Bitcoin Mining: It’s not supposed to be easy.
“God (Satoshi) will not have his work made manifest by cowards”
Ralph Waldo Emerson in Self Reliance
This edited quote by Mr. Emerson perfectly applies to Bitcoin Mining.
Bitcoin Mining has been in a funk. Public miners have plummeting stock prices, Compute North just declared itself bankrupt (will touch on that below) and of course, the bitcoin price has been hovering around $20K for a while. Troubled times.
Going back to the White Paper, while Satoshi used the analogy of Gold Mining, he did not use the phrase Mining. However, obviously central to the white paper was solving the double spending problem without the use of a third party. This is where his genius lies and ties into the idea that mining is hard by design, it’s a feature, not a bug. Mining is ensuring that transactions are valid and added to the Bitcoin blockchain correctly using a global network of computers running the Bitcoin code. It’s also how new Bitcoins are created and rewarded to those who are running the network.
Satoshi, explicitly, was relying on incentives as much as math. Its strikingly different from our current fiat masters with all their rules and regulations. His software calculation in the mining code didn’t prohibit double spending, rather it just made it economically unattractive. Said differently, he didn’t solve the double spending problem, rather he aligned incentives so that it wasn’t worth it. However, that means that Mining is hard.
Aside from the technical reasons that mining is difficult, there are also societal and cultural ones. Adoption takes time. Look at the birth of the modern telecommunications industry, we now all have high-speed connections at home and on phones, content plenty to look at, but it wasn’t smooth. Many companies went bankrupt (including one I worked at), strum und dang was the order of the day for telecommunications companies in the 1990s and 2000s. So it will be with Bitcoin, the company I was working for was building a fiber network that is still in use today, value was created, we just didn’t receive the benefit.
Compute North was founded in 2017 (ages ago in Bitcoin years). It grew and took along a lot of capital, both equity and crucially, debt. The decision to finance growth with debt took down a lot of telecommunications companies decades ago and will likely take down more bitcoin mining companies. With equity, you must profitably grow to make a positive investment, but with debt, you have to grow profitably on a schedule (or raise more debt). There also tends to be sharper elbows in the debt world as they need to protect their downside as they are not compensated for wild successes. I have no inside information, but it seems Compute fell prey to those sharp elbows. A debt provider called Generate Capital said that Compute Defaulted on their loans and took over control of some of their mining farms. While there will be disruption, it’s unlikely that the mining farms opened by Compute North will be shut down. Folks will benefit from the investment, just not Compute North.
I recently wrote up The Bitcoin Mining Business Model Beauty Contest, writing on the positive attributes of the public miners. They do have much going for them, just not a high Bitcoin price. The future is unlimited for an asset that will replace our broken fiat model, give individuals greater sovereignty, and force out-of-control leviathan governments to reign in their spending.