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The Financialisation of Crypto Mining

Jan 16, 2023
The Financialisation of Crypto Mining

Once upon a time, fresh cryptocurrency was mined by tech-savvy and passionate individuals, running independent rigs from their basements, backyards and bedrooms.

Some would say it was the early ‘golden age’ of mining, where control and prosperity were in the hands of ordinary people, rather than governments or large corporations.

That was back in the early days of the 2010s, and the picture has changed dramatically since then.

As interest in crypto has spread, mining operations have scaled up to match. In 2022, new coins are increasingly mined by professional mining centres.

These crypto ‘farms’ have the money to invest in advanced Graphics Processing Units or Applications Specific Integrated Circuits, to solve hash problems faster. Therefore, they stand a higher chance of profiting. Independent rigs simply can’t compete with this massive computing power.

So, what does this gradual monopolisation of the mining industry mean? 

Poorer chances for independent miners.

Investopedia reported that 10% of Bitcoin miners control 90% of the network’s mining capacity, and 0.1% of miners own 50%. This means the chances for newer, and smaller miners are slim.

Anyone can still invest and trade in crypto. However, as the control of mining is taken away from the public, there’s one less way for ordinary people to get in on the ground floor of the crypto phenomenon, and turn a profit.

There are exceptions. In January 2022, two solo miners hit the jackpot, as reported by Cryptonews.

One miner, ‘with only 126TH in hash power’ discovered a block which earned ‘USD 266,870 in BTC as a reward.’

Another, an Ethereum miner who had only been in the game since late December, running on a hash rate capacity of ‘2.19GH/s’ won a block ‘netting them a hefty ETH 168 (USD 524,000).’

However, these stories really are one in a million, and if the number (and scale) of mining operations continue to rise, the difficulty is likely to increase accordingly.

Climate Impacts.

Another negative aspect is the impact of large-scale mining on the environment. The larger the mining operation, the higher its energy consumption.

The cost of the energy required to mine at scale helps ensure that no one party can ‘hijack the network.’ As stated by Investopedia, it also means that ‘about 37 kilotons of electronic waste are annually produced as a by-product of Bitcoin mining.’

This might not seem like a game-changer compared to industries that have long been the culprits of mass fossil fuel consumption, like Big Oil. However, to disregard the climate impacts of bitcoin mining is to massively underestimate the scale of demand.

Mining is closely linked to fossil fuels and could revive our dependency on these harmful resources. 

One mining company alone ‘resurrected’ a coal power plant in Montana ‘on the brink’ of closing forever. When a new data centre became the sole recipient of the plant’s output, carbon dioxide emissions increased by up to 5000%, as reported by the Guardian.

That’s just one example. Multiply it by the rapidly increasing number of large mining operations out there, and you’ll see a serious impact on efforts to slow global warming.

It’s the same old conundrum: There’s money to be made in crypto, but is it worth the earth?

What about financing?

We don’t need to reiterate that setting up a mining rig, let alone a large-scale farm, is expensive.

So, how are companies, large or small, raising the initial capital to get going?

Could new kinds of financing be a solution to the problems we explored above?

Traditional business loans will often be unavailable to small or independent operations that are not registered as trades or businesses.

According to Protocol, ‘existing options for bitcoin miners, like those from Salt Lending or BlockFi, mostly centre around using a miner’s existing crypto or equipment as collateral.’ 

This means that the less you already have, the less you are likely to secure a loan. There’s a clear disadvantage here for independent miners. The system gives a head-start to larger-scale operations whose equipment and facilities can act as a springboard into expansion and further profits.

New options are emerging, such as a revenue-based structure from Pipe, which has been described as a “mine now, pay later” route. On their website, they promise to ‘transform recurring revenue into up-front capital for growth without dilution or restrictive debt.’

Pipe CEO Harry Hurst said he wants to ‘open up bitcoin mining to smaller players in the market,’ by restoring the ability to get set up with ‘specialized computers which can cost $10,000 or more,’ Protocol reported.

In this model, smaller miners can at least grow at the same rate, proportionately, as their larger counterparts. It doesn’t mean they’ll turn the same kind of profit but could help them maintain a foothold in the market.

Then, there are Bitcoin-backed lending services.

These allow crypto investors to use their Bitcoin as collateral for a fiat loan (a loan backed by the government, but not based on a physical asset like gold). 

This money can then be used ‘to buy ASICs or other mining hardware, pay for electricity costs, or finance other operational costs,’ as stated by Compass Mining.

A loan of this type could benefit independent miners who have already been successful in securing cryptocurrency, but as we’ve established, these are becoming extremely rare. For those just starting out, it’s a no-go.

The Bitcoin-backed loan is more accessible to investors, who put down real-life cash for their crypto in the first place. This rather contradicts the goal of making financing more accessible for those without the capital to fund a mining operation independently.

In sum, the various financing options available for miners may support the survival of smaller operations in the future. As it stands though, larger farms are winning out.

Therefore, concerns such as alienating independent miners from the industry, as well as the climate ramifications of large-scale mining, should be taken into account on a higher level moving forward.

Read our Whitepaper on the Transformation in Crypto

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