Bitcoin mining is growing across North America, sparking new revenue opportunities for businesses that have access to low-cost energy sources, including renewable ones. Be aware of the risks as well as the benefits.
Despite the cryptocurrency’s highly fluctuating price and its growing environmental issues, Bitcoin mining is booming in North America. In the state of Texas specifically is beginning to become an epicenter after China had banned the mining industry in 2021, triggering the exodus of miners out of the state. This ban decreased China’s control over Bitcoin mining from around two-thirds of the world’s industry in April 2021 to just 1% by July 20, has opened up an chance that could allow North American companies, particularly those working in the energy sector to get more acquainted to Bitcoin mining and integrate Bitcoin mining into their company plans.
For those who aren’t familiar with the workings of Bitcoin’s cryptocurrency, “mining” is how transactions are verified for the blockchain. It’s basically a competition to create blocks, or records that are added to the ever-growing blockchain network. For the service, winners get paid with Bitcoin (BTC) that has surpassed a record value of greater than $688,000 by the month of November 2021.
In the aftermath following the Chinese ban, companies that are based within North America, which include Riot Blockchain and Marathon Digital Holdings have been able to raise huge amounts of capital to accelerate manufacturing and increase their industrial operations. Additionally, Chinese companies have joined what’s been dubbed”the Great Mining Movement” to North America, investing in US facilities and building huge warehouses of their own, that are equipped with thousands of computers specifically designed to mine a variety of cryptocurrency, the most famous one being Bitcoin.
What I’ve learned through my experiences conducting feasibility studies with Canadian clients who are interested in this lucrative industry is that new players particularly energy-related companies are also entering the field in a substantial way through joint ventures as well as other partnership arrangements. Power costs are one of the major elements in mining cryptocurrency. That means companies with access to reliable, low-cost electricity–particularly from renewable sources–have an opportunity to play a central role as the industry evolves in North America.
In this piece I provide a look into the basics of Bitcoin mining and explain how to quantify the cost and benefits, which are enormous. I also tackle the challenges of the field, including concerns about energy consumption and the risks associated with it, such as the constantly evolving regulatory environment for crypto.
Bitcoin Mining Basics
The basis of each cryptocurrency is a Blockchain, that is in essence an electronic ledger, which is sustaining an ever-growing number of records. Blocks in the chain are documents where information such as Bitcoin transaction records are kept, as well as the miner created that specific block. Each block is also equipped with the hash, which is a distinct 64-digit number that is used to identify the contents of the block, and also the hash for the previous block within the chain.
In order to be able to claim the block for most cryptocurrency, Bitcoin included, a mining entrepreneur must have the ability to determine the hash value to be that is less or equal to the value that Bitcoin generates to complete the transaction. As more miners compete with more power being utilized to compete, the chance of winning is diminished–currently, the odds are one of the hundreds of trillions, which helps create a rate for the creation of new blocks, which is currently approximately 1 every 10 min.
The competition between miners together secures the blockchain by permitting transactions and data to move in what’s described as a non-trustworthy way, which means that an intermediary, such as bank doesn’t have to guarantee that the Bitcoin cannot be used twice. Instead, the challenge of determining the correct hash as well as the financial rewards of a successful solution create a safe consensus mechanism, making it impossible for hackers to steal.
The consensus mechanism employed by Bitcoin is called Proof of Work, also known as PoW. Because the algorithm is based on the collective strength of a large number of computing devices, PoW is a remarkably solid method to ensure an open and secure network. But it’s not without drawbacks. It is, in particular, extremely energy-intensive. As more computers are utilized for mining it, the amount of power needed to earn cryptocurrency and keep the network running grows.
Other cryptocurrencies, such as Ethereum have changed and are looking to change to a different algorithm known as proof of stake, also known as PoS. PoS does not require the vast and decentralized network of miners to run its operations, and therefore is much less intensive in terms of energy use. Although it’s not as secure, its lower demand for energy could help make it cheaper for the blockchains to be able to support the next generation of crypto applications such as smart contracts, non-fungible tokens and the decentralized financial system. Bitcoin However, it has not yet announced plans to move to PoS.
As part of Bitcoin’s supply management system the amount of reward that is earned for mining blocks is scheduled to be cut by half by 2024, from 6.25 BTC per block mined after the latest reduction in May 2020, and then 3.125 BTC in 2024. The current enthusiasm for mining even in the face of this planned decrease, is a sign of the viability of the business and the belief that Bitcoin’s original currency will continue to appreciate. It also indicates that the so-called hashrate which is the number of hash predictions being calculated during a particular time period on the network, fell as Chinese mining companies were needed to close their doors in 2021. This provided a huge opportunity for the new miners. As of December 20, 2021 the average hashrate was approximately 175 quintillion hashes or 175 exahashes per minute (EH/s).
Bitcoin Mining Setup
The essential resources needed to mine Bitcoin comprise:
- At minimum, one specially-designed device (called the Application-specific Integrated Circuit or ASIC miner) designed and created to compete against and provide support for a specific cryptocurrency.
- The most reliable, and affordable energy source.
- A dependable internet connection.
- An infrastructure for cooling (whether the mining is at your home or on an Bitcoin farm).
