With profit margins as high as 90%, energy companies are becoming major players in the cryptocurrency space

Energy companies are becoming a major force in the cryptocurrency space as they reduce operational risks and expand profit margins. Beowulf Mining Plc’s cryptocurrency subsidiary TeraWulf expects to have 800 megawatts of mining capacity by 2025, or 10% of the bitcoin network’s current computing power, according to regulatory filings.

Zhitong Finance noted that the company was one of the few energy groups that discovered Bitcoin mining was profitable from its customers before building its own cryptocurrency mining facilities, and the company discovered the opportunity when it built a data center for Marathon Digital (MARA.US) in 2020.

“Energy companies tend to be very conservative by nature and are often regulated,” said Paul Prager, CEO of TeraWulf. “We are an early adopter because we are on the front lines of this partnership with Marathon Digital.”

Gregory Beard, CEO of Stronghold, said that while miners can earn a healthy profit of 5 cents per kilowatt, miners who own direct energy and power assets tend to enjoy lower prices. "If you buy energy from a producer and then pay a third-party operator to manage the data center, your profit margin will be lower than those companies that own their own energy."

The extra profits could give energy companies an edge over rivals as profit margins in bitcoin mining continue to squeeze. With bitcoin still 40% below its November high and the Russia-Ukraine conflict pushing up energy prices, profit margins have fallen to around 70% from 90%, analysts say. Further pressure is expected as bitcoin block rewards are also scheduled to be cut in half in less than three years.

“It’s not only an efficiency from a business perspective, but it’s also about the risk we can take that we’re better able to manage,” Prager said.

Typically, bitcoin miners pay hosting sites to not only build their own data centers but also host, run and maintain their mining machines. Fees for such services have been rising since the ban on crypto mining in Asia brought a multi-billion dollar windfall to U.S. miners, allowing many miners to earn more bitcoin from the network with the same input.

In the U.S., early adopters of bitcoin mining technology such as Marathon Digital and Blockchain (RIOT.US) still dominate in terms of computing power. But another advantage that energy companies-turned-bitcoin miners may enjoy over their peers is that they are willing to sell the bitcoins they mine, unlike some crypto enthusiasts who keep holding them.

With the recent drop in bitcoin prices, companies like Marathon Digital have been improving their balance sheets and turning to debt and equity capital markets to raise funds. Meanwhile, CleanSpark Executive Chairman Matthew Schultz said the company has not sold a single share of equity since November last year.

“We’re not selling a portion of the company, but a fraction of the bitcoin we mine," he said. "At current prices, it costs about $4,500 to mine a bitcoin in our own facilities; that’s a 90% profit margin. I can sell the bitcoin and use it to pay for my facilities, operations, people and growth without diluting my equity.”