Author: Aoyon Ashraf, Eliza Gkritsi
CoinDesk’s first ever year-end survey of crypto miners reveals a competitive but mature business with potential for merger activity to accelerate.
If you thought 2021 was a wild ride for crypto mining, you’d better strap yourself in for 2022.
The past year saw one of the biggest shake ups in mining history. Swathes of Chinese miners had to look for new homes due to the most intense regulatory crackdown in the country to date, while an ongoing global chip shortage capped the capacity of new mining machines globally.
But thanks to these developments, North American miners had a stellar year. With China out of the game, and their machine orders already in place, the U.S. and Canada have quickly risen to be the uncontested hashrate capitals of the world.
Read more: How Bitcoin Mining Works
As the price of bitcoin hit historic heights, mining profit margins were as high as 90%. The industry entered a “gold rush” period, said Amanda Fabiano, the head of mining at New York based Galaxy Digital, citing the high profitability of the miners.
At the same time, a subtler change took place. “Mining seems to have crossed the line where it was very risky and uncertain,” said Didar Bekbau, co-founder and CEO of Kazakhstan-based miner Xive. The global industry is now becoming more like traditional business, where risk is lower and investors are throwing money in and are ready to wait two or three years to get their return, he added.
However, the landscape for the digital asset mining industry in 2022 is shaping up to change significantly once again, as the delay in supply of new mining rigs starts to normalize and competition becomes more intense.
“As more miners enter the sector, margins will likely shrink, particularly for new entrants, as long as the bitcoin price stays stagnant,” Fabiano added.
With competition ramping up next year, some miners will start to feel the margin squeeze, leading to potential for increased mergers and acquisitions. “I think there’s going to come a time, in the not too distant future, where there are companies that have raised money, have machines on order and have not deployed them yet that are in a cash crunch,” said Fred Thiel, CEO of Marathon Digital, one of the largest publicly traded bitcoin miners.
“When that happens, you get some very interesting opportunities, because now you don’t have to integrate a company; you’re just acquiring their assets,” he added.
To be sure, this is not bad news for the industry in the long term. More consolidation and competition will not only make the industry more mature but will also help usher in the age of more efficient mining operations and incentivize use of more renewable sources of power.
“With the overall expansion of market boundaries, such a positive feedback mechanism will elevate the bitcoin mining industry to a more competitive and dynamic stage,” said Edward Lu, senior vice president of Canaan, one of the industry’s largest manufacturers of bitcoin mining machines.
It’s unanimous; the hashrate for the Bitcoin network will increase significantly next year. Some estimates project it will double as more miners join the network. The hashrate is a measure of computational resources used to conduct mining activities and secure the Bitcoin blockchain, and it is an important metric of competition.
Along with new entrants, Chinese miners who exited the region have been coming back online outside of China and will continue to do so next year. This will add to the hashrate and consequently the difficulty of the network, according to April Luo, an institutional sales representative for Asia at BlockFi, a company that provides structured financial products to miners and also started mining colocation with Blockstream.
Echoing the sentiment, Juri Bulovic, vice president of strategy at Foundry, the Digital Currency Group (DCG) subsidiary focused on mining and crypto staking, said that “mining difficulty will continue to increase and will exceed the previous all-time high next year, as miners continue to expand their operations, but also due to the increased efficiency of the latest generation of mining machines.” (CoinDesk is also a subsidiary of DCG.)
In fact, some industry participants are calling for hashrate reaching within the range of 300-350 exahash/second (EH/s) by the end of next year, which will be 70%-100% higher compared to around 179 EH/s as of Dec. 14, according to data from analytics firm Glassnode.
One such observer is Rob Chang, CEO of bitcoin miner Gryphon Mining, who thinks it’s possible for the hashrate to reach 300 EH/s by the end of 2022. Meanwhile, Ben Gagnon, chief mining officer of Bitfarms, expects the hashrate to be between 300 and 350 EH/s by the end of next year. Bekbau of Xive also anticipates the hashrate doubling in 2022.
However, Bitmain-backed mining platform BitFuFu’s CEO Leo Lu doesn’t expect the uptick to kick in until March, because miners in Kazakhstan will likely continue to face power rationing while the build-out of new operations in the U.S. and Russia will slow down over winter. Meanwhile, Chinese authorities are intensifying their crackdown in the country and are actively blocking mining pools.
As the hashrate and difficulty increases, miners will have to try harder to remain profitable, as long as there are no dramatic fluctuations in the price of bitcoin.
“If our top end scenario of 300 EH/s comes to pass, the effective doubling of the global hashrates would mean that mining rewards will be cut in half,” Gryphon’s Chang said.
As competition eats away at the high margins of the miners, companies that can keep their costs low and are able to operate with efficient machines will be the one that will survive and have a chance at thriving.
“Miners with low costs and efficient machines will be best positioned while those operating older machines will feel the pinch more than others,” Chang added.
