Original article from Galaxy
Compiled by Odaily Planet Daily Golem ( @web3_golem )
Editors note: Galaxy released its 2024 Bitcoin Mining Mid-Year Report on July 31, which mainly discusses the current economic situation of mining (including fluctuations in mining costs and transaction fees), the advantages and new business growth points of mining companies under the demand for electricity from artificial intelligence and high-performance computing, and the prediction of future hash rates. The key points are listed below. In addition, because the trend of integrating artificial intelligence (AI) and high-performance computing (HPC) with Bitcoin mining has given mining companies that can provide electricity in the short term a unique advantage, it also provides new business directions for mining companies that are currently suffering from poor economic benefits due to the reduction of hash prices and transaction fees. Therefore, the editor has compiled the second part of the report for your reference.
Key Takeaways:
As hash prices hit new all-time lows, mining difficulty dropped 10% from a peak of 88.1 T (implied hashrate 630 EH) to a post-halving low of 79.5 T (implied hashrate 569 EH) in early July. As of this writing, the difficulty is 82.0 T (implied hashrate 587 EH).
In the first quarter of 2024, listed mining companies raised a total of US$1.8 billion in equity capital, the highest amount raised in a quarter in the past three years.
While miners have been raising capital through equity issuance in recent months, we expect debt capital markets to re-emerge in the second half of 2024 and 2025 as the value of available power capacity soars.
Miners that have secured approvals for large-scale power capacity, infrastructure with long procurement cycles, and water and fiber are best positioned to take advantage of the AI revolution.
In our annual report, we estimated a hash rate target range of 675 EH to 725 EH by the end of 2024. We are now revising growth upwards to between 725 EH and 775 EH, combining public miner information, seasonal trends, and profitability analysis.
From January 1, 2024 to July 23, 2024, Bitcoin miners generated 12,970 BTC ($863 million as of July 23, 2024) in transaction fees. Miners earned approximately 55% of the total fees in 2023 (23,400 BTC).
So far this year, mining MA has completed more than $460 million in transactions, mainly divided into site sales, reverse mergers and company acquisitions. We expect MA activity within the industry to continue.
The value of electricity has soared, and mining companies are favored by capital
Since valuations began to surge in the fourth quarter of 2023, driven by expectations of approval of spot Bitcoin ETFs, mining companies have continued to raise funds (mainly equity) to expand rapidly before the halving. In the first quarter of 2024, listed mining companies raised a total of $1.8 billion in equity, setting a record for the highest amount raised in a single quarter in the past three years.
Before the halving, miners actively raised funds in order to expand rapidly, hoard Bitcoin, improve equipment efficiency, and build cash reserves to seize opportunities in the subsequent difficulties. Of the $1.8 billion raised, the top three mining companies by market value (Marathon, CleanSpark, and Riot) accounted for 75% of the funds. The new generation of competitively priced mining machines launched by Bitmain and MicroBT has increased the urgency for other miners to expand production capacity and connect machines as soon as possible to obtain a high return on investment (ROI).
As shown in the above chart, debt capital has largely disappeared from the market since mid-2022. Previously, the debt financing options available to miners were primarily structured around ASIC collateral. The challenges with ASIC collateral financing are the volatility of ASIC prices, the rapid depreciation of collateral, and the lack of margin call requirements in many contracts. When mining conditions deteriorate, not only does the cash flow generated by the machine decrease, its value also decreases, and as the loan-to-value ratio (LTV) rises, miners are unable to repay outstanding debts, putting lenders in a dangerous position.
However, as the value of available power capacity soars, lenders are expected to re-enter the market in the second half of 2024 and 2025. The nearly insatiable demand for power capacity from Bitcoin miners and hyperscale computing centers (i.e., large-scale data centers with scalable cloud infrastructure) has driven up the value of available energy capacity. From a lender’s perspective, underwriting debt for miners that have secured large-scale power capacity in prime locations provides some coverage in the event of deteriorating mining economics. Additionally, during 2022 and 2023, miners strengthen their balance sheets by reducing outstanding debt and creating leaner cost structures. As a result, we believe the industry is now well-positioned to finance itself with debt rather than relying solely on issuing equity for future growth.
Power assets are still in a price discovery period. Recent asset sales prices per MW vary, but the general trend is upward. From a mining company perspective, it may be attractive to capitalize on the rising value of their mine sites at a project level, rather than continue to dilute shares as their primary source of capital. A focus on generating free cash flow and creating a lean structure while aligning debt with cash flow payoffs allows mining companies to grow with high capital efficiency. Mining companies can also gain new sources of debt capital when their business expands into AI and HPC, which are not available to pure mining companies.
Even as debt financing becomes a reality, the mining expansion arms race continues, with significant equity financing activity expected in the second half of 2024. Public mining valuations have risen, driven by ambitious growth targets, expectations of future Bitcoin price increases, and the AI/HPC narrative. These increased valuations help miners reduce shareholder dilution from equity issuance. As large public mining companies announce ambitious growth targets, expansion and capital raising activity does not appear to be slowing down, even with hash prices near historic lows.
Building the next generation of global data centers?
