What are crypto miners, where is the industry going and why could they make a good stock addition to your portfolio? You’ll find all you need to know in this article.
The biggest myth of all is that cryptocurrency mining consumes astonishing amounts of energy. Let’s address this idea first so that you can read the rest of the article with a peaceful mind.
The global world energy production totaled 154,750 TWh in 2021. It is estimated that around 50,000 TWh – almost a third of it – was wasted, due to inefficiencies. Bitcoin mining’s energy use is currently at around 220TWh per year. If you do the math, this is about 0.14% of the global energy production, and 0.44% of the total wasted energy.
If we take the argument further, we can see that Bitcoin mining has the highest sustainable energy mix in any industry. Global BTC mining has a portion of 58.5% of its energy coming from renewable. We often saw bitcoin energy consumption compared to that of other countries. If we keep going in this logic, we can see that if bitcoin was a country, it has the highest energy mix of all, 10% ahead of Germany, the country with the highest mix at 48.6% as of Q4, 2021.
Now let’s get to the main part of our article and start by defining what a cryptominer is. Cryptominers are an essential element of the blockchain ecosystem.
Without entering in too many details, the process goes as follows: every time a transaction takes place, it is sent to the previous and subsequent transactions, creating a chain of time-stamped records, which we call a blockchain. However, each record needs to be thoroughly checked to avoid fraudulent transactions. The validation involves a mathematical problem that is hard to solve but easy to verify. That is where crypto miners come in.
Many entities with massive computing power are competing to solve the problem. Whoever solves it first earns the right to post the transaction to the ledger and is rewarded with cryptocurrencies – currently, the reward on the Bitcoin network is 6.25 BTC. However, the problem has become so complex that it is now almost impossible to solve it without brute force – that is, many very powerful computers shooting multiple combinations until one works to solve the problem.
One key concept that often comes around is “hash rate”. The hash rate is essentially the measure of computational power used to mine bitcoin. The more people mining bitcoin, the bigger the hash rate.
Over the past 13 years, the machines working to maintain the BTC network have undergone rapid technological development. As you will see, equipment quality is one of the most important factors to determine if a mining operation will be profitable or not. Old mining rigs are quickly surpassed by new ones. Less computing power means fewer chances to get the right combination.
The first block ever was mined by Bitcoin’s pseudonymous creator Satoshi Nakamoto. Far from using a powerful computer, the first block was mined using a central processing unit (CPU), a device present in any functional computer.
In 2010, the first graphics processing units (GPU) were developed. GPUs were originally built for gaming applications and performed a narrower range of tasks. What they excel at, however, is the computation of simple mathematical operations in parallel, unlike CPUs which only manage to solve one problem at a time. Any video games require the simultaneous generation of thousands of pixels, depending on the player’s moves. Once repurposed, GPUs became the perfect candidates to mine bitcoin, being 6 times more efficient than their older brother. Field programmable gate arrays (FPGAs) were the next innovation, with hardware components that were easier to adapt for bitcoin mining, mining twice as fast as GPUs.
The third major innovation is likely the most important, but also the one requiring the most time and effort to implement. Instead of repurposing existing machines, a China-based computer hardware manufacturer built the first set of application-specific integrated circuits (ASICs). The simple fact that these were made specifically to mine bitcoin gave them an unprecedented advance.
Many manufacturers entered the market to build continuously more powerful and energy-efficient ASICs. Today, we estimate that the average ASIC is 100 million times faster than the 2009 CPU.
2021 was already a great year for miners, but 2022 and the years to come are set to be even more impressive. According to Galaxy Digital, the industry entered a “gold rush” period. Uncertainty about the business model is starting to fade, and institutional investors are starting to inject large sums of money into the business. As the competition ramps up – due to the supply delay normalization of mining rigs and larger confidence in the industry – the global industry is set to under large changes and expansion.
One of the biggest changes we see in the space is increased M&A. Many players in various categories will start to want to acquire miners. First, large cryptocurrency mining companies such as Riot Blockchain and Marathon Digital Holdings will likely keep expanding their mining capacity, acquiring more machines and existent players. Secondly, transactional companies that want to offer Bitcoin payments often face KYC challenges. How can Mastercard, Visa, Square, and PayPal make sure that the provenance of their Bitcoin is clean? What better ways to mine bitcoins yourself, ones that have never seen a transaction yet? Data Centers will also likely invest in mining farms. Indeed, their infrastructure is not so different from that of a crypto miner. This could be a decent diversification play for them to enhance their profit margins. Lastly, energy companies will likely be interested in the business, simply because of their access to cheap energy. As of now, they sell electricity to cryptominers, but some are starting to think: why not keep this energy, and start our own mining operations? When crypto becomes the new gold and you have the machines to dig it, why stay on the bench?
Existing miners will also diversify. The Proof-of-Work model (Bitcoin, Ethereum) is starting to see some competition. Other validation models, such as staking, are starting to see some traction (Solana, Cardano, Avalanche). The Lightning Network is also making its way in the sphere, with more and more users opening nodes to facilitate Bitcoin transactions. Finally, some miners will likely turn some of their computational power to high-performance computing as a service.
In many regards, investing in crypto miners can be a very good, if not better alternative to investing in Bitcoin directly.
Indeed, when investing in a cryptocurrency, you do not own much more than a digital title. Such a title does not bring much to you. What’s worse, if you buy BTC at $40,000 and it drops to $20,000, you’re in for a 50% loss. This volatility can be hard to handle, even for the most fervent Bitcoin believer.
Investing in miners could be seen as a fixed-income BTC play. Indeed, when one invests in a miner, it is not only a bitcoin investment but also an investment in its technology, minus the volatility.
Additionally, miners could be seen as a true ESG play, as they are paving the way for a greener grid. Constantly looking for greener energy, miners are installing their sites in unoccupied land and contributing to the construction of a global green energy grid. In fine, this would make it both an ESG and infrastructure play, as many of these sites could be then repurposed into data centers or high-performance computing services
Lastly, as the price of Bitcoin goes up, so does the price of cryptominer stocks. And we still see great growth potential in this digital currency. In 5 years, Bitcoin’s market capitalization grew from a mere $15 billion to over $800 billion at the time of writing – with an all-time high of over $1.1 trillion in October. We largely share the views of Ark Invest, which gives some examples of how BTC’s price – and thus, the stock prices of miners – has a long way up ahead. In 2030, if BTC comes to represent 2.55% of the institutional asset base, this would give it a market capitalization of $4.1 trillion and a price of $196,000. The same results would be obtained if it came to represent 5% of the cash of S&P 500 companies.
We hope that this article has brought you more insights into the question of crypto miners. Our team believes that they have a great way ahead of them and that they could make an interesting alternative to more traditional cryptocurrency investments.
We include this stock category in our EVOO Blockchain product, which aims to get exposure to blockchain technology while being decorrelated from crypto. It is composed of four buckets, namely:
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