Diving deeper into flare gas mining
Not all flaring is the same. Let’s go beyond a simple gas flare -> Bitcoin mine calculation and look at the technical & economic challenges of various types of gas.
Not all flaring is the same. Let’s go beyond a simple gas flare -> Bitcoin mine calculation and look at the technical & economic challenges of various types of gas. This is the first in a series on the topic from the perspective of oil & gas natives.
You’ve probably heard about mining as a method of reducing natural gas flaring in the oilfield. A few small operations pioneered the approach as early as 2016, and now the idea is several years into proof of concept at various scales & in various states. (Nico Smid from The Bitcoin Mining Block Post has a solid overview written about a month ago)
The Whitehouse recently released a report titled: “Climate and Energy Implications of Crypto-Assets in the United States” that caused a stir in the mining community. It isn’t particularly detailed but provides a surprisingly clear-eyed evaluation of the potential of mining off flare gas:
“While the EPA and the Department of the Interior have proposed new rules to reduce methane for oil and natural gas operations, crypto-asset mining operations that capture vented methane to produce electricity can yield positive results for the climate, by converting the potent methane to CO2 during combustion. Mining operations that replace existing methane flares would not likely affect CO2 emissions, since this methane would otherwise be flared and converted to CO2. Mining operations, though, could potentially be more reliable and more efficient at converting methane to CO2.” – pg 24
I think they’ve properly identified flaring as a grey area for proponents of carbon offsets through mining. The whole proposition truly comes down to the nature of flaring and venting rather than any value proposition from Bitcoin.
The whole proposition [of flaring] really comes down to the nature of flaring and venting rather than any value proposition from Bitcoin.
One of the primary reasons a mine may or may not work on flared gas has to do with why the gas is being flared in the first place. Well operators typically do not flare gas is there’s any option to deliver it.
Here’s 6 common reasons why operators may flare gas from a well—
Temporary flaring at the start of production — often called “flowback”. May be used to handle gas removed from frac water. Gas production at this stage is often low, inconsistent volumes and the well will begin to “gas up” as the hydrostatic pressure of the frac water in the well is removed. These are poor candidates for mines since the flare will only be on site 1-45 days typically.
Emergency flaring during drilling or completions — It may be necessary to deal with gas influx from the reservoir before the production facilities are ready for use. With massive amounts of heavy equipment on location and high danger of fire, these situations are unlikely to ever see mining.
Gas quality may cause an operator to flare gas — Natural gas is a conglomeration of various molecules, most are hydrocarbons but some of which are classed as “waste gasses”. Common waste gasses include Nitrogen (N2), Carbon Dioxide (CO2), Hydrogen Sulfide (H2S), and (to a lesser extent) Helium (He). Nitrogen and Helium are rather inert but lower the value of the gas and will cause midstream pipeline companies to sometimes reject natural gas from a well, leaving it stranded. CO2 and H2S are far more corrosive and erode pipeline steel. H2S exposure can be fatal even at relatively low levels and can occur naturally in a reservoir or be induced by human error if drilling and completion water isn’t treated properly with a biocide to prevent surface bacteria from entering the reservoir. Bitcoin mining ultimately has a future here, but it will take significant technological revisions to consistently produce energy without causing environmental damage.
Gas can become temporarily stranded if downstream facilities are shut in or have an emergency. This could be regular plant maintenance or a plugged line. Many modern wells have small flares that rarely run as a contingency plan for these instances. Small volumes may be flared until wells can be shut in or pipeline pathways can be rerouted so that there are no pipeline explosions from over-pressuring. Inconsistency makes these flares poor targets.
Spatially stranded gas is an excellent target for mining — Crusoe pioneered this approach in North Dakota with oilfields that couldn’t connect to markets because they lacked economic viability or couldn’t surpass regulatory hurdles. These long-term flaring situations are genuinely wasteful and both the operator and miner significantly benefit from the synergy even before the environment comes into consideration. The catch is that these wells are almost entirely oil wells and changes in oil commodity markets can cause operators to cease production even if the mine is still profitable. More than one miner has found that out the hard way.
Economically stranded gas — (what Nakamotor primarily targets) This is gas that has historically been produced into a pipeline and is forced into flaring for economic or regulatory reasons not tied to the presence of pipelines. With increased regulatory burdens on pipelines, many midstream operators are electing to shut in old lines, even filling them with cement in some circumstances. This kills the market for all the wells connected to the pipeline and forces operators to find alternative outlets for gas, often resulting in the temporary flares coming into constant use. Alternatively, midstream companies may try to pass on regulatory and repair costs, resulting in untenable fees for gas where the well operator may pay for takeaway capacity. Flaring ends up being an economic path of least resistance for these wells.
Let’s examine the feasibility of each type —
Venting is another nuance, as gas escaping produced oil may evaporate from tanks and other surface equipment. This may go through a Vapor Recover Unit (VRU)or may be left unmeasured and unflared. Many tanks do not have pressure measurement and it can be hard to calculate how much gas is even available from vented sources.
The final component to stress is the proximity of wells. Depending on the field and whether wells are horizontal or vertical, it may be difficult to collect enough volume for a generator. Connecting stranded volumes may have regulatory and economic hurdles even with the well-intentioned plans of reducing energy waste. High prices for pipe and labor make collecting 5-10 wells into a single point source for a mine largely impractical and miners have been forced to evaluate individual well sites on the whole.
