Crypto Miners Test Texas’ Limits

Published Nov 3, 2022, 9:00 AM

As our colleague David Pan has been reporting, Bitcoin miners have been having a very rough time of it.

To paraphrase one of his recent stories, falling Bitcoin prices and rising energy costs “led to combined second-quarter losses of more than $1 billion for the top three US publicly traded players — Core Scientific, Marathon Digital and Riot Blockchain.” Yikes.

This crunch has led to miners trying to raise cash by selling off their emergency stockpiles of Bitcoin - into the teeth of a down market.

At the same time, miners continue to flock to places like Texas - and not everyone is a fan of these relatively recent arrivals. Texas isn’t known for having the world’s most stable power grid, so miners and state officials have sought to pilot ways to address concerns about energy consumption

Bloomberg reporters David Pan and Michael Smith join this episode for more on how the miners are holding up.

This is Bloomberg Crypto, a daily Bloomberg I Heart podcast, and I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News. It's Thursday, November three. As my colleague David Pan has been reporting, bitcoin miners have been having a very rough time. To paraphrase one of his recent stories, falling bitcoin prices and rising energy costs lead to combined second quarter losses of more than one billion dollars for the top three publicly traded players in the US Core, Scientific Marathon, Digital and Riot Box Chain. Yikes. This crunch has led to miners trying to raise cash by selling off their emergency stockpiles of bitcoin right into the teeth of a down market. But at the same time, and here's where you'll hear from my colleague Michael Smith, miners continue to flock to places like Texas, where not everyone is a fan of those recent arrivals. Why well, Texas isn't known for having the world's most stable power grid, so miners and state officials have had the pilot ways to address concerns about this rising energy consumption. We're going to turn now to Bloomberg Reports. Is David Pan and Michael Smith. David, Michael, good to have you on the show. Probably not so good for the people who are going to be talking about today, who are the bitcoin miners. David. I'd love to start with you because you've been reporting extensively on the state of the industry, which seems from reading your reporting not to be great right now. Yeah, definitely. Um so when you when you look at a mining avenue for all the bigcoin mining companies, uh, we are seeing like record lows constantly in recent weeks. And um there are three major reasons. The first one is apparently the low biitcoin prices. You know it started from earlier this year the market crashed. The second reason is the soaring energy costs, and earlier this year we have you know, the rushing invasion into Ukraine that kind of increased the guest prices um for the whole energy market. Later this year, we see the heat waves across the Southern States in the US, and nearly all industrial scale bitcoin miners in Texas have shut off their machines. That's as the company's brace for a heat wave that is expected to push the state's power grid near its breaking point. The state has become one of the world, and then we're seeing more competition because which is a little bit contraintuitive because we see low prices with the high energy prices. Uh. But at the same time, miners continue to install their mining machines. So a very big reason for that is because they bought so many machines um during during the boom market, starting from last December last November, and now they finally got the machines and the price of the prices are crashing. But at the same time they have to install or to continue to build up the capacity because they've already invested like tens of millions of dollars into the infrastructure. They have to finish it so that they can actually prevent further losses in displayer market. The very definition of some cost fallacy, it sounds to me. But you know, Mike, you spent a bunch of time interviewing miners in Texas and you you sort of like written about what that experience wasn't And one thing that struck me from your reporting was like this fundamental optimism about a lot of those folks despite the conditions that David are describing. Yeah, it's kind of interesting. Um, I've met a lot of a lot of folks who are actually building out mines or certainly all have dreams of building minds, and those dreams really haven't been diminished or what I can tell. It's kind of like the psychology of oil. People who are looking for oil and gas, they're always looking to strike it rich, and Texas is by definition the kind of place that invites that kind of sort of enthusiasm. We've seen in you know, the last few weeks of October that gas prices and in Texas are actually like declining significantly. There are supply problems. It's a complicated story. It's always complicated story. But some of the costs are coming down, but at the same time, miners are trying to cover those costs by selling their bitcoin into a market in which bitcoin is hovering like blue. What are what like what are the analysts projections for how this is going to play out? In Q three earnings? In Q four you will see like the you