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Thinking Outside The Box With Upstream’s New Black Box For Home Bitcoin Mining
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Canada seems to offer many of the advantages for successful bitcoin mining — lots of stranded renewable energy (mostly hydro), a cooler climate (which is easier on equipment) and a lower fiat currency value (more competitive than the U.S. dollar).
But even with China losing more than 20% of its hash rate in recent weeks because of forced regulatory shutdowns, and with the U.S. rate climbing to 17%, the Cambridge Center for Alternative Finance estimates that Canada’s current share of the world’s Bitcoin network is only 3%.
Malaysia, Kazakhstan, Iran and Russia are all mining at a higher hash rate than Canada.
So, what is keeping bitcoin miners out of Canada?
Compass Mining, a full-service mining host and equipment provider, recently released an in-depth mining report that included a look at mining in Canada and concluded that energy should be inexpensive there — but that a problem lies with the regulatory environment. In addition, the report noted that the Canadian government is developing a carbon tax that will likely raise the cost of energy.
Demonstrating this problem, Colin Sullivan, CEO of British Columbia-based MintGreen, explained that energy prices in that province are relatively high because local energy provider BC Hydro is a crown corporation and doesn’t have the same commercial pressures as a private provider.
“I wouldn’t describe energy prices as globally competitive,” Sullivan told Bitcoin Magazine. “In my conversations with Chinese miners, they’re looking for energy costs around $50 per megawatt hour.”
For his business in particular, that concern has not been a deal breaker for operating in Canada, though many other bitcoin mining operations would likely not see it this way.
“MintGreen is less interested in power prices because we create heat markets with our miners,” Sullivan added. “Selling heat from our digital boilers allows us to be much more competitive irrespective of energy price. This and green grid power makes British Columbia an excellent fit for us.”
The World Bank publishes an “Ease Of Doing Business” ranking, which includes a measure of the availability of electricity. Its data gives Canada a low score for its availability of power sources, ranking it 124 out of 190 countries for ease of accessing electricity. (The U.S. ranks 64.)
Citadel256, a Canadian startup with founding partners who are Canadian entrepreneurs, is helping miners from China relocate to Texas and the U.S. Midwest, because this lack of energy availability prohibits it from recommending its home country.
“We’d like to recommend Canada, but the problem here is not so much the cost of energy itself but the logistics of accessing energy markets,” Citadel256 cofounder and mining consultant Magdalena Gronowska told Bitcoin Magazine. “Energy is abundant in Canada but it’s not cheap to access. The cost of energy infrastructure — generation, transmission and distribution — is spread across and recovered from the rate base.”
“Canada has a large landmass and infrastructure investments are recovered over a smaller population base than the U.S., so it’s generally more expensive,” she added.
Compass Mining’s report maintains that Canada’s regulatory environment is the main problem for mining companies noting that ”the high level of bureaucracy in the country has hindered the growth and scalability of Bitcoin mining,” and that “there is a lack of clarity regarding how cryptocurrency assets should be treated. Each Canadian province having its own securities regulator further complicates matters.”
The report cited the case of Blockstream mining, which has farms in Quebec and in the U.S. state of Georgia. Going forward, Blockstream has chosen to expand in Georgia as it finds Quebec’s regulatory environment too difficult to navigate.
Gronowska agrees with Compass Mining that the Canadian regulatory environment is a challenge.
“Regulatory burden and red tape can also add costs and timeline uncertainty to a facility build out, which adds risk to any mining project,” she noted. “Canada has stringent environmental and safety regulations. For example, carbon is increasingly becoming a cost center and factor into long-term operational decisions. Electrical equipment that meets our standards may result in longer lead times.”
Compass concluded that it is the country’s confusing and unclear regulatory environment that causes mining companies to go elsewhere.
“A myriad of regulatory bodies increases the risk that miners can be subject to changes that unfavorably impact their businesses,” per the report. “Provincial, federal and municipal governments may also introduce changes that adversely affect mining operations.”
Gronowska agrees that there tends to be a bias against business in Canada and that fragmented regulations and multiple regulatory bodies impose additional challenges for bitcoin miners.
“Miners seek the path of least resistance and favor more business-friendly jurisdictions outside Canada,” she said.
Still, some bitcoin mining operations, like MintGreen, have been able to find niches that make Canada the perfect home for them. The province of Alberta is the most business-friendly jurisdiction in the country, and companies like Upstream Data have been able to thrive off of the grid using gas flaring from oil production.
And on another positive note, bitcoin mining companies wanting to list on Canada’s stock exchange are likely to be more successful there than they would be in the U.S.
“Stock exchanges with less stringent listing requirements, like the Toronto Venture Stock Exchange (TSXV), have resulted in a diverse collection of cryptocurrency companies trading on the public markets in Canada,” Compass Mining reported. “The risk profile of Canadian companies is generally higher compared to their U.S. counterparts.”
Like many providers in the space, international bitcoin mining services company Compass Mining is on a roll. With the success of BTC and rising mining revenues — now at an all-time high of $60 million per day — this rapidly-growing startup finds itself squarely in the middle of a bull run.
