It’d be fair to say Bitcoin mining, a crucial activity for securing the Bitcoin network, had a pretty transformative 2021. To tell us what’s in store for the sector in 2022, Ray Sun – Head of Finance with Exponential Digital – spoke with Stockhead.
What is Bitcoin mining?
Hi, Ray. Bitcoin mining… some of our readers might know a little bit about it, but could you give us a simple overview of how the process works?
Sure, simply put… miners are tasked with verifying Bitcoin transactions and then adding them to the blockchain (which is a digital ledger of all Bitcoin transactions). In order to do this, miners use powerful computers to solve complex mathematical equations.
When a miner solves one of these equations, they’re rewarded with Bitcoin. So, essentially, mining is how new Bitcoin are distributed and how transactions are verified and the integrity of the immutable transactional database of Bitcoin and its holders is maintained.
At a higher level, big banks would traditionally act as the middlemen in financial transactions. However, with the advent of Bitcoin and other digital currencies, distributed cryptography and network consensus replaces the need for a third-party financial intermediary in many cases.
You’re heading up financial operations at Exponential Digital, which is a part of the US crypto mining firm PrimeBlock. How does a finance director like you end up in the Bitcoin mining industry?
Actually, quite a few finance professionals have made the move to Bitcoin mining recently. There are a few reasons for this. First, the industry is growing rapidly and presents a lot of opportunities for those who are willing to take a risk. Second, many finance professionals are interested in digital currencies and see mining as a way to get involved in a key part of the space.
And finally, many miners are realising that they need skilled financial professionals to help them run their businesses effectively and in compliance with regulations and accounting standards. So, it’s really no surprise finance professionals are flocking to the mining industry.
Bitcoin mining challenges
What are the biggest challenges facing miners at the moment?
There are a few challenges right now. An ever-present one is sourcing and paying for, at scale, the machines required to meet the increasing difficulty of solving the mathematical equations needed to earn Bitcoin block rewards. Another is the increasing cost of electricity needed to power these mining rigs.
There’s also the issue of creating a sustainable business model in light of these challenges. And alongside all of this, regulators are still calibrating an appropriate approach to address digital currencies.
Bitcoin mining is largely a race to solve equations as quickly as possible, which means that we miners are constantly struggling to get ahead of each other, from cheaper electricity to faster machines, all while navigating heat management, energy efficiency, and even regulatory uncertainty.
What are the benefits of having mining operations in North America?
For one, with China’s crypto mining ban, the US is quickly becoming a world leader in Bitcoin mining. The US also has an increasingly more developed infrastructure and knowledgeable workforce when it comes to mining. Talent is key in this industry and the US has a lot to offer in that respect.
And the US has a robust and well-functioning legal system. This is important for any business, but especially so in the cryptocurrency space where regulatory uncertainty is still prevalent.
In contrast, the likes of Kazakhstan, Russia, and Belarus lack the necessary legal framework to support safe, legitimate Bitcoin mining operations and attract global capital. So, by having operations in the US, mining companies are able to take advantage of the country’s many benefits, including access to US capital markets, and minimising the risks associated with operating in uncertain environments.
The sustainability factor
What do you see as the future of Bitcoin mining?
Sustainable mining is key to the future of Bitcoin and all other Proof-of-Work (PoW) digital currencies. It’s important that miners can continue to operate in a profitable way while also being good stewards of the environment. I believe the US is well-positioned to lead the way in terms of sustainable mining practices.
With mining shifting to more regulated, sustainability-focused countries, I see a future where legitimate mining companies can continue to thrive and innovate in this exciting industry, with ESG-focused players being recognised and rewarded by the market.
Why does sustainable mining matter?
Sustainability in mining is a nuanced topic. While some claim that mining has an outsized impact on climate change, the reality is that it uses a tiny fraction compared with many industries, including legacy financial and banking industries and associated supporting industries.
Coinbase this year reported on how the energy wasted by “on-but-inactive” household devices every year, in just the US, could power Bitcoin mining for one and a half years.
Nonetheless, it’s important for miners to take measures to be as environmentally sustainable as possible. This includes reducing energy consumption, recycling resources, and using renewable energy whenever possible.
And from a business perspective, sustainability is key. Miners need to be able to operate profitably in order to remain in business. This means finding ways to keep costs down and increase efficiency. Sustainability is also about being responsible members of the community and ensuring that our operations don’t have a negative impact on the communities in which we operate.
What’s your go-to answer to those who perceive Bitcoin mining having a harmful impact on the environment?
The traditional banking system actually has a far bigger environmental footprint than Bitcoin. Bitcoin consumes less than one-fifth the electricity of bank branches and ATMs.
Of course, legacy banking and financial services are a huge market segment, with a broader reach, but it’s important to keep this in perspective since there is a tendency towards explicit or implied assumption that legacy activities are pristine vs crypto and other innovations.
The negative environmental impacts of Bitcoin mining have been grossly exaggerated. In reality, miners are quickly becoming leaders in sustainable practices.
The myths around Bitcoin mining and its supposed negative environmental impact have been debunked time and again. But the perception remains, in part because it’s a complicated process that many people don’t understand.
The fact is, many mining companies are taking their responsibility to the environment seriously. They’re constantly looking for ways to reduce our energy consumption, recycle resources and use renewable energy sources.
Mining can be both profitable and sustainable. Publicly listed mining companies will face increasing market discipline from institutional investors and other stakeholders to drive ESG progress.
The Bitcoin Mining Council
The Bitcoin Mining Council was formed following a May meeting between leading Bitcoin miners, such as PrimeBlock, and Elon Musk – a meeting convened by MicroStrategy CEO Michael Saylor. How much influence does the council have?
Basically, the Bitcoin Mining Council is a voluntary, open forum of Bitcoin miners. It’s not the illuminati, but its influence is growing. Its goal is to promote collaboration and information sharing among miners in order to improve the overall health of the Bitcoin mining ecosystem.
The council has already been successful in terms of promoting collaboration. For example, members have come together to develop best practices for mining sustainably. The Council has also been effective in terms of information sharing, with members regularly sharing information on new mining technologies and strategies.
Competition and public-private partnerships are key to advancement of the crypto and digital spaces.
How concerned are you about potential regulatory roadblocks in the US? Could the infrastructure bill pose a threat to the Bitcoin mining sector if it’s not amended again?
We’re confident that the regulators in the US will eventually come up with a workable framework for digital currencies and their associated risks. In the meantime, companies within the industry are working hard to ensure that we’re in compliance with all applicable regulations, including any changes that may result from the passage of the [US government’s trillion-dollar] infrastructure bill.
The bill changes the definition of [crypto] “broker” to mean anyone providing any service “effectuating transfers of digital assets on behalf of another person”. This definition includes crypto miners, and could pose a threat to miners that don’t actually possess the relevant information to report to the IRS.
We hope that either subsequent legislative action or regulatory guidance will smooth out these unintended inefficiencies from the law.
And it’s important that all miners stay up to date on the latest regulatory developments, as the landscape is changing rapidly.
Crypto mining and investing
What should investors think about when considering mining-related investments?
When considering mining-related investments, it’s important to keep in mind the risks and rewards associated with the venture. Mining can be a lucrative business, but it also comes with…