Crypto mining is crucial. Blockchains, and Bitcoin in particular, are the financial infrastructure. Global networks of “trust machines” distributed across the globe ensure decentralization, and lay the foundation for an open Internet.

Here’s some good news.

Crypto mining is generally healthy.

This article is part of CoinDesk 2023 Mining Week sponsored by Foundry.

The Bitcoin network hashrate is a good indicator of how much computing power it takes to run the network. Bitcoin’s hashrate on July 21 was 400 exahash every second. This is a five-fold increase from June 2021.

In about nine months, the economics of mining will change dramatically, and no one can stop it. The fourth Bitcoin will be halved in April 2024.

At the moment, the miner of a block can claim the coinbase transactions every time the block is mined. The coinbase transaction can contain up to 6,25 bitcoin. This is how bitcoins get minted. After April’s halving, the 6.25 bitcoin reward becomes 3.125 bitcoin.

The block subsidy and network transaction fees (i.e. The block subsidy is where the majority of earnings come from. The halving will result in miners losing out on 3.125 Bitcoin ($90,000.) per block.

The halving of the minimum wage is not unexpected. Miners are prepared for it based on previous experience. It’s not a major change but it is a simple one. We’ve known for years that this was going to happen. Bitcoin was designed with these halvings in place from the beginning and this will not change.

Cycles of business

The mining industry has had a rough time in the past year. Ethereum’s protocol changed from proof-of work to proof-of stake earlier this year, so anyone who was mining Ethereum lost their revenue source.

Bitcoin then decided that it was time to have a bear-market, which is bad for business. (Especially if you are mining bitcoins). In March 2022 the price of bitcoin was $48,000. By November 2022 it was only $16,000.

In 2022, the publicly traded mining companies Core Scientific (CORZ), Riot Blockchain, Bitfarms, Iris Energy, and CleanSpark, all of which are listed on stock exchanges, will have traded at a loss of 99%, 85% respectively, and 91%, 92, 92, and 79%.

Core Scientific declared bankruptcy. CORZ should emerge from restructuring by September, and will be entering an environment more conducive to profitable operation.

Now, miners have healthy margins again. Especially those who can access cheap energy such as TeraWulf and CipherMining. Their gross margins for Q1 2023 were over 60%.

(Anthony Power/Compass Mining)

Anthony Power, a bitcoin mining analyst who writes for Compass Mining, thinks mining companies are going to be just fine. When asked in an interview if miners will survive the halving, he told CoinDesk “they survived the drawdown to [$16,000], so sure they can.”

“You also have to think about the spot Bitcoin ETF applications. If those get approved, just think about how much money will come into Bitcoin.” Power is referring to applications to the SEC from major institutions like BlackRock to start exchange-traded funds for bitcoin; ETFs have long been seen as crucial for getting more retail investors into the crypto space.

Power’s latter point is that miners won’t lose out on revenue if the block subsidy halves and the U.S. dollar price of bitcoin keeps going up.

The public companies have recovered nicely so far in 2023, effectively acting as high beta bets on the price of bitcoin. While bitcoin is up 75% so far in 2023, CORZ, RIOT, BITF, IREN, and CLSK are up 1,042%, 445%, 307%, 468% and 219%, respectively.

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Environmental headwinds

Bitcoin mining uses energy and, given Bitcoin’s growth in the last few years, we now operate in a world where energy markets and bitcoin mining are intimately tied. The inputs to a mining operation are deathly simple: hardware and energy. That’s it. If you can get mining machines and energy at a good price, then you can run a profitable mining business.

Many have argued that mining is a way to improve energy grids, especially in states like Texas, since Bitcoin is supposed to operate as a “buyer of last resort” for energy and so provides utilities with some level of a predictable revenue source. Bitcoin miners participate in demand response programs (as do other types of businesses like supermarkets and hospitals), agreeing to help grid operators reduce stress on generators and transmission and distribution lines in exchange for lower electrical rates. This is in exchange for curtailing their energy use when demand for energy peaks.