Founded in October 2020, Compass has been able to capitalize on a growing demand for mining services, particularly through access to new ASICs in a very tight mining equipment market. In a news release from early March, Compass described itself as “the first two-sided bitcoin hosting marketplace,” meaning that it works with both prospective miners helping them get established and with existing hosting facilities to find the best fit to fill their vacancies.
The release also announced that Compass had secured $1.7 million in seed funding in a round led by Galaxy Digital, with participation from other stalwarts in the space, including CoinShares and CoinGecko.
“March was the best month yet for miners @compass_mining!” Compass CEO Whit Gibbs recently tweeted. “13.964 #btc mined, up 114% from February. 112 [petahashes] contributed to Bitcoin’s network security.”
Echoing the enthusiasm and adding some detail to what is driving this growth in the bitcoin mining industry through an April 4 newsletter, Upstream Data’s Steve Barbour noted how lucrative bitcoin mining has become:
“…the bitcoin price started appreciating and it has since increased approximately 600% (since Oct 2020) and the difficulty has not even doubled. The result is a marked increase in revenue for bitcoin miners everywhere,” he wrote. “..I am a bit surprised at how slow the difficulty and hash rate has been to react to the price, but this is likely due to the significant shortage in the semiconductor industry combined with existing mining hardware failure (hardware breaking). With no relief in the semiconductor supply chain in sight, I would guess bitcoin mining will continue to be extremely profitable for quite some time to come.”
Bitcoin mining has become so competitive and profitable that it’s becoming increasingly difficult for people wanting to mine BTC to access the ASICs needed to power a profitable mining operation.
As a “two-sided marketplace,” one of Compass’s secrets to success is its ability to acquire new ASICs for clients in such a challenging market. It’s easier for a larger provider like Compass to deal with ASIC suppliers like Bitmain, Whatsminer and Canaan, which are likely to prioritize bigger customers like Compass, rather than smaller mining operations.
Compass has been able to secure new ASICs, even as the demand for silicon-based chips has become a problem affecting manufacturing enterprises around the globe. A Compass team on the ground in Southeast Asia, including COO Thomas Heller, negotiates directly with manufacturers.
In a direct message on Twitter, Gibbs told Bitcoin Magazine that its work with ASIC manufacturers is “very relationship based” and it is fortunate that Heller “has great ties to Chinese distributors from his time working in China”.
In its first two months, the company sold $11.4 million worth of mining machines to clients, per its March news release.
Bitcoin’s mining difficulty just reached a record high above 20.6 trillion as more people are mining at a larger scale than ever before thanks to ballooning mining revenue and bitcoin’s parabolic price rally.
“A new difficulty all-time high is no surprise considering mining revenue has tripled in recent months,” said Edward Evenson, business development lead at Braiins, a mining software company that recently acquired full ownership of leading pool Slush Pool after being majority stakeholders since 2013.
Saturday’s adjustment at block 665,280 marks an 11% increase from the last adjustment on Dec. 27.
Difficulty is a relative measure of the amount of resources required to mine bitcoin that climbs or falls depending on the amount of computing power consumed by the network, known as its hashrate.
As bitcoin’s price continues to soar – briefly almost touching $42,000 Friday – miner revenues keep pace, incentivizing even more participants to mine. Twelve months ago, bitcoin’s difficulty was below 15 trillion.
“I see this trend continuing in the first half of 2021,” Evenson told CoinDesk.
Signalling even more upward difficulty adjustments in the future, mining companies plan to capitalize on higher revenues at such a scale that their orders for new machines have left leading manufacturers like Bitmain sold out until August even after nearly doubling the price of some models.
“ASIC manufacturers have had to turn away more than half a billion dollars in mining equipment orders in Q4 2020 alone,” Evenson said. “Hardware supply chains are currently overloaded by immense demand.”
Companies like Core Scientific are handily contributing to the overload with massive 59,000-machine orders from Bitmain, which are set to triple its mining capacity.
Publicly traded mining firms like Riot Blockchain (RIOT) and Marathon Patent Group (MARA) placed similar pre-orders for 31,000 and 90,000 machines through 2020, respectively.
Based on the ongoing mining frenzy, Bitcoin’s hashrate is “likely to at least double in 2021,” Evenson predicts.
More than an inconvenience, the current ASIC shortage signals a deeper fundamental weakness in the mining sector amid soaring revenues and activity.
“Right now, the biggest risk to the mining business is the ASIC shortage,” said Steve Barbour, president of portable mining infrastructure manufacturer Upstream Data, in a direct message with CoinDesk.
Barbour said he doesn’t see “any signs yet” that manufacturers are “ramping up fast enough” to meet the yet unabated surge in demand for machines. They aren’t even pursuing temporary solutions like offering mid-tier machines for “miners who aren’t interested in high-priced, high-efficiency gear.”
With no signs of replenished supplies, miners have been scavenging secondary markets for any available and working machines, causing prices of some models to reach 12-year highs, per CoinDesk’s prior reporting.
The miner manufacturing business “definitely has room for more diversified competition,” Barbour said.