- A computer with software and the technical expertise to establish and oversee operations.
A mining business at home could be comprised of an ASIC computer and a few of ASIC miners.
ASIC miner is an ASIC miner can be described as a piece of equipment designed for mining specific crypto currencies like Bitcoin. (iStock)
Hobbyists who were solo were responsible for the initial success of Bitcoin However, they’re now much more inclined to sign up with a virtual mining group such as Slush Pool or AntPool in order to improve their chances for success.
Today’s business can be more accurately described by an industrial-scale mining facility that contains many thousands of ASIC miners who are housed in warehouses or perhaps a cluster of warehouses.
An industrial Bitcoin mining operation in Moscow (iStock)
No matter if you’re setting it up in your home or an industrial warehouse the mining framework is the same regardless of size.
It is first necessary to purchase an ASIC mining device that has been optimized to work with Bitcoin like one made from Bitmain and Whatsminer. The newest ASICs begin at around $11,000, but older models can be bought used at a lower cost. If all else is equal the latest models produce more terahashes every second, or TH/s, so the aim is to find the latest and most efficient ASIC you can afford.
The next thing to consider is power, which is required for both running and to keep cool for the ASICs. Due to the relatively low cost of overhead and the variance in equipment prices the price of electricity is the primary factor when the calculation of your net profit. The Cambridge University’s Centre for Alternative Finance produces an international map that illustrates how the market sought out cheap electricity after mining was banned from China and how nations such as that of US, Canada, and Russia experienced significant increases in hashrates.
In addition, of course, you’ll have to calculate the cost to manage and house your business, ensure it stays cool and connect it to a speedy reliable internet service, and then staff it if aren’t planning to handle it by yourself.
In terms of revenues miners could get the block reward and the transaction fee (the cost that the network compensates successful miners and rewards the miners to confirm transactions) If and when they are successful in winning the block. The fees for transactions can differ according to network conditions and the amount that the transactor will pay to expedite processing. However, at the end of 2021 the average fee was 0.125 BTC according to my analysis, which amounts to approximately 2% of the block reward.
Bitcoin Mining Risks
Every new venture is not 100% risk-free, but obviously. Since miners get paid in Bitcoin and the volatility of Bitcoin’s price is a significant risk to revenue. Operating risks include issues like the possibility of issues with connectivity to the internet or overheating ASICs. system hacks, but considering the size and the protection that is this Bitcoin network, the risk of hacking is low.
The top priority should be the reliability and availability of electricity. Because electricity is so essential to this model of operation miners must be attentive to the redundancy of their electricity supply. Although Texas has become an industry hub but there are serious concerns regarding the security of its power grid that investors need to think about.
The regulatory environment is also the risk of a possible threat mining companies in China as well as other countries are studying. Many countries that were favorable to miners like Kazakhstan and Iceland have started to limit new and existing mining operations to control the demand on their power grids. Many US states, including Texas have also embraced Bitcoin mining in some cases, even going so that they provide incentives for producers. However, it is the US Federal government has been paying more attention to the sector in the present, with tax reporting requirements to start in 2023, and increased scrutiny from authorities at the Federal Reserve into crypto’s risks to banks, consumers, and the financial system in general.
Since the cryptocurrency regulations in both the US as well as across the globe remain extremely fluid, miners must to be vigilant and keep an eye out for any changes that could affect their bottom line.
Bitcoin mining’s energy needs cause another issue that is the environmental impact that mining has, and it has ethics and reputational risk. The cryptocurrency business has faced harsh criticism over the carbon footprint it leaves. The New York Times recently calculated the power used by Bitcoin every year with the power utilized by Finland for one year. In reality, it’s true that even the most effective Bitcoin mining operation requires about 155,000 kWh in order to produce one Bitcoin. In comparison the average US household uses around 990 kWh per month.
Climate isn’t a specialized issue anymore. According to the latest Deloitte report cutting carbon emissions has become an all-encompassing goal and companies respond. In May of 2021, Tesla was one of the largest investors in Bitcoin has announced that it will stop transactions with Bitcoin because of environmental concerns. Tesla has since stated that it will resume accepting Bitcoin when it can confirm that at the very least 50 percent from Bitcoin mining operations utilized renewable energy sources.
The crypto industry is beginning to react as well. A lot of the largest producers are now committing to switching to renewable energy whether through direct purchases or by purchasing carbon credits. Companies like Great American Mining and Crusoe Energy have developed strategies to make use of mining farms energy that is otherwise wasted, such as natural gas that is flared at oil fields, surplus wind or solar energy that cannot be stored, or hydropower produced through dam overflows. This is only viable inso long the crypto mining does not increase demand for the service.
Bitcoin Mining: A New Opportunity
While Bitcoin mining’s economics on a large the scale of mining are attractive but producers must be aware of the environmental and regulatory implications. For new players such as power firms, integrating Bitcoin mining into existing processes to manage their energy consumption gives them the chance to influence public opinion as well as a surplus of resources.
Researchers from the University of Cambridge found that about 40 percent of PoW mining is currently run by renewable power sources, but pressure is growing to substantially increase this number. Businesses with eco-friendly energy solutions could be a significant part of making this happen, while reaping huge advantages.