As the cryptocurrency predicament continues, investors’ push to restore the market to its all time high value of more than $2 trillion, has hit hurdles ranging from concerns about mining energy impact on the environment and the show of displeasure toward the digital coins by many governments.
China’s recent clampdown on miners and financial institutions dealing in cryptocurrency compounded the situation, as the South Asian giants hosted more than half of cryptocurrency miners.
The clampdown has not only halved the cryptocurrency market value, it has also created a vacuum that needs to be urgently filled to salvage the much touted market from total plunge.
Tesla CEO Elon Musk, a big fan of cryptocurrency whose investment in environmentally friendly electric vehicles forced them to part ways with cryptocurrency, promised to return as soon as miners reduce carbon emission generated by mining to 50%. That means, significant shift to clean energy. Musk’s promise offers hope for cryptocurrency rebound given that his February announcement that Tesla would accept bitcoin for payment spurred cryptocurrency to its greatest rally so far.
The vacuum created by China’s crackdown on cryptocurrency has resulted in “mining migration”, with most of the miners moving abroad to continue their work, their destination – Texas among other places.
Texas has become a choice destination for the migrating miners for many reasons. CNBC chatted with experts who explained why the US city has become the next stop for most miners leaving China.
Because miners at scale compete in a low-margin industry, where their only variable cost is typically energy, they are incentivized to migrate to the world’s cheapest sources of power.
“Every Western mining host I know has had their phones ringing off the hook,” said Castle Island Ventures founding partner Nic Carter. “Chinese miners or miners that were domiciled in China are looking to Central Asia, Eastern Europe, the U.S. and Northern Europe.”
One likely destination is China’s next-door neighbor, Kazakhstan. The country’s coal mines provide a cheap and abundant energy supply. It also helps that Kazakhstan has a more lax attitude about building, which bodes well for miners who need to construct physical installations in a short period of time.
Didar Bekbauov runs Xive, a company that provides hosting services to international miners. Xive also sells the specialized equipment needed for mining.
Bekbauov says that he’s stopped counting the number of Chinese miners who have called him to ask about relocation options, ranging from operations with 15 rigs to thousands.
“One miner told us that only government electricity plants have restricted mining and private ones will continue to service miners,” Bekbauov told CNBC.
“But most of the electricity is generated by government power plants, so miners will have to move. That makes them uncertain and desperate to find other locations,” he said.
Whether Kazakhstan is a destination or simply a stopover on a longer migration west remains to be seen.
Arvanaghi is bullish on North America and thinks the hashrate there will grow over the next few months.
“Texas not only has the cheapest electricity in the U.S. but some of the cheapest in the globe,” he said. “It’s also very easy to start up a mining company … if you have $30 million, $40 million, you can be a premier miner in the United States.”
Wyoming has also trended toward being pro-bitcoin and could be another mining destination, according to Arvanaghi.
There are, however, a few major limitations to the U.S. becoming a global mining destination.
For one, the lead time to build the actual physical infrastructure necessary to host miners is likely six to nine months, Carter told CNBC. “The U.S. probably can’t be as nimble as other countries in terms of onshoring these stray miners,” he said.
The move logistics may also prove difficult. There is a shipping container shortage, thanks to the tail winds of the Covid pandemic.
But perhaps the biggest question is the reliability of the Texas power grid. A storm that devastated large swaths of the state in 2021 has reignited a debate over whether Texas should winter-proof its systems, a potentially costly project that might affect taxes or other fees for those looking to tap into the state’s power grid. More recently, ERCOT, the organization that operates Texas’ grid, asked consumers to conserve energy amid what officials called an unusual number of “forced generation outages” and an upcoming heat wave.
For the time being, there isn’t that much mining capacity worldwide that is ready to absorb the Chinese miner diaspora. While they scramble to find a new home, we could see hashrate go offline – and stay offline.
In practice, that would mean all the remaining miners are more profitable for a period of time.
Having more geographic dispersion would even out the global balance of power, and it would also reduce the ability of any one sovereign nation to co-opt or control the network.
We may also see special crypto economic zones pop up in the next few months.
“You will see jurisdictions adopting a very favorable stance and creating the equivalent of special zones to encourage miners to host locally,” said Carter. “We’re seeing it at the state level here. You’re also going to see it at the country level, you might even see subsidized electricity for mining.”
Musk recently moved to Texas, where his space company, SpaceX is now headquartered. Musk’s company is building “a more than 100 megawatt energy storage project in Angleton, Texas” which is connected to an electric grid that nearly failed during the recent winter storms that roiled the state. It could also mean that many migrated miners will have the chance to migrate to clean energy, increasing bitcoin chances of being accepted by Tesla once again.