New miners will be especially affected by smaller margins – and there are a lot of them. Power and infrastructure are among the key cost considerations for miners. New entrants have a harder time securing cheap access to these, due to a lack of connections and increased competition over resources.
“We anticipate that the inexperienced players will be the ones to experience lower margins,” said Danni Zheng, vice president of crypto miner BIT Mining, citing costs like electricity and data center construction and maintenance.
Miners like Argo Blockchain will strive for ultra-efficiency while growing their operations. Given increased competition, “we have to be smarter about how we grow,” said Argo Blockchain’s CEO Peter Wall.
“I do think that we’re in this kind of super cycle that is different from previous cycles but we still have to keep our eye on the prize, which is being very efficient and having access to low-cost power,’’ Wall added.
Rise in M&A
As winners and losers emerge from the hashrate wars, larger, more capitalized companies will likely gobble up smaller miners who struggle to keep pace.
Marathon’s Thiel expects such consolidation to pick up in the middle of 2022 and beyond. He also expects his company Marathon, which is well capitalized after raising nearly $700 million, to grow aggressively next year. This could mean acquiring smaller players or continuing to invest in its own hashrate.
Hut 8 Mining, which recently closed a $173 million public offering of common shares, is ready to follow the same playbook. “We’re cashed up and we’re ready to go, regardless of which way the market turns next year,” said Sue Ennis, head of investor relations for the Canadian miner.
Other than large miners, it’s also possible that big entities, such as power companies and data centers, may want to join the buying spree, if the industry becomes more competitive, and miners face the margin crunch, according to Argo’s Wall.
Several such traditional companies have already entered the mining game in Asia, including Singapore-based real estate developer Hatten Land and Thai data center operator Jasmine Telekom Systems. Malaysian miner Hashtrex’s Gobi Nathan told CoinDesk that “corporations around Southeast Asia are looking to set up large-scale facilities in Malaysia next year.”
Similarly, Europe-based Denis Rusinovich, co-founder of Cryptocurrency Mining Group and Maverick Group, sees a trend for cross-sector investments in mining in Europe and Russia. Companies are seeing that bitcoin mining can subsidize other parts of their business and improve their overall bottom line, Rusinovich said.
In Russia, the trend is apparent with energy producers, whereas in continental Europe, there tend to be small mines that integrate waste management with mining or take advantage of small bits of stranded energy, he added.
Cheap power and ESG
Access to cheap power has always been one of the main pillars of a profitable mining business. But as the criticism around mining’s impact on the environment has grown, it is all the more important to secure renewable sources of energy to stay competitive.
“We think more mining businesses will follow the trend of carbon-neutral or renewable-powered mining next year as ESG [environmental, social and governance] compliance continues to be a must for most tech companies,” said Igor Runets, CEO of BitRiver, a hosting provider for green cryptocurrency mining.
A recent survey by the Bitcoin Mining Council, an industry forum, found that 58% of the total energy used in crypto mining globally during the third quarter of this year was sustainable, up 3% from the second quarter. The increase is partly due to the rapid expansion of North American mining amid the exodus from China, and miners rotating toward more sustainable energy and modern mining techniques.
Read more: China Crypto Bans: A Complete History
As mining becomes more competitive, “energy-saving solutions would be a game-determining factor,” said Arthur Lee, founder and CEO of Saitech, an Eurasia-based, clean-energy driven digital asset mining operator.
“The future of crypto mining would be empowered and sustained by clean energy, which is the shortcut towards carbon neutrality and a key to alleviating worldwide electricity shortage whilst improving miners’ return on investment,” Lee added.
In addition, there are likely going to be more energy efficient miners, such as Bitmain’s latest Antminer S19 XP, that will also come into play, which will make the businesses run more efficiently and have less impact on the environment.
However, efforts toward a more sustainable business model for the mining sector shouldn’t just be limited to more environmentally friendly mining but should also include the “social” part of ESG. With more new miners entering states such as Georgia, Texas and New York, community engagement in these regions will be even more important heading into the next year, according to Zach Bradford, CEO of bitcoin miner CleanSpark.
Read more: Why Shouldn’t the Navajo Mine Bitcoin?
“I think that community involvement is going to be incredibly important [in 2022]. You’re either going to be in with the community that you’re in or you’re going to be on outs,” he said. “Especially with some of the non-U.S. groups that are coming in, I think they’re going to have a harder time than U.S. domiciled companies,” he added.
Fast money versus value investors
One of the main reasons many new players are flocking to the crypto mining sector is due to its high margins as well as support from the capital markets. The mining sector saw a slew of IPOs and new funding from institutional investors this year. As the industry becomes more mature, the trend is expected to continue in 2022.
“Capital markets will continue looking to deploy capital in bitcoin and miners,” Bitfarms’ Gagnon said. He noted that so far it seems that initial fundraising (pre-IPO) is significantly easier for investors in the sector, as many are looking for a quick flip. However, the outlook for long-term value investors is still unknown, as it remains a largely untapped market, he added.
