The Coming Battles For Bitcoin
by: Mike Hobart
Bitcoin has taken the mainstage as of late with its rapid run up of over 50% in price appreciation in a very short timeframe. However, where the conversation is not and where it should be is in the corner of the miners. With hashrate hitting an all-time high of 348 Exahash per second, we have a few things that we need to discuss and explore with an emphasis on the coming Hashrate War.
Bitcoin Mining and the Environment
Energy markets are providing a very interesting reprieve for miners in a tangentially related sort of manner. We have seen an absolute bloodbath in natural gas since December of 2022, falling just shy of 70% since its high. Why is this related to bitcoin mining? Because our producers, including both strict natural gas producers as well as the oil production operations that yield associated natural gas with their operations, are now less incentivized to increase output when prices are so low.
This shifts the incentives from producing and shipping natural gas and liquefied natural gas products to reducing outputs ‘til demand outpaces supply. A significant player on that front was likely the results of the drilling operations in western New Mexico as detailed by Dr. Anas with Green Candles Investments’ Macro Insights podcast, linked here. This provides a perfect environment for these producers to turn to their experimental projects of incorporating bitcoin miners. Particularly in the area of the associated gas producers, where they can consume their excess gas without having to stomach capex costs at the level of pipeline infrastructure or liquefaction facilities. Resulting in increased oil output, mitigated capex, and a very liquid, saleable asset that trades 24/7, 365 with the potential to not have to be concerned with bank operations or failures in risk management – *cough* Silicon Valley Bank *cough*. I only say ‘potential’ because that would require these entities to actually engage in proper custody of their bitcoin assets.
This is why I am of the opinion that the oil & gas producers are a major contributor into the march of the hashrate. I personally believe that lots of learning and excitement has been flooding across the energy producers, but especially of those related to the hydrocarbon industry. December saw a dip of about 8% in hashrate, specifically on Christmas Day, and then has been on a moon mission ever since.
Now, this brings us to how things might go looking forward. For those that did not get the chance to listen-in on the Spaces conversation between Simply Bitcoin and the Luxor Team, our conversation turned toward this discussion rapidly. We’ve experienced a generally mild winter here in the Northern Hemisphere, which has many of us expecting that this summer may make for a bit of a cooker. This can drastically impact bitcoin miners, and therefore the hashrate.
When the weather gets hot demands tend to go up, for both on- and off-grid miners. On-grid miners will have to curtail operations if demand spikes in order to facilitate civil needs, such as peak demand hours for running air conditioners on those sweltering summer days. Off-grid miners have to contend with the generators or turbines that are consuming the associated natural gas that provide power to the miners onsite. These generators have automated defense mechanisms to kill operations if they begin running too hot; you don’t want a turbine or generator running so hot that it binds up… things tend to explode in those situations. That’s not an outcome that anybody wants.
There’s also the matter of the environments that these well pad operations tend to find themselves in; barren, flat, dry, and dusty stretches of American landscape. All of these factors influence the health and consistency of mining operations on a well pad. When you have a flat, dry and barren landscape that is being heated all day by the summer sun the mix tends to result in consistently windy conditions. That brings with it debris, and of specific concern: dust.
This isn’t just your average dust that you wipe off your desk or mantle over your fireplace. For those that have not had the pleasure of working in these desert environments, this particular dust is what we call “moondust.” This type of sand is so finely ground down that it can permeate nearly any kind of filtration system. As an example of this, let’s discuss how one might interact with this environment as an individual. The fine grains will fly through the air and make it through the mask covering your face, and coat the lining of your nose, drying out your nostrils and kicking off a response that results in overproduction of mucus by the membranes of your respiratory system. This sand will also coat & cake around the eyes and mouth, while drying out the skin, pulling sweat & water from the epidermis. Our moondust therefore also makes it through many of the filtration solutions on the market, as well as finding ways around any spaces of an operation that are not air-tight. These grains, once occupying the same airspace as bitcoin miners, then get sucked in through the intake fans of our miners. The grains can cause microscopic erosions of the plastic fan blades on the intake, which can result in a degradation of the blades, oftentimes fully cutting the blades off. This moondust will also find its way into the guts of the miners, collecting and caking around as many corners of the ASICs as it can, which can provide the potential for degraded performance or damage.
And that’s all without considering the implications of pollen release during the spring and fall months.
Bitcoin Mining Innovation
Now for a brief discussion on innovation within the space. Last year was clearly the race for immersion mining, it was like… so fetch. All of the cool miners were doing it. Now, however, the real race will be who can tackle the water-cooled solution(s). Immersion mining is effective, but it is very expensive. BitCool ain’t cheap. And it ain’t cheap to dispose of either. The team over at Upstream Data have been making moves in this area and would be worth keeping an eye on. The reason that finding a water-cooled solution that is economical is due to the electrolytic environment produced when using water, resulting in rapid corrosion. Meaning the lifetime of materials involved are rapidly reduced.
Meanwhile there were claims made in 2022 that some were working on industrial-sized, potentially liquid-cooled, bitcoin miners. The validity of these claims remains to be seen, so stay tuned.
The Coming Wars in Bitcoin
Upstream finds themselves at the center of one of these conversations as well. Steve Barbour recently shared that he had been awarded a patent for a blockchain mine at an oil and gas facility, patent no. 11574372. The reason that I find this interesting is because before this, the only other entity that I am aware of that was in possession of a patent for bitcoin mining with natural gas was Crusoe Energy. Now we have a multi-polar environment within the bitcoin mining space. This is what is causing me to begin to believe that there is a storm brewing within the space. Not just between individual miners, but I suspect that there will be a likelihood for predatory acquisitions in this space in the very near future. Not just between miner-to-miner, but also energy producer-, and oil & gas producer-, -to-miner.
This would result in a true Hashrate War; where miners are competing for market share and dominance of access to cheap energy in order to deploy operable Hashrate to their mining pool of choice.
Then there’s the other war that I see brewing. This one will be between JPMorgan and BlackRock. JPM has been making moves relatively quietly to prepare for onboarding of bitcoin and crypto services and exploring the development of wallet products, while BlackRock is pushing the use of the USDC stablecoin. I personally believe that there is a likelihood for a big showdown to occur in the future between JPM and BlackRock over being the CBDC of choice for the United States of America.