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Bitcoin Mining The Evolution of A Multibillion Dollar Industry Yassine Elmandjra, and Derek Hsue, lowering the risk of monopolies, a promising sign for Bitcoin. There, however, remains a high level of concentration at the foundry level. Only two - TSMC and Samsung - have the resources and skills to deliver cutting edge fabs. Over time, fabless designs should become more efficient, lowering the foundries’ bargaining power. As ASIC lifecycles continue to lengthen, the need for miners to rely on manufacturers may also diminish. At the mining pool level, while there may be increased concentration risk, efforts to further decentralize hashpower at the protocol level are underway. And, as as we’ve noted, mining concentration does not necessarily yield a greater risk to security.64 While considered a risky, volatile but highly profitable business today, we believe mining should evolve to resemble the traditional commodities industry over the long term. ASIC lifecycles will be long enough that industrial miners will have far greater predictability on their cash flows. In a mature derivatives market, miners will be also be able to hedge against bitcoin’s volatility risk, ensuring sufficient cash flows to fund ongoing operations. The greater predictability will attract a new pool of risk averse players with large sums of capital. These players will further capitalize on the second and third order opportunities mining presents. One such example is its usefulness in smoothening peak and trough power demands. While many power plants tend to only run during times of peak energy demand, Bitcoin mining provides incentives to operate year round.65 Ultimately, deeper capital markets, longer hardware cycles, lower than expected thresholds to profitability, and dampened price volatility should provide significant opportunities to unlock an unprecedented demand to mine bitcoin. In its entirety, we estimate the cumulative spending on mining (17 billion USD) is just above 10% of the total wealth it secures (150 billion USD), of which the energy burned to secure Bitcoin annually is a fraction. Viewed under this lens, the mining industry has become hyper-efficient in the relative amount of resources it expends as a function of the wealth it has secured to date. We expect Bitcoin’s network value to continue to appreciate at a faster rate than cumulative mining spending, yielding even greater efficiencies than today. In times of geopolitical uncertainty and financial market volatility, converting electricity into a monetary asset could take on new importance. We believe Bitcoin is a call option on a global digital monetary system and a hedge against existing regimes, potentially undermining the dollar as the world’s reserve currency. Bitcoin mining could be the ultimate path to direct exposure to this new monetary world order. 64 Hasu. “No, Concentration Among Miners Isn’t Going to Break Bitcoin.” CoinDesk, CoinDesk, 20 Feb. 2020, www.coindesk.com/no- concentration-among-miners-isnt-going-to-break-bitcoin. 65 “This Utility Heats New York State—And Mines Its Own Bitcoin” Bloomberg, 5 Mar. 2020, https://www.bloomberg.com/news/ articles/2020-03-05/this-utility-heats-new-york-state-and-mines-its-own-bitcoin 25PDF Image | Bitcoin Mining
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