Bitcoin euphoria is back. So what would Sam do? Enterprising shopkeeper Samuel Brannan coined it in by selling kit to prospectors who rushed into California during the 1850s gold rush. It was nice business: gold pans, retailing at 20 cents before 1849, were soon going for $8.
Fast forward a couple of centuries to the bitcoin rush: the bitcoin price has almost tripled in the past year to about $73,500 and miners that hatch the tokens are riding the wave. Marathon Digital Holdings is up by a similar magnitude; Riot Platforms is up nearly 60 per cent.
Mining coins, as with any commodity, requires top dollar kit (in this case vast computing capacity) and plenty of energy — more, reckons the Cambridge Blockchain Network Sustainability Index, than Egypt or Poland.
It also — again as with oil or anything else dug out of the ground and seabed — requires an end price above the cost of production. Estimates for the production cost of bitcoin sit around the mid-$20,000s, leaving miners comfortably in the money right now: daily mining rewards hit a record $79mn on March 11, according to Blockchain.com data.
For sure, bitcoin will not rally forever and mining is a brutal business; many players have been wiped out. Of the dozen or so listed names, mainly in North America, only three have market caps above $1bn. Mining rigs are inherently more expensive as efficiencies improve and three big manufacturers — Bitmain, Canaan and MicroBT — dominate.
Ongoing threats include environmental concerns that the industry is guzzling electricity, and more regulatory scrutiny. The EU’s Markets in Crypto Assets will start taking effect towards the latter half of the year; in the US half the CFTC’s actions last fiscal year were taken against digital assets. Meantime, competition is growing, not least from states like the UAE and Bhutan and wealthy (usually industrial) families.
The recent greenlighting of ETFs, which have attracted over $70bn in inflows in barely two months, is more nuanced. Investors could use these as a proxy for miners, making them a substitution rather than additional demand.
More immediate is next month’s “halving”, an event carried out every four years or so and designed to mimic supply constraints in the real world. 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 else being equal, production costs will double to about $50,000.
Yet things are unlikely to be quite so dire. For one, well-funded miners spend the run-up buying more efficient kit. Note: more than a few hold bitcoins themselves, ensuring deep pockets.
At the other end, some miners will simply fold or be bought; see, for example, Marathon’s $179mn purchases at the end of last year. JPMorgan estimates a 20 per cent drop post-halving in the hashrate, a measure of computing power brought to bear. Other miners, such as Bitdeer, are getting into manufacturing rigs themselves.
Miners, sensitive to lobbyists and wallets, are also getting savvier about energy costs, increasingly turning towards renewable energy and taking on stranded electricity from producers. Japan’s Tepco is one such provider. Countries such as Ethiopia and Paraguay are also selling excess capacity to miners.
Still, investors might recall that Brannan’s nous was all about timing. Today, those gold pans can be had for a mere $5.95.
Energy storage could be the next power grab
It took 4,000 men to hollow out the Scottish mountain Ben Cruachan and build a pumped storage hydro power station at its core.
Construction techniques have modernised since the plant opened in 1965. But investors should be thinking about pumped storage hydro 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 power stations to help meet demand next decade when weather-dependent renewables are not generating. As Britain’s electricity system relies more heavily on renewables, however, price arbitrage opportunities should arise for long duration energy storage technologies (LDES).
By 2035, there will be excess power generated by renewables and nuclear plants during 64 per cent of hours across the year, according to analysis produced for the UK government. That compares with 14 per cent in 2023.
Conversely, there will be periods where renewables output is insufficient to meet demand. Of the periods of excess or shortfall in 2035 modelled by consultancy LCP Delta, more than 50 per cent of those events are forecast to last more than 24 hours.
Currently, Britain leans heavily on gas-fired power stations to fill those gaps. Companies such as SSE and Czech billionaire Daniel Křetínský’s EPH already have plans for new gas plants — although it is suggested these could be decarbonised through technologies such as carbon capture and storage or hydrogen.
More LDES would at least lessen dependency on gas. Pumped storage hydro, known as “water batteries”, is more established but other LDES technologies include compressed air and flow batteries.
Plants such as Ben Cruachan, where Drax is proposing to invest £500mn to build a new 600MW water battery, use electricity at times of excess to push water from one reservoir to another at a higher elevation. The process is reversed during shortages, when prices are higher.
High upfront costs and revenue uncertainty have stymied efforts to build large new LDES schemes since privatisation in 1990. A 1.5GW water battery proposed by SSE in the Scottish Highlands will cost about £1.5bn. The UK is now consulting on a mechanism to guarantee revenues if returns drop below an agreed floor.
Developers’ hopes have been dashed before. Drax’s equity story remains dominated by its quest to extend public subsidies for its wood chip-burning power plant in Yorkshire. Its shares trade at a lowly 4.5 times forward earnings.
Trying to build LDES assets in Britain has been a long duration game. An increasingly renewables-dependent system, and fear of a gas comeback, puts a positive outcome in sight.