Miners are at the intersection of two major growth trends: Bitcoin and AI/HPC. Given the nonlinear correlation of operating costs to Bitcoin prices, miners are still slightly profitable and can benefit from the continued bull market in Bitcoin prices. At the same time, generative AI is one of the fastest-adopted technologies in history. For example, ChatGPT reached 100 million users within the first two months of its release, becoming the fastest-growing application in history. Coupled with the fact that the power required for AI model training and inference is an order of magnitude higher than that used by traditional data centers (a ChatGPT query requires 10 times the power of a Google search), the AI arms race has created a huge demand for finding reliable power in a short period of time.
Global data center electricity demand is expected to grow 160% by 2030. In the United States, data center demand is currently estimated at 21 gigawatts (GW) and is expected to increase to 35 GW by 2030. U.S. installed power generation capacity is expected to increase by approximately 370 GW over the same period. However, as shown in the above chart, the U.S. Energy Information Administration (EIA) expects a net reduction in dispatchable generation sources (coal, natural gas, nuclear, etc.), which means that non-dispatchable, intermittent generation sources (wind, solar, etc.) will largely fill the expected supply and demand gap. Therefore, if this is converted to terawatt hours (TWh), total power generation is expected to increase by 240 TWh, while new data center load (assuming 99.995% uptime) will increase by 123 TWh (14 GW/1000 * 8,760 hours/year * 99.995%).
The increase in intermittent generation sources coincides with demand growth due to data center loads, but it could also lead to grid congestion, transmission constraints and supply shortages as loads from other sectors such as electric vehicles and domestic industrial manufacturing are also expected to grow. This could further delay load interconnection studies, approved phase-in plans and facility agreements as grid operators evaluate the relationship between the United States rapidly growing electricity demand and generation growth.
Mark Zuckerberg pointed out in a recent interview with Dwarkesh Podcast that there are no gigawatt data centers yet and that “ the key now is to secure energy ,” which is the biggest bottleneck in the race for AI supercomputers. This is an arms race for power capacity, and Bitcoin miners with large-scale power, contiguous land, water, and fiber connections are best positioned to take advantage of this megatrend.
While there are many differences between Bitcoin mining and AI data centers, mining companies are best positioned to enter the AI/HPC data center market from a time-to-market perspective. From high-voltage substation components to downstream medium- and low-voltage power distribution systems, they are similar to the power infrastructure used in traditional data centers. Some electrical components, including main power transformers and gas circuit breakers, have very long lead times, and mining companies that have already purchased these assets have a competitive advantage over new entrants who face a 3-4 year procurement period.
Mining companies have the land and power infrastructure needed to build the next generation of the world’s largest data centers . Data center developers and large-scale computing centers may begin bidding for these parks to ensure rapid access to large-scale power. This trend is just beginning, and CoreWeave’s acquisition of Core Scientific for $1 billion is an early signal. As the traditional data center market and colocation providers become increasingly saturated, large-scale computing centers will be forced to break outward and further into secondary and tertiary markets for “greenfield development.”
Miners started to get involved in AI/HPC in 2023, but the June 2024 CoreWeave and Core Scientific 200 MW colocation deal still surprised the industry. Before the AI boom, these super sites owned by large miners were valued solely for their Bitcoin mining potential. However, the impact of the CoreWeave deal on Core Scientifics stock price shows that miners can benefit from the trend towards AI. The chart below shows how miners who take a hybrid mining/AI approach benefit compared to miners who focus on a pure mining strategy.
This upside exists because the economics of AI/HPC are strong as of today. If you break it down into a per-Megawatt-hour (“$/MWh”) figure, the latest generation of Bitcoin mining machines generates about $125/MWh (S 21 at a hash price of $0.053/TH/day), and fluctuates with the hash price. Assuming a $40/MWh power cost, the gross profit per MWh is $85/MWh. In contrast, in the Core Scientific/CoreWeave deal, even after paying for the majority of the CapEx investment, CoreWeave is willing to pay a fixed $118/MWh, plus the cost of power delivery (GPU+IT and mechanical cooling infrastructure) for 280 MW in order for Core Scientific to provide the hosting service.
If the market continues to reward miners pursuing AI/HPC opportunities, there will be fewer pure-play Bitcoin miners with large sites in the future, especially if hash prices remain low .
As of July 22, the total market capitalization of the companies in the above chart (pure mining + hybrid) is $28.2 billion. As shown in the figure below, compared to the capital flowing into AI, it is hard to imagine that mining companies in a favorable position will not turn to hybrid in the future. As computing needs continue to increase, large-scale computing centers including Amazon , Microsoft ( Stargate , Wisconsin , Sweden ), Google and other companies have announced huge growth investment plans in the field of AI in the next few years.
Some Bitcoin miners are already benefiting from the AI trend. However, until miners prove they can build and operate these data centers at scale, they will continue to undercut pure data center providers.
in conclusion
The first half of 2024 marks a defining period for the Bitcoin mining industry, with significant economic challenges and groundbreaking developments. Despite historically low mining economics, the industry has demonstrated remarkable resilience and adaptability in the face of historically low hash prices and high demand for electricity.
The convergence of AI/HPC and Bitcoin mining is a transformative endeavor for many companies seeking to exploit the powerful but unrelated economics of mining.
As power demand for AI/HPC continues to grow, power supply has become a clear bottleneck, so miners with large power supplies are well positioned. For these miners, it will be critical to remain flexible in the future and allocate megawatts of capacity in a direction that maximizes shareholder returns.
