Margins of up to 90% give energy companies that mine bitcoin an edge

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When Beowulf Mining Plc built a data center in Montana for a major Bitcoin miner in 2020, the three-decade-old energy company saw a big opportunity.

While his client Marathon Digital Holdings Inc. depended on third parties for electricity, Beowulf had direct access to electricity in what could be a profitable game if he were to start mining Bitcoin himself.

The gamble paid off and was filed to go public with its TeraWulf crypto branch in 2021, with the company planning to have 800 megawatts of mining capacity and 10% of the Bitcoin network’s current computing power by 2025.

The company is just one of the few energy groups to learn about Bitcoin mining from customers before building their own facilities, including CleanSpark Inc., Stronghold Digital Mining Inc. and Iris Energy Ltd. And with lower operational risks and wider profit margins, energy companies are becoming a major force in crypto.

“Energy companies tend to be very conservative in nature and they are often regulated,” said Paul Prager, CEO of TeraWulf. “We are early adopters because we had a front row seat in our partnership with Marathon.”

While miners can have a decent margin on 5 cents per kilowatt, those with a direct power source and energy assets tend to enjoy a much lower price, said Gregory Beard, managing director. by Stronghold.

“If you buy power from a producer and pay a third-party operator to run the data center, you’re going to have lower margins than those who do it themselves,” Beard said.

This extra profit could give energy companies an edge over their competitors as the lucrative bitcoin mining industry margins have compressed. With the price of Bitcoin still down 40% from November’s peak and the war in Ukraine propelling energy prices higher, margins have shrunk to around 70% from 90%, analysts said. With Bitcoin block rewards also scheduled to be halved in less than three years, additional pressure is also expected.

“It’s not just efficiency from a business perspective, but it’s from a risk perspective that we’re better equipped to handle the downside,” Prager said. “When a transformer fails on site, you don’t call a third-party service company to come and fix it, placing a change order, paying them overtime, and hoping that in two to three weeks, this transformer is repaired.”

Typically, Bitcoin miners will pay hosting sites not only to build their data centers, but also to host, run, and maintain their machines. Fees for these services have also increased since Beijing’s ban on crypto mining gave US miners a multi-billion dollar boon, with many able to get significantly more Bitcoin from the network with the same entry.

The Bitcoin network is programmed to give a fixed number of rewards in the token when miners successfully process a block. The more computing power a miner or group of aggregated miners has, the more likely the miner will receive the rewards.

Early adopters of Bitcoin mining in the United States, such as Marathon and Riot Blockchain Inc., still dominate in terms of computing power. But another advantage energy-minded Bitcoin miners might enjoy over their peers is their willingness to sell the Bitcoin they mine, unlike some crypto enthusiasts who promote hodl, or mantra” hold on for life.”

With the recent drop in Bitcoin prices, companies like Marathon have consolidated their balance sheets and turned to the debt and equity capital markets to raise funds. Meanwhile, CleanSpark hasn’t sold a single stock since last November, said Matthew Schultz, executive chairman.

“Instead of selling part of the business, what we’re selling is a small part of the bitcoin we’re mining,” he said. % margin. I can sell bitcoin and use it to pay for my facilities, operations, staff, and growth, without diluting my shareholders.”

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