Bitcoin mining: The price of electricity is no longer the only criteria

Sustainable development and ethics
TRIBUNE. For Guillaume Girard, analyst at Galaxy Digital, the success of miners now also depends on their ability to adapt to the (changing) energy market.

As you may know, 2022 was a very difficult year for bitcoin miners, and especially for publicly traded companies that used debt to fund their growth.

These companies, mostly based in North America and in particular in Texas, represent today more than a third of the global hashrate (computing power), against less than 5% in 2020.

The reason for this exponential growth, beyond the migration of Chinese hashrate to the United States after the "ban" on mining decided by Beijing in May 2021, is mainly explained by the local organization of the energy market.

Benefiting from the large investments in renewable energy that have helped create an energy surplus in some states, miners have identified opportunities to build their mining farms around power generation sites and away from major cities and industrial areas, the main sources of electricity consumption.

In Texas, for example, there is a stark division between the eastern part of the state, where the majority of the population is concentrated, and the western part, which is relatively less dense, but which hosts a majority of the solar and wind generation. Connecting these sites to major cities with high-voltage lines is not only extremely expensive and time-consuming, it is also inefficient because the further the electricity must travel, the greater the transmission losses. 

By locating near these generation sites, miners provide opportunities for producers of these energy sources by providing them with a stable and interruptible source of demand, while accessing lower than market electricity costs.

Graph representing East-West in the Texas market with pricing hubs in red

However, in a free market where access to capital is easy, financial margins always tend towards zero and only the most efficient players can survive. This has always been the case for the commodities market and the world of mining is no different!

Thus, finding alternative sources of income must become a priority. Having access to low cost electricity is still very important, but it is gradually becoming insufficient.

Historically, miners have tried to diversify their sources of income by offering hosting services (which consists of hosting machines on behalf of third parties), by lending their bitcoin treasury to generate interest or by investing in similar sectors such as HPC (High-Performance Computing). But since the end of 2021 and especially in 2022, some miners are now interested in the energy market. 

Indeed, in a deregulated market such as ERCOT (the American organization that operates the Texas electricity network), it is possible to exchange energy contracts like shares. Thanks to this system, miners who have secured a PPA (Power Purchase Agreement, allowing them to obtain a fixed electricity price and not be exposed to market fluctuations) are free to temporarily sell their right to consume electricity to someone else when the opportunity cost of doing so is more profitable than simply mining Bitcoin. 

Let's take an example: let's imagine a miner A who has secured a PPA at $40/MW for his 200 MW mining farm. By mining bitcoin, the miner receives $100/MW in bitcoin and thus makes a profit of $60/MW. 

Now, let's imagine that for some reason (a heat wave, for example), Texas experiences a very high demand for electricity and that the market price of electricity rises to around $200/MW. The miner in question will be encouraged to stop mining operations that are bringing in $100/MW and to sell his electricity contract for $200/MW, thereby making a profit of $200 - $40 = $160/MW.

The American Riot Platforms, for example, generated more than $9.5 million by selling more than 11,717 MWh last July to ERCOT's "4 Coincident Peak program" (a special program for buying back energy in times of crisis). This represents over 439 bitcoins of revenue where Riot had generated "only" 318 bitcoins from mining over the same period, an increase in revenue of 138%.

Beyond a purely economic interest, this control of energy markets also allows miners to participate in power grid stabilization programs when conditions require it (curtailment programs, load resources programs).

During a cold storm that hit Texas this past Christmas, U.S. miners were able to work with ERCOT to shut down operations to reduce upward pressure on electricity prices.

As we can see below, during the peak of the storm, electricity prices (in blue) rose to $3000/MW, causing miners to stop operations in a few seconds (in orange). In total, more than 1280 MW (potentially 40 EH/s where the entire world hashrate represented 260 EH) from the 20 largest miners disappeared from the electrical grid, leaving time for prices to return to a stable level.

In the near future, only those miners who are able to master the workings of the energy markets will be able to generate positive margins and continue their operations during difficult market periods. As mining companies become more specialized, they will refine their energy strategies and try to differentiate themselves to the investors who ultimately allow them to finance themselves and continue to gain market share.