know, the negative impacts from the climate because you know, they kind of like scaled back a lot of mining operations during the summers. That will directly affect their revenue for the third quarter and for the fourth quarter. I think that is a very interesting time for us to see because, as Michael said, some part of the costs are decreasing, for example, like the energy prices because it's getting cooler and and the mining ranks are getting cheaper. But at the same time we are seeing increasing costs in other areas, for example, the borrowing costs, like you know, the lenders are scaling back, and interest rates arising generally exactly, and people lenders generally just like have less trusting bitcoin miners because fair and and then we also have this like a very wonky but super important gauge, which is the mining difficulty. You know that that is the measure of computing power used for bitcoin mining. Uh So, previously we mentioned that there are a lot more miners, they are forced to continue to build out their capacity. That would actually increase the mining difficulty for everyone who's the mining biwcoin, which means this will lower the revenue for each miner. So this is sort of like a zero stump game. So the more miners there are, the more mining power there is, the less revenue each minor we have. Mike, can you talk about some of the specific things that folks in Texas are doing to handle like this kind of confluence of events, especially on the Responding to the concerns that many people have identified about the strain on Texas is power grid the regulators in Texas, which is quite likely lightly regulated. Uh, basically they should come to grips with the fact that there's this enormous potential power drain to bitcoin mines on the on the grid which is quite fragile, So they are trying to um accommodate it in a way that doesn't short out their grid. And the main thing that they're relying on is for bitcoin miners to turn off their computers when electricity is peaking so much that there might be blackouts. And right now there are a lot of incentives in place in Texas for them to do that. Mainly they get paid to do it um but it's still a voluntary program. Bitcoin miners in Texas are taking the week off to keep the state's energy grid intact. Whether the war in Ukraine, supply chain bottlenecks are sending energy costs higher, and that's beginning to might give me the point that like mining in Texas has you know, consistently increased year on year, but a lot of the demand management programs that you know, the Texas pol Grid operates, air air coots and others have put in place, have happened with mostly declining prices. There were absolutely a few folks who will operating when Bitcoin was treating, you know, above sixty dollars. But I would say just from a time basis, like a majority of these plants have been rolled out when prices are either falling or kind of like range bound. And so, David, it's like, if we are having a conversation and Bitcoin prices are back up at sixty dollars, what we may find is like less pseudo altruistic willingness from folks to be like, of course we will unplug our computers like no problem. Um. That will certainly be an interesting and interesting things and you're gonna see more underground mining operations if that happens. Well, I remember one of the things that you told me, David, is that like China was just very good at identifying where there were these large farms because they're like, hmm, it seems like a lot of people using a lot of electricity over there. Mike, do you get any sense from the operators in Texas or any other places that even reports it from that they have that kind of monitoring infrastructure or they really relying on like word of mouth and goodwill. Uh, they certainly had the infrastructure to to monitor it. But I think what you have in Texas is that they want bitcoin miners to move in. They want them to plug into the grid. They're doing everything they can to facilitate it, as opposed to sort of watch over it and regulate it. Um. So they don't need to go underground as long as they can convince a utility to give them the electricity they want. Uh, you know, they do have to technically have the capacity. Uh, they can do whatever they want. There's no restrictions coming up. You'll hear more from Bloomberg Reports David Pan and Michael Smith. We'll be right back. Let's talk about John who quickly who you know, is at Deer Technologies and has come out with an interesting plan to get more involved in shall we see salvaging some of what's happening with my named David. Can you tell us a little bit more about this. The company set up a distressed font four bitcoin miners, which essentially means that they're setting up two hundred and fifty million dollar fund to buy distressed assets for other mining companies. It's almost like vulture capitalists, like they're buying cheap assets, like you know, in their later time they will benefit from it. How do those other companies feel about but they're building this up and basically just like waiting for them to have some trouble. Those companies, Uh, I feel like, you know, they they're probably looking for opportunities to sell their machines. Maybe they'll get in touch with the fund and see if