptop, a large part of crypto mining took place in the US. However, as the computing power required to solve the math problems increased, Chinese mining operations dominated.
The Chinese miners had two advantages: easy access to cheap electricity, including in Mongolia, and a domestic production base where so-called mining equipment can be made – computers with chips made specifically for mining. While there are other mining operations around the world, China remains a leader far and wide as you can see this diagram from the Cambridge Center for Alternative Finance:
Now some US companies believe they can wrest part of the mining pie from China. In the case of Core Scientific, low-cost power agreements were made at five locations in Dalton, Georgia, Marble, NC, and Calvert City, Kentucky. The company has also signed contracts with Chinese manufacturers to get the first dibs on the latest mining equipment and plans to mine not only Bitcoin, but also so-called altcoins such as Litecoin, Bitcoin Cash, Zcash and Ethereum.
Core Scientific is one of the largest miners in the U.S. today, but its operations are part of an even bigger plan. That plan is being driven by a company called Foundry, which is behind the just announced $ 23 million investment in Core Scientific. Foundry is a subsidiary of Digital Currency Group (DCG), a sprawling crypto conglomerate, which recently announced this Spend $ 100 million on mining initiatives.
According to Mike Colyer, CEO of Foundry, increasing crypto production in the US will help strengthen the Bitcoin network by diversifying the miners who run it.
“Bitcoin will only work if it’s distributed and decentralized around the world,” says Colyer, who predicts that US-made bitcoin could rise to 25% in the next few years.
In other words, the US mining companies will help ensure that no mining consortium can work together to manipulate the blockchain network. Such an arrangement requires a single entity to control over 50% of the network – a risk that is small with Bitcoin but has occurred with smaller digital currencies.
The foundry’s mining initiatives promise to strengthen Bitcoin’s network – and, of course, give the company the opportunity to make money – but may also reflect another strategic imperative. As the demand for bitcoin in the market increases, more companies may want a private offering to make trading easier. In the case of DCG, which has a huge consumer bitcoin business, Foundry’s ventures can help facilitate vertical integration.
“Mining is a great way to accumulate bitcoin. With the right setup, you can mine it cheaper than buy it, ”says Amanda Fabiano, who used to oversee mining for investment giant Fidelity and now does the same for crypto trading company Galaxy Digital.
How best to use energy in a “world with carbon problems”?
To get a different perspective on bitcoin mining in North America, I spoke to Steve Wright, the general manager of a public utility in Chelan County, Washington. During the last big Bitcoin boom in 2017, Wright struggled with a group of mining companies to develop the county’s plentiful hydropower resources.
“We had a lot of companies that would come and say, ‘We’re going to do great things,’ and then they would disappear,” Wright recalls. “People would say, ‘We’re here for the long term,’ and then nobody would pick up the phone.”
Problems also emerged in the form of reckless operators overloading transformers and starting fires. Meanwhile, the crypto miners who wanted to open a business were demanding the low electricity tariffs available to the locals. Wright was at risk of undercutting the profits the utility made by selling its hydropower at higher rates to external markets.
Wright was also pushed back by residents of the county who wondered if it was ethical to spend energy on something like bitcoin mining.
“If you have green electricity and a world with carbon problems, people have been asking if that’s the best way to use that energy,” said Wright, whose job it is to monitor dams on the Columbia River like the following.
The debate about the environmental impact of crypto mining is not limited to Chelan County. The payment giant Square, which recently bought $ 50 million Bitcoin for his corporate coffers, announced This week, $ 10 million was pledged to support a Bitcoin Clean Energy initiative as part of a larger plan to be carbon neutral by 2030.
In the meantime, other U.S. companies are finding creative ways to reduce Bitcoin’s environmental footprint. Galaxy Digital’s Fabiano pointed out three companies in the oil and gas space – Crusoe Energy, Great American Mining, and Upstream Data capture the energy Typically wasted by flaring (when shale drills burn excess natural gas) to fuel crypto mining.
All of this can help calm critics who view Bitcoin mining as an environmental disaster. But companies like Core Scientific also have to overcome another PR problem: Mining is run by seedy carpet baggers who abandon local communities.
That perception is another legacy of the Bitcoin boom of 2017, when digital miners – who usually share the libertarian, limitless worldview of the larger crypto community – took cities across the country with them. The best known example is Rockdale, Texas. The city became the subject of one Wired Magazine function about how a Chinese company, Bitmain, announced a new Bitcoin company that would help replace jobs and revenue that had been lost as a Alcoa Plant closed. Rockdale City officials threw lavish dinners to make the mining managers feel welcome, but like in Chelan County and elsewhere, they disappeared into the night.
In terms of jobs, cryptocurrency mining operations may offer a handful of new positions for local residents. However, according to Wright, the job opportunities are nothing like those of a recently closed aluminum plant – meaning his county has less reason to launch a welcome mat for crypto businesses.
Colyer, the foundry’s CEO, admits that the crypto mining industry must overcome a deep level of distrust. But he insists that companies like Core Scientific are a different breed than previous night flights.
“In 2017, there were a lot of people making big promises, walking around the company and terrifying local governments. Many of those people have disappeared and the remaining companies are legitimate, ”he says.
But even if North American mining companies can overcome public skepticism, they must also prove that they can succeed in a company that has been largely defined by failures.
Rely on Chinese chips
Successful crypto mining requires the use of new machines with ASIC chips – a type of computer chip specially designed for a specific purpose. In the case of Bitcoin mining rigs, the chips are specifically designed to solve the math problems that make up the blockchain.
This begs an obvious question: if a company can make the best mining equipment, why should they sell them instead of setting up their own bitcoin mining operation?
In fact, Bitmain, one of the two Chinese companies that make most of the machinery, has been accused in the past of branding used mining equipment as new. The company is now the subject of an ongoing Class action which claims it was secretly mining bitcoins bought by its customers.
The allegations are unproven and Bitmain denies wrongdoing. However, the situation appears to be at risk for companies like Foundry and Core Scientific, which not only have their own mining operations but also plan to supply machines to other companies.
Colyer of Foundry says such concerns were valid in the past, but that the mining industry has moved to eliminate proprietary trading by Chinese manufacturers. One reason, he says, is because manufacturers have realized that the global distribution of mining power is benefiting the wider Bitcoin economy.
Fabiano, the mining expert at Galaxy Digital, says the industry has become more trustworthy in part because there is now intense competition between Bitmain and the other big manufacturer, MicroBT.
Fabiano adds that access to state-of-the-art mining equipment, which can cost anywhere from $ 2,600 to $ 2,800 apiece, has become difficult due to problems in the supply chain. She notes that the companies source their chips from TSMC and Samsung in Taiwan, and that these companies have hundreds of other customers – including those Apple—This may take precedence over Bitcoin companies. The result, says Fabiano, is that new machines may not be available until next July.
In the long term, Core Scientific executives predict that chipmakers like TSMC may build manufacturing in the US and become a domestic source for mining equipment. However, Fabiano suggests that China will always have the manufacturing lead and that Colyer’s forecast that the US will get a 25% share of mining capacity is optimistic.
The bottom line is that striving for a booming crypto mining industry in the US is risky and fraught with uncertainty – much like Bitcoin itself.
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