Bitcoin mining is becoming industrialized

As the cryptocurrency industry continues to grow, so too does mining. But as far as mining is concerned, a new trend has recently emerged.

Bitcoin mining started as a small experiment by a few people repurposing their home computers to mint virtual coins that were worth next to nothing at the time. Fast forward to 2020, however, and Bitcoin mining has become a robust industry that continues to grow along with Bitcoin itself.

Today, the Bitcoin network’s hash rate sits at around 129 EH/s, following similar price action to Bitcoin, even after the mining reward halving in October. James Bennett, CEO of ByteTree, a crypto data provider, told Cointelegraph that this trend is likely to continue. “The investment in Bitcoin network infrastructure is clear. You only need to look at a series of all-time highs in network difficulty to see the rate at which new mining capacity is being added.” Here’s how the mining industry is changing and maturing.

Listed companies joining

There has been a trend of high-profile investors, both corporate and individual, investing in Bitcoin and other digital assets. As public companies, including Nasdaq-listed Bit Digital, begin to get involved in the industry and related activities, Bitcoin mining will also do the same.

With Bitcoin mining profits returning to pre-halving levels, it makes sense that companies and individuals would want to invest in Bitcoin mining as an additional source of income, especially considering that Bitcoin mining has proven to be fairly immune to the setbacks caused by COVID-19 and widespread lockdowns, Whit Gibbs, host of the Hashr8 podcast, told Cointelegraph on the matter.

“There have been a number of large companies involved in Bitcoin mining for some time. The most notable of these is Fidelity. Not only have they established a mining operation, they have also been a huge supporter of research and education in the industry. Additionally, another notable company that has an active interest in mining is Horizon Kinetics.”

Capital Access

As new players join the industry, access to capital is imperative. Many digital asset liquidity companies such as Blockfills, Nexo, etc. are now catering to the needs of Bitcoin miners. This allows miners to expand their operations and have some wiggle room when they don’t want to sell Bitcoin at a low price.

For example, Blockfills announced in May that it would provide financial solutions to mining companies that want to purchase new generation ASIC mining equipment in North America. Since then, Blockfills has committed approximately $50 million in financial support to these miners. Neil Van Huis, partner and director of Blockfills, told Cointelegraph:

“Financial support is a primary function of any growing asset class. Our goal is to continue to bring traditional practices to fast-growing areas to fill gaps and drive the development of this field. $50 million is just the beginning. We have another $50-70 million to complete in the next few months, and we expect to complete up to $250 million in financial support by May 2021.”

Additionally, miners have always been subject to Bitcoin’s volatility. There were no hedging options in the early days, but now the advent of Bitcoin derivatives allows miners to hedge, and hash rate derivatives have also improved on these, providing users with a miner-specific product that they can take advantage of.

Sam Chwarzynski, CFO of Blockware Solutions and managing partner of Blockware Mining (a company that provides hardware and services within the mining industry), explained that hash rate derivatives are still a new product, but two variations of them have become popular. There are basic "cloud mining" contracts, and there are "difficulty hedge" contracts, which allow miners to lock in a specific network difficulty for a certain period of time, usually 6 to 9 weeks. Chwarzynski further added: "For a slight premium, "difficulty hedge" contracts allow miners to hedge production costs, similar to how traditional commodity producers/farmers hedge production with futures and other derivatives. As the commoditization of Bitcoin mining continues, we expect the hash rate derivatives market to mature as well."

Government involvement

Over time, Bitcoin’s reputation has changed dramatically, leading governments to take a more relaxed or regulatory stance towards the cryptocurrency industry. Countries such as Portugal have cut taxes on activities such as cryptocurrency trading and mining as a way to incentivize development. Gibbs told Cointelegraph, “In addition to self-mining, many countries actively support Bitcoin miners through energy subsidies and tax incentives. I think these countries now realize that they have to ensure that as much computing power as possible is within their borders.”

Other governments have also begun investing in Bitcoin mining themselves, with Kazakhstan already having 13 Bitcoin mining operations in the country, with plans to open four more. However, not all governments have a positive attitude toward cryptocurrencies, and in some countries mining remains illegal.

Mason Jappa, CEO of Blockware Solutions and managing partner of Blockware Mining, told Cointelegraph that this situation poses a lot of risks. “Many mining farms in Venezuela and some other countries are facing a situation where the government may not support their operations. That is, the mines are operating illegally, and if they are caught, their operations may be shut down and the miners may be detained.”

On the other hand, other governments have also taken less conventional approaches to bitcoin mining. While Iran legalized the practice last year, it recently announced that newly mined bitcoins must be sold directly to the country's central bank. Gibbs added: "The ability to anonymously accumulate bitcoins through mining is an attractive value proposition for countries that cannot easily trade with other countries due to sanctions, etc. I think this is why some countries have started mining bitcoins."

More decentralized

With all the new tools, access to new resources, and the collaboration and assurances provided by governments on multiple levels, the mining industry will likely continue to be taken over by companies with large capital investments. However, Gibbs believes that it will become more decentralized in terms of the geographic distribution of mining farms.

He added that Chinese miners are now diversifying some of their operations to other countries, but that doesn’t mean they are losing their dominance. “As long as 100% of Bitcoin mining ASICs originate from China, or very close to China, they will continue to have an insurmountable advantage over the rest of the world.”

As the big players enter with large amounts of money, mining will likely continue to grow out of the community. What was once a practice of a few people using their personal computers has now become a huge industry. To mine, you must purchase specific machines, host them, maintain them, and pay for other expenses. However, for now, Bitcoin mining can still be profitable, especially as the price of Bitcoin continues to break new highs.