they can actually sell some machines to to uh deal have was fond but um at the same time, I think it's almost like a music chair situation. You know, everybody's hanging hanging in there, and then when the music stops, they just hope that that won't be me, you know, that won't be themselves, and and then they would just like survive these cycle and make huge profits later when the market comes back. David, you are planning to be to be spending some time in Texas again for another conference relates to mining, and you know in in the newsletter subscribed to the Boomboo Crypto newsletter, UM. In the newsletter that you wrote about this, you mentioned that a group of miners are having like a a commiserative drinks session where they're like, hey, guys, it's rough out here, let's get together and share our sorrows, you know, which which is really interesting to me because you know, Mike, you described like this fierce competition, this potentially challenging UM pricing environment, and David you're like, there are people who are waiting for other people to kind of go bust, and yet there they seem to still have this sort of collaborative relationship. Yes, it's it's a very small circle. So the event is called Support Group for Executives from Mining Companies. Of I think it is a very small but very interesting circle because like you have Marathon Riot, I mean, all of these companies, they have their the mining stocks are essentially like very similar to Meme stocks. They are driven by publicity and everything. So so like what you see is actually in the circle, you see a lot of big personalities, especially in the c suite of these mining companies, and then they don't really want to make their making mistakes and they don't want to see their companies failing, you know, like in front of their peers or something like that. So um, I think that would be really interesting to see, you know, who will be able to survive. But at the same time, it's the sad moment for from mining companies because they're not doing really well. Yeah, what an interesting time and come to Yeah, I was gonna say, just to add to that, UM, I've been to a ton of these. They have meetups every every every month in Houston for example, in other places. And what's interesting to me about the culture is that it really is egalitarian in a way, like and they like to play that up. So you go to these meetings and I'm sure you'll see this at the support group where you'll have the CEO of Riot, you know, the mind they have in Texas hanging out with this guy, you know, this twenty two year old kid who has no money, no no stake in thinking, but has a really cool idea. And they really do like to let anyone talk about their dreams, so to speak. I think because a lot of them come from that background and they've had this meteoric rise and and they really respect it. But it's also because of the philosophy behind bitcoin. A lot of these folks are very ideologically faithful to bitcoin and they believe it's like a way of life, and you see that in the enthusiasm they had for the business and the way they like to listen to all ideas, but also in the way, you know, it's quite Darwinian like a lot of them are waiting to swoop in like bit DearS doing with that fun and buy out a guy who's who's gone broke or a woman's gone person has gone broke. Um. All this sort of philosophical foundation to bitcoin and the kind of folks that attracts and convert to the tracts feeds these phenomena we're talking about. It feeds into the way the businesses are run and the way they're reacting now. And it also explains a lot about why they're flocking to Texas because they can do whatever they want and they have the actual systems supporting them. So much of crypto is a tech story, and so much of every tech story is a culture story, and how the culture of the beliefs, the norms, the practices, as you say, don't just inform how things happen, but in some cases determine what's what those outcomes are. Well, thank you both for joining me. It was a pleasure as always, and happy to have you back in the podcast anytime, any time wonderful. You can find more of their reporting on the Bloomberg Terminal, on Bloomberg dot com or on Twitter. Mike is at Smith Markets that's m A r K E T S. And David Pan is at David Pan Underscore One. That's d A v I D P A N Underscore the Lumber One. On the next episode of Bloomberg Crypto, we'll tackle crypto company earnings, doage coin and Elon Musk, and who the must read Bloomberg opinion columnists are for all things digital assets. Spoiler alert, yes, one of them is Matt Levine. This is Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. For more shows from I Heart Radio, visit the I Heart Radio app, Apple Podcasts, or wherever you get your podcasts. Send us your comments, questions, or suggestions for the show to Crypto at Bloomberg dot net or find us on Twitter. We're at Crypto. The supervising producer of Bloomberg Crypto is Vicky Verglina. Our senior producer is Janet Babin. Our producers are Mohammed Rouke and Sharon barriro Our Associate producers are Ty Butler and Moses on them. Desta wonder At is our engineer. Original music by Leo Sidron. I'm Stacy Marie Shmal. We'll be back tomorrow.

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