Bitcoin mining: The price of electricity is no longer the only criterion
TRIBUNE. For Guillaume Girard, analyst at Galaxy Digital, the success of miners now also depends on their ability to adapt to the (shifting) energy market.
As you may know, 2022 was a very difficult year for bitcoin miners, and in particular for listed companies that resorted to debt to finance their growth.
These companies, mostly based in North America and in particular Texas, now account for more than a third of the global hashrate (computing power), compared with less than 5% in 2020.
The reason for this exponential growth, over and above the migration of Chinese hashrate to the United States following the "ban" on mining decided by Beijing in May 2021, is mainly explained by the local organisation of the energy market.
Benefiting from the large investments in renewable energies that have helped create an energy surplus in some states, miners have identified opportunities to build their mining farms around energy generation sites and away from major cities and industrial areas, the main sources of electricity consumption.
In Texas, for example, there is a glaring divide between the east of the state, which concentrates the majority of the population, and the west, which is relatively less dense but hosts a majority of solar and wind generation. Connecting these sites to the major cities with high-voltage lines is not only extremely costly and time-consuming, it is also inefficient because the further the electricity has to travel, the greater the transmission losses.
By locating not far from these generation sites, miners thus offer opportunities to producers of these energy sources by providing them with a stable and interruptible source of demand, while at the same time having access to lower-than-market electricity costs.
Graph representing East-West on the Texas market with pricing hubs in red
The only problem is that in a free market where access to capital is easy, financial margins always tend towards zero and only the most efficient players can survive. This has always been the case for the commodities market and the world of mining is no different!
So finding alternative sources of revenue must become a priority. Having access to a low electricity cost is still very important, but it is gradually becoming insufficient.
Historically, miners have tried to diversify their sources of income by offering hosting services (which involves hosting machines on behalf of third parties), lending out their bitcoin treasury to generate interest or investing in similar sectors such as HPC (High-Performance Computing). But since the end of 2021 and particularly in 2022, some miners are now interested in the energy market.
In fact, in a deregulated market such as ERCOT (the US organisation that operates the Texas electricity grid), it is possible to trade energy contracts like shares. Thanks to this system, miners who have secured a PPA (Power Purchase Agreement, enabling them to obtain a fixed electricity price and not be exposed to market fluctuations) are free to temporarily sell their right to consume electricity to someone else when the opportunity cost of doing so is more profitable than simply mining Bitcoin.
Let's take an example: let's imagine a miner A who has secured a PPA at $40/MW for his 200 MW mining farm. By mining bitcoin, the miner receives $100/MW in bitcoin and therefore makes a profit of $60/MW.
Now imagine that for some reason (a heatwave, for example), Texas experiences very high electricity demand and the market price of electricity rises to around $200/MW. The miner in question will be encouraged to stop mining operations, which are earning him $100/MW, and sell his electricity contract for $200/MW, reaping a profit of $200 - $40 = $160/MW in the process.
The American company Riot Platforms, for example, generated more than $9.5 million by selling more than 11,717 MWh last July to ERCOT's "4 Coincident Peak programme" (a special programme for buying back energy in times of crisis). This represents more than 439 bitcoins in revenue where Riot had generated "only" 318 bitcoins from mining over the same period, an increase in revenue of 138%.
Besides a purely economic interest, this control of the energy markets also enables miners to participate in programmes to stabilise the electricity grid when conditions require (curtailment programmes, load resources programmes).
During a cold storm that hit Texas during the recent Christmas holidays, American miners were able to work with ERCOT to interrupt their operations in order to reduce the upward pressure on electricity prices.
As we can see below, during the peak of the storm, electricity prices (in blue) soared to $3000/MW causing miners to shut down their operations in a matter of seconds (in orange). In total, more than 1280 MW (potentially 40 EH/s where the entire world hashrate represented 260 EH) from the 20 largest miners disappeared from the electricity grid, leaving time for prices to return to a stable level.
In the near future, only miners who are able to master the workings of the energy markets will be able to generate positive margins and continue operations during difficult market periods. As mining companies become more specialised, they will refine their energy strategies and they will try to differentiate themselves with investors who, at the end of the chain, enable them to finance themselves and thus continue to gain market share.