“The 2022 and 2023 story is that demand response is working at scale. Miners have touted this benefit for a long time and now we have the track record to point to,” GRIID’s Chief Strategy Officer Harry Sudock told CoinDesk. “Operations across the board continue to scale capacity – just look at the hashrate – but the benefit to electric systems is undeniable.”

However, environmentalists argue that miners are using more energy than would otherwise be the case, and unnecessarily, and perhaps there’s merit to that argument, but predictable demand for energy should be preferred to outright wasting it.

Miners respond by saying that they use up energy that’s normally wasted. Take how miners are working with oil & gas producers to take off their “associated gas” (which is normally flared, or burned, on-site). Bitcoin miners set up in oil fields where natural gas is typically vented into the atmosphere because it is cost-prohibitive to transport it. Some bitcoin miners have set up operations at the oil fields and used that natural gas to mine bitcoin, which reduces greenhouse gas emissions.

A very mobile industry

This type of stuff is actually important because it illustrates something fundamentally great about Bitcoin mining: It can be done anywhere.

Like in, say, rural Kenya, which is what microgrid developer Gridless is doing. Gridless, a startup backed by ex-Twitter CEO Jack Dorsey, has brought electricity to people in Kenya and Malawi who are otherwise excluded from the grid. They have set up hydropower microgrids and are mining bitcoin with the energy the people don’t use.

The regulatory aspect

Greenpeace is an environmental nonprofit and they’re not big fans of Bitcoin mining. And to bring awareness to how much they hated Bitcoin mining they commissioned an art piece of a huge skull urging people to come together to protest for a code change to Bitcoin so that it doesn’t require energy to work anymore. It didn’t exactly work as planned, since the Skull of Satoshi became an unintentional mascot and, ultimately, the code change would never go through. Bitcoin will always be a proof-of-work blockchain network.

The attention Greenpeace is giving Bitcoin is also coming from regulators and governments for basically the same reasons. China banned crypto mining in 2021 due to its environmental impact, although that lasted all but two seconds, and the White House came out swinging earlier this year proposing a punitive tax on crypto mining operations for “the harms they impose on society.”

Political grandstanding aside, most of the national rules targeted at miners don’t really exist. Where they do exist is at the state level, albeit not to a fatal extent.

“Arkansas is a good example,” Luxor’s Head of Content Colin Harper told CoinDesk. “Miners are regulated as much as they are subject to the same constraints as other power consumers. Of course there’s the moratorium on fossil fuel-based miners in New York, but really the over-regulation that some states have tried to push through have ultimately fallen through for now.”

Harper was alluding to Texas whose state Senate passed a bill which would have limited bitcoin miners’ ability to participate in demand response programs only for it to be shot down in the state House.

As for the U.S. losing its foothold on bitcoin mining with all the regulatory crosshairs aimed at crypto, CleanSpark’s VP of Mining Technology Taylor Monnig thinks the opposite.

“I think the U.S. will actually increase its foothold in the mining space, even with regulatory uncertainty we continue to see companies scaling in the US at larger and larger scales. It will take time for the U.S. to fully understand the benefits of Bitcoin and Bitcoin mining, once that happens we will see even more expansion,” he said.

The unpredictable aspect

The mining industry has many inputs which are more or less predictable (or at least, logical). That said, there are many potential unpredictable factors which could crop up and turn it all on its head. We’ve already touched on the price of bitcoin. That’s unpredictable – who knows what the mining world would like if bitcoin hit $1.48k or $148k or $1.48 million. But there are many other potentially unpredictable things.

Just take Ordinals, Bitcoin’s answer to NFTs, which have mostly been created on Ethereum. Ordinals were incredibly popular earlier this year and they ushered in a huge spike to miner fees for a few months. While the Ordinals spike in miners fees has mostly fallen away, there’s always potential for innovators to create new ways to use the Bitcoin network, creating new demand for the services that miners provide.

Mining is still a young industry, and it’s ripe for change.

Edited by Ben Schiller.