Home Commodities Crypto Miners Are Prepared to Dig A Little Deeper

Crypto Miners Are Prepared to Dig A Little Deeper

by SuperiorInvest

Bitcoin euphoria is back, with new highs for much of this week, before falling a bit. So what would Sam do? Enterprising merchant Samuel Brannan coined it by selling equipment to prospectors rushing to California during the gold rush of the 1850s. It was a good business: gold pans, which before 1849 sold for 20 cents, soon They sold for 8 dollars.

Fast forward a couple of centuries to bitcoin fever: the price of bitcoin has nearly tripled in the past year to about $73,500, and miners incubating the tokens are riding the wave. Marathon Digital Holdings is up by a similar magnitude; Riot Platforms is up almost 60 percent.

Coin mining, as with any commodity, requires high-value equipment (in this case, high computing power) and a lot of energy; more, according to the Cambridge Blockchain Network Sustainability Index, than Egypt or Poland.

Also – as with oil or anything else extracted from the earth and the seabed – it requires a final price higher than the cost of production. Estimates for the cost of bitcoin production sit around $20,000, leaving miners comfortably in the money right now: Daily mining rewards hit a record high of $79 million on March 11, according to Blockchain.com data.

To be sure, bitcoin won't recover forever and mining is a brutal business; Many players have been eliminated. Of the dozen publicly traded names, primarily in North America, only three have market capitalizations above $1 billion. Mining rigs are inherently more expensive as efficiency improves and three big manufacturers (Bitmain, Canaan and MicroBT) dominate.

Current threats include environmental concerns that the industry is gobbling up electricity and increased regulatory scrutiny. EU cryptoasset markets will begin to come into effect towards the second half of the year; In the US, half of CFTC actions last fiscal year were taken against digital assets. Meanwhile, competition is growing, especially from states such as the United Arab Emirates and Bhutan and from wealthy (generally industrial) families.

The recent approval of ETFs, which have attracted more than $70 billion in inflows in just two months, is more nuanced. Investors could use them as substitutes for miners, making them a substitution rather than additional demand.

Two charts: the first is a dual-axis chart showing the retraced stock prices of bitcoin miners along with the price of bitcoin;  the second is a bar graph that shows

More immediate is next month's “halving,” an event that takes place roughly every four years and is designed to mimic real-world supply constraints. Miners will have to work twice as hard for the same money as the number of bitcoin rewards drops from 6.25 to 3.125; Or put another way, all things being equal, production costs will double to approximately $50,000.

However, things are unlikely to be that dire. On the one hand, well-funded miners spend the lead-up period purchasing more efficient equipment. Note: More than a few own bitcoins, ensuring deep pockets.

At the other extreme, some miners will simply retire or be bought out; see, for example, Marathon's $179 million purchases late last year. JPMorgan estimates a 20 percent drop after the halving in hashrate, a measure of computing power used. Other miners, like Bitdeer, are getting into rig manufacturing themselves.

Miners, sensitive to lobbyists and pocketbooks, are also becoming more conscious of energy costs, increasingly turning to renewables and taking on locked-in electricity from producers. The Japanese Tepco is one of those suppliers. Countries such as Ethiopia and Paraguay are also selling excess capacity to miners.

Still, investors may remember that Brannan's intelligence was all about timing. Today, those gold trays can be had for just $5.95.

Energy storage could be the next energy hoarder

It took 4,000 men to excavate Scotland's Ben Cruachan mountain and build a pumped storage hydroelectric power station at its center.

Construction techniques have been modernized since the plant opened in 1965. But investors should think about pumped storage hydroelectric systems and technologies that store energy for hours, if not days, for other reasons.

The UK government has confirmed long-held suspicions that Britain will have to build new gas-fired power stations to help meet demand next decade, when climate-dependent renewables are not generating. However, as the UK electricity system becomes increasingly reliant on renewables, price arbitrage opportunities should arise for long duration energy storage (LDES) technologies.

By 2035, there will be excess energy generated by renewables and nuclear plants for 64 percent of the hours of the year, according to an analysis prepared for the UK government. That compares to 14 percent in 2023.

On the contrary, there will be periods when renewable energy production will be insufficient to meet demand. Of the excess or deficit periods in 2035 modeled by consulting firm LCP Delta, more than 50 percent of those events are expected to last longer than 24 hours.

Britain currently relies heavily on gas-fired power stations to fill those gaps. Companies such as Czech billionaire Daniel Křetínský's SSE and EPH already have plans for new gas plants, although it is suggested they could be decarbonised using technologies such as carbon capture and storage or hydrogen.

More LDES would at least reduce dependence on gas. Pumped storage hydropower, known as “water batteries,” is more established, but other LDES technologies include compressed air and flow batteries.

Plants such as Ben Cruachan, where Drax proposes investing £500m to build a new 600MW water battery, use electricity in times of excess to push water from one reservoir to another at higher altitudes. The process is reversed during shortages, when prices are higher.

High upfront costs and uncertainty over revenues have hampered efforts to build large new LDES projects since privatization in 1990. A 1.5GW water battery proposed by SSE in the Scottish Highlands will cost around £1,500 millions. The UK is now consulting on a mechanism to guarantee income if yields fall below an agreed floor.

Developers' hopes have been dashed before. Drax's capital story remains dominated by its attempt to extend public subsidies for its woodchip-burning power station in Yorkshire. Its shares trade at 4.5 times forward earnings.

Trying to build LDES assets in Britain has been a long game. A system increasingly dependent on renewable energies and the fear of a return to gas suggests a positive result.

Source Link

Related Posts