Hope is Not a Strategy for Bitcoin Miners
I’d like to be clear that I am a full-throated believer in the Bitcoin Mining Industry. Bitcoin will change the world and Mining is a critical element of this. I also believe that Mining is the best way to acquire Bitcoin. However, believing in the future of this industry is not the same as believing in the structure of how it is currently organized.
Currently, the Bitcoin Mining industry is, by all metrics, troubled. In the past week, we’ve seen a slew of troubling press releases and indications that numerous public Bitcoin Miners are considering bankruptcy to add to those already in bankruptcy.
Why such trouble for an industry whose future is so bright? I believe it stems from grafting a brand-new worldview, system, and ethos (Bitcoin) onto a corrupt, diseased one (Fiat). Bitcoin Miners are heavily reliant on Wall Street, which is thoroughly polluted with short-term win-lose high-time preference incentives. I addressed the financing side recently in You Cannot Reason with a Tiger when your Head is in its Mouth. Miners are also reliant on politicians. They attempt to jam their worldview, manifesting itself in ESG, onto our innovative industry. I addressed the political side, with special attention to the lovely and talented (sarcasm font, she is a hack grifter) Senator Warren in Freedom and Electricity.
Perhaps the biggest reason is that Bitcoin Miners are an ebullient lot. We are convinced that the future is bright for Bitcoin and Bitcoin Mining and almost can’t consider a countercase. However, regretfully, Hope is Not a Strategy.
While many confuse volatility for risk (volatility is price fluctuations, while the risk is what will happen to the asset over the long term) with Bitcoin price, the fact stands that Bitcoin has been volatile. Bitcoin Mining involves capital expenditures upfront and then operational expenses, mostly electricity, over time. There are many ways to finance this with debt or equity being the most obvious. If there is debt, you must then pay back the debt over a fixed period. Adding these elements together proved toxic for Bitcoin Miners as they were hoping that Bitcoin would keep increasing in price or that the Capital Markets would provide additional capital.
I passed the CPA test a million years ago and to help me pass I took an in-person class at night. The instructor was a colorful guy and a bit abrasive. He would respond to incorrect answers to test questions with a loud WRONG. He vowed that this one word would be the only thing we would remember about his class. 25 years later, I realize he is right. I have the same answer to the Bitcoin miners who were hoping for the Bitcoin price to increase forever or for capital to be continuously provided. WRONG.
How to square the circle of believing that the future is Bright for Bitcoin Mining as well as believing that their structure today is impossible FUBARed? Well, different structures.
Some of the elements that might be utilized in the future of Bitcoin Mining include:
• Off the grid: While utilized today, it may become the standard for Bitcoin Mining in the future. In a recent (excellent) podcast titled Closing the Loop, the CEO of Riot talked about the advantages of his mining operation. He mentioned that they have a long-term, very favorable electricity rate that utilizes the public ERCOT grid. This sounds great at first glance, but when you think deeper you realize that they are engaged in a form of rent-seeking that benefits a private actor using a public asset. Perhaps over time regulatory overlords like Senator Warren will drive these types of companies away from public electricity and the majority of Bitcoin Mining will be done off the grid.
• Privately Financed: There are several innovative financing strategies that could be employed for Bitcoin Mining, pushing ownership of mining farms to true believers in Bitcoin and away from Wall Street.
• Smaller Scale: It’s possible that the future of the Bitcoin Mining industry, like Bitcoin itself, is highly decentralized. The natural economies of scale that I can think of are minor relative to the exposure to our voraciously power-seeking politicos that being large entails.
• Dark: Bitcoin is gloriously permissionless. Bitcoin Mining is different in that it exists in the real world and is subject to some types of permissions. Even if it is just for permission for land rights. However, future Bitcoin mining might exist in a nether world where the owners might be attempting to keep it on the down low.