CRYPTO MOVERS AND PRICES
Bitcoin (BTC) continues to trade in a range between USD 34,000 and 38,000 as it has for the past 4 days. Ethereum (ETH) is breaking out above USD 1,400 and threatening a move above previous all-time-highs as the coin’s volume exceeds that of BTC on Bitfinex.
Crypto Story of the Day
Since the BTC hash rate— a representation of the total computing power mining the BTC network— achieved record highs earlier this month, we’ve fielded an increased amount of questions regarding the significance and nature of investing in mining.
From 2009 to 2011, BTC mining was largely performed by hobbyists on non-specialized equipment. It wasn’t until 2013, when interest in mining had increased significantly, that Chinese computer hardware producer Canaan Creative launched the first application-specific integrated circuits (ASICs), which were also the first pieces of hardware specifically designed to mine BTC. Since then, BTC mining has evolved via an arms race between miners who are competing to deploy mining equipment that optimizes the use of electricity.
Over the past decade, BTC mining has turned into a highly specialized sub-sector with miners seeking comparative advantages in a number of ways, such as deploying more advanced equipment, seeking out colder environments where cooling costs are lower, and seeking sources of cheap electricity, to name a few. BTC miners, unlike most other actors in the crypto space, invest in highly-specialized physical infrastructure. This includes hardware specifically designed to mine BTC and sometimes power sources for the mining work itself.
For example, in 2018 U.S.-based Digital Farms Inc. was revealed to be repurposing a New York state hydroelectric dam to power a BTC mining facility. Direct institutional involvement in mining is extremely tepid. However, several crypto firms, such as Digital Currency Group's mining subsidiary, Foundry, have developed facilities where institutional actors can essentially rent mining hardware.
The most notable institutional participant in mining is Fidelity, which began mining BTC as early as 2014 according to Christine Sandler, Head of Sales and Marketing at Fidelity Digital Assets. Fidelity also owns a 10.6% stake in Canadian mining firm Hut 8. While the BTC hash rate has set records, estimated miner revenues (transaction fees plus newly minted coins) in USD have yet to surpass records set in December 2017.
When an actor decides to invest in mining, they’re taking a riskier position compared to a spot purchase of BTC. First, their investment in highly-specialized equipment means that their capital is relatively locked. The only means of retrieving the capital is through selling the equipment at a significant discount. Moreover, given that mining rewards are issued in BTC while costs are paid in local fiat currency, miners’ solvency is tied to the price of BTC more immediately than other business in the space.
Hash rate shows a confidence and investment in the network by incumbents, but doesn’t necessarily indicate the presence of a new incremental buyer that would sustain price appreciation across longer time horizons.