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Bitcoin mining: The price of electricity is no longer the only criteria
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February 9, 2023

Bitcoin mining: The price of electricity is no longer the only criteria

TRIBUNE. For Guillaume Girard, analyst at Galaxy Digital, the success of miners now also depends on their ability to adapt to the (changing) energy market.

As you may know, 2022 was a very difficult year for bitcoin miners, and especially for publicly traded companies that used debt to fund their growth.

These companies, mostly based in North America and in particular in Texas, represent today more than a third of the global hashrate (computing power), against less than 5% in 2020.

The reason for this exponential growth, beyond the migration of Chinese hashrate to the United States after the "ban" on mining decided by Beijing in May 2021, is mainly explained by the local organization of the energy market.

Benefiting from the large investments in renewable energy that have helped create an energy surplus in some states, miners have identified opportunities to build their mining farms around power generation sites and away from major cities and industrial areas, the main sources of electricity consumption.

In Texas, for example, there is a stark division between the eastern part of the state, where the majority of the population is concentrated, and the western part, which is relatively less dense, but which hosts a majority of the solar and wind generation. Connecting these sites to major cities with high-voltage lines is not only extremely expensive and time-consuming, it is also inefficient because the further the electricity must travel, the greater the transmission losses. 

By locating near these generation sites, miners provide opportunities for producers of these energy sources by providing them with a stable and interruptible source of demand, while accessing lower than market electricity costs.

Graph representing East-West in the Texas market with pricing hubs in red

However, in a free market where access to capital is easy, financial margins always tend towards zero and only the most efficient players can survive. This has always been the case for the commodities market and the world of mining is no different!

Thus, finding alternative sources of income must become a priority. Having access to low cost electricity is still very important, but it is gradually becoming insufficient.

Historically, miners have tried to diversify their sources of income by offering hosting services (which consists of hosting machines on behalf of third parties), by lending their bitcoin treasury to generate interest or by investing in similar sectors such as HPC (High-Performance Computing). But since the end of 2021 and especially in 2022, some miners are now interested in the energy market. 

Indeed, in a deregulated market such as ERCOT (the American organization that operates the Texas electricity network), it is possible to exchange energy contracts like shares. Thanks to this system, miners who have secured a PPA (Power Purchase Agreement, allowing them to obtain a fixed electricity price and not be exposed to market fluctuations) are free to temporarily sell their right to consume electricity to someone else when the opportunity cost of doing so is more profitable than simply mining Bitcoin. 

Let's take an example: let's imagine a miner A who has secured a PPA at $40/MW for his 200 MW mining farm. By mining bitcoin, the miner receives $100/MW in bitcoin and thus makes a profit of $60/MW. 

Now, let's imagine that for some reason (a heat wave, for example), Texas experiences a very high demand for electricity and that the market price of electricity rises to around $200/MW. The miner in question will be encouraged to stop mining operations that are bringing in $100/MW and to sell his electricity contract for $200/MW, thereby making a profit of $200 - $40 = $160/MW.

The American Riot Platforms, for example, generated more than $9.5 million by selling more than 11,717 MWh last July to ERCOT's "4 Coincident Peak program" (a special program for buying back energy in times of crisis). This represents over 439 bitcoins of revenue where Riot had generated "only" 318 bitcoins from mining over the same period, an increase in revenue of 138%.

Beyond a purely economic interest, this control of energy markets also allows miners to participate in power grid stabilization programs when conditions require it (curtailment programs, load resources programs).

During a cold storm that hit Texas this past Christmas, U.S. miners were able to work with ERCOT to shut down operations to reduce upward pressure on electricity prices.

As we can see below, during the peak of the storm, electricity prices (in blue) rose to $3000/MW, causing miners to stop operations in a few seconds (in orange). In total, more than 1280 MW (potentially 40 EH/s where the entire world hashrate represented 260 EH) from the 20 largest miners disappeared from the electrical grid, leaving time for prices to return to a stable level.

In the near future, only those miners who are able to master the workings of the energy markets will be able to generate positive margins and continue their operations during difficult market periods. As mining companies become more specialized, they will refine their energy strategies and try to differentiate themselves to the investors who ultimately allow them to finance themselves and continue to gain market share.

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Guillaume Girard
Analyst at Galaxy Digital

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Find the best of the crypto, NFT and DeFi news every Wednesday and Thursday in the two newsletters written by our specialised journalists Grégory Raymond and Raphaël Bloch.