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Bitcoin Mining The Evolution of A Multibillion Dollar Industry Yassine Elmandjra, and Derek Hsue, If Bitcoin were to reach $1 trillion in network value, miners probably would generate roughly $15 billion in annual revenue from block rewards and transaction fees consistent with a 2024 inflation schedule and a transaction fee to market cap ratio of 1%. Given a two year hardware replacement cycle, depreciation would consume 50% of their revenue per year, suggesting that miners would not be willing to pay more than $7.5 billion for equipment annually. While the largest mining machine manufacturers have reported25 EBITDA margins higher than 50%, their margins are likely to settle at or near the 30% for traditional semiconductor and equipment manufacturers,26 yielding an industry EBITDA of $2.25 billion. If the equity market were to value them at 10 times EBITDA, the total Enterprise Value attributable to mining equipment manufacturers would be roughly $20 billion. Consequently, discounting to today’s $150 billion in Bitcoin network value, the total enterprise value attributable to mining equipment companies should not exceed $5 billion.27 IV. The Operations of Mining The Evolution of Mining as an Operation As the industry has professionalized, mining operations have changed substantially. Mining data centers are now industrial-scale facilities with management and servicing on par with traditional cloud data centers.28 Contracts often are long term and built for multiple hardware cycles requiring significant upfront capital spending and power supplies ranging in the hundreds of megawatts. Electricity is a critical consideration in the economics of mining facilities, with low-cost stranded renewables particularly attractive.29 Miners have also begun to leverage vented and flared natural gas at upstream oil and gas facilities.30 Additionally, governments are offering electricity subsidies to attract miners who will set up operations and steer their countries toward the leading edge of innovation.31 25 Zhao, Wolfie, and Stan Higgins. “Bitcoin Mining Giant Bitmain Just Officially Filed for an IPO.” CoinDesk, CoinDesk, 27 Sept. 2018, www.coindesk.com/bitcoin-mining-giant-bitmain-files-ipo-prospectus-in-hong-kong. 26 “Margins by Sector (US).” Operating and Net Margins, pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html. 27 For context, Bitmain’s most recent proposed valuation was $12 billion. 28 Kampl, Alex. Analysis of Large-Scale Bitcoin Mining Operations (or How Bitcoin Miners Make $845 Million a Year). Allied Control, 2014, www. allied-control.com/publications/Analysis_of_Large-Scale_Bitcoin_Mining_Operations.pdf. 29 Bendiksen, Christopher. “Beware of Lazy Research: Let’s Talk Electricity Waste & How Bitcoin Mining Can Power A Renewable...” Medium, CoinShares, 1 Nov. 2019, medium.com/coinshares/beware-of-lazy-research-c828c900b7d5. 30 “Bitcoin Mining: Upstream Data Inc.: Lloydminster, Alberta.” Upstream Data, www.upstreamdata.ca/. 31 Alderman, Liz. “Despite Bitcoin’s Dive, a Former Soviet Republic Is Still Betting Big on It.” The New York Times, The New York Times, 22 Jan. 2019, www.nytimes.com/2019/01/22/business/georgia-bitcoin-blockchain-bitfury.html. 12PDF Image | Bitcoin Mining
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