Currently investors are using miners as a proxy investment for bitcoin. But as institutions are becoming more experienced, they will change how they invest in mining, according to Gryphon’s Chang. “We are noticing that they are focusing more on the things institutional investors traditionally place a lot of emphasis on, which are namely: quality management, experienced execution and companies that act like blue chip organizations [established companies] as opposed to stock promoters,” he said.
But as more traditional finance looks to dabble in crypto mining, the higher the scrutiny of the sector. “It’s not so rosy. It’s a positive development in the sector, but we should pay attention to these other developments,” such as short-seller interest, Rusinovich said.
Another trend that is likely to grow among the miners is the shift towards structured financial products, as they increasingly try to lock in margins, generate additional income from their mined coins and hedge the rise in competitive landscape, according to BlockFi’s Luo.
Supply chain: The big uncertainty
A conversation about crypto miners’ outlook wouldn’t be complete without assessing the supply-chain issues that have been a big constraint for the industry this year and are likely to spill into 2022.
“The chip shortage is one of the defining supply chain issues of 2021,” said Philip Salter, chief technology officer of Genesis Digital Assets. (Note: Genesis Digital Assets is different from Genesis, the crypto lending firm owned by CoinDesk parent company Digital Currency Group.)
Driven by Covid-19′s impact on global trade, as well as rising geopolitical tensions between the U.S. and China, the global chip shortage has impacted 169 industries, from cars to soap manufacturing.
Bitcoin miner Blockware Mining Inc.’s CEO Michael Stoltzner explained that before 2021, mining rig orders placed directly with manufacturers would be delivered within six weeks. Now, only large orders are confirmed in the first place, and manufacturer’s order books are filled well into 2022 and even 2023.
Blockware Mining has navigated these issues by planning ahead and determining the best way to negate the supply-chain challenges for miners that are looking to ramp up production.
However, the industry is divided on whether the chip shortage issue will be resolved heading into 2022.
“My hope is that supply chains are going to get better, probably mid-year, call it June, July,” said CleanSpark’s Bradford. He thinks that, right now, the squeeze in the supply chain is more pronounced given there is higher priority for holiday-related shipping.
If the supply chain issues get resolved next year, the smaller and newer companies that are feeling the brunt of the challenges currently will be able to enter the industry swiftly and compete with the larger miners, said Jonathan Manzi, the CEO and co-founder of Beyond Protocol, a blockchain technology company.
On the flip side, Gryphon’s Chang expects the supply chain bottleneck to last until at least mid-2023, as the chip manufacturers have stated that the global semiconductor shortage will extend through to 2023. And when chip manufacturers are eventually able to resume normal supply, the larger industries, such as cell phones, medical equipment and transportation, will be first in line before bitcoin miners get their fill, he added.
But other than the availability of rigs, where to put them will increasingly be a bottleneck. Both BitFuFu and BlockFi identified rack space as a major constraint for the coming year; BlockFi’s Luo specifically highlighted this problem within the U.S.
The second life of rigs
Following the China mining shutdown and consequent migration, thousands of mining rigs were abandoned in the country. While many have already been shipped overseas, others have yet to be snatched up in second hand markets and deployed.
Some miners will find opportunity in this secondhand market in 2022, even if the rigs don’t have the latest technology. “It clearly offers a lot of opportunity for some players … to develop their hashrate,” Rusinovich said, adding that “people were already saying for a couple of years that S9s were out [of the game], but they are still around.”
In the future, the latest mining rigs will be first deployed in regions with “stable laws and regulations as well as developed infrastructures,” like the U.S. and Europe, BitFuFu said.
Meanwhile, inferior rigs from these countries will then flow to Kazakhstan, Southeast Asia and other crypto-friendly places with less-developed infrastructures. Old mining rigs will be installed in Russia and Africa, facing a certain level of policy and regional risks. All these can create new opportunities.
“It’s a matter of risk, you don’t want to send a S19j pro to a certain country where they might disappear or be turned off,” but an S9 that costs much less is an easier loss to stomach, said Alejandro de la Torre, founder of ProofofWork.Energy consulting firm.
New technologies in mining
As efficient mining becomes a more important tool in order for miners to stay ahead of the competition, companies will increase their focus on not just better mining computers but new innovative technologies to maximize their overall profit. Currently the miners are leaning toward using technology such as immersion cooling to boost the performance and lower the cost of mining without having to buy additional computers.
“Aside from reducing power consumption and noise pollution, the immersion liquid-cooled miner occupies significantly less space, with neither pressure fans, water curtains nor water-cooled fans needed to achieve a better heat dissipation effect,” Canaan’s Lu said.
Such technology will be able to increase the efficiency of the mining machines and the entire facility.
Most recently, CleanSpark bought 20-megawatt-powered immersion cooling infrastructure for its Norcross, Georgia, bitcoin mining facility and is aiming to increase its mining efficiency by over 20%.
Riot Blockchain, one of the world’s largest bitcoin miners, also said in October that it plans to increase its mining hashrate up to 50% by using 200 megawatts of immersion-cooling technology at its Whinstone facility in Texas.