Bitcoin mining has and will reduce flaring and venting and help bring the oilfield into a more ecologically-focused future, but it is not a one size fits all solution.
Bitcoin mining has and will reduce flaring and venting and help bring the oilfield into a more ecologically-focused future, but it is not a one size fits all solution. It will take a measured practical review on a case-by-case basis to know if a mine is viable. Right now, there are plenty of opportunities as acceptance of off-grid/remote mining grows. The jury is still out on the ultimate impact of mining off flare gas though. Maybe it will have staying power and significant impact, maybe we will find that our continental-level statistics were a bit irrationally exuberant.
Kyle Drew, Operations, Nakamotor
Nakamotor is working on a series of research pieces on this topic, examining the mining viability of flares, orphaned wells, and producing fields in North America.
Can Bitcoin Mining make Private Equity love the Oilpatch again?
Bitcoin mining in the oilpatch mirrors previous private equity opportunities.
Private equity lost it’s love for the oilpatch almost a decade ago, but recent trends in off-grid Bitcoin mining provides all the incentive for it to come roaring back.
It’s been almost a decade since the American shale revolution peaked. The advent of horizontal drilling + hydraulic fracturing unlocked incredible domestic energy production and cemented U.S. energy dominance worldwide. The mechanisms driving the trend were both technical and financial, with private equity discovering massive opportunity providing capital to aggressively develop new technologies & explore new production strategies.
Bitcoin mining in the oilfield echoes the NGL revolution, the shale revolution, and may catapult domestic energy innovation forward again.
The oilfield has learned from it’s mistakes and transitioned to more traditional investment strategies, prioritizing drilling out of cashflow. The aggressive capital from private equity in the late 2000s, early 2010s no longer seeks to pursue innovation in the industry as the ESG narrative distorts market signals. We only just recently got done picking ourselves off the floor from the 2014 shale peak. There just doesn’t seem to be a sector of oil & gas that attracts the aggressive, innovation-focused capital provided from private equity.
Bitcoin mining in the oilpatch sets the stage for that private equity to come roaring back. Here we have a business that lies at the intersection of every major investment trend: technology, energy innovation, bitcoin/cryptocurrency, flare/methane reduction (ESG et al). Mining is a cashflow positive business, often countercyclical to oil & gas, and it is rapidly scalable + deployable.
Where traditional investment moves too slowly, private equity steps in to juice the trend.
Our friends, Giga Energy, down in Texas.
While many in PE flock to the siren song of crypto startups with dubious tokenomics, others will begin to discover that the capital-intensive infrastructure play of Bitcoin mining offers outsized returns on innovation and speed. One of the most opportunistic plays is in integrating Bitcoin mining into existing oil & gas production, unlocking massive amounts of stranded energy & providing a real, profitable solution to the industry’s flaring & venting problems.
Just about every single producer we talk to has a beef with their pipeline, especially the smaller guys. What if we could skip the pipeline entirely? Avoid the protestors, regulators, and have more control over your production. It’s not too good to be true, we just need tons of capital yesterday.
The oilpatch’s previous run with private equity ran into a few issues, one of which resulted in massive amounts of stranded/flared gas in the Bakken. Now private equity has an opportunity to fix that previous problem, and all the incentive to do so.
We’ll expand on this on this in future Nakamotor Memos.
Charlie Spears
Strategy, Nakamotor
Survival of the fittest
Many will not survive this Golden Age of Bitcoin Mining
Many will not make it through this Golden Age of Bitcoin Mining.
We’ve been heads down building for the past several months. Like groundhogs, we poke our heads out to assess the market and right now it looks like it could be a longer winter than we’d hoped. It’s been bloody out there, folks!
Many Bitcoin miners live in the real world, having to communicate the insanity of the broader cryptoasset space to a diverse range of investors. Here’s excerpts from what we’ve said—
In lieu of a specific thoughtpiece, here are selections of what we’ve said to communicate to our capital partners as we enter what could be one of the most profitable bear markets for well-positioned Bitcoin miners.
It's been bloody across all markets not just cryptoassets. Tech stocks have faired worse than Bitcoin the past 6 months by some metrics. At least Energy is up, but the markets stare into an abyss. The Central Bank of Japan appears to be losing control of the yield curve while Westerners blame Exxon & Putin for high gas prices. Our current Administration supports that narrative. Inflation is the highest in my lifetime while bond yields aren't remotely close to enabling our generation to afford retirement.
I'm an armchair macroeconomist, but to be in this business of Bitcoin mining you have to not only be able to troubleshoot an ASIC control board but also: deal with exporters who only speak Cantonese, negotiate with a 3-toothed well Pumper, produce complex & unconventional financial models in dual-denominating currencies, and communicate a sophisticated heterodox perspective on Russian expansionism, NATO, and the Eurodollar system. So why not also be an armchair macroeconomist?
I've been buying Bitcoin for close to a decade now and am a veteran of these events, although they haven't lost that visceral gut punch. The 2014 - 2016 bear market was particularly lonely -- but the question at the time was whether Bitcoin, other cryptocurrencies, would even exist in the future. Now, the uncertainty is not whether this is just a niche market, but on what timeline and path we take along the adoption curve.
—
I remember the March 12 COVID crash as the traditional markets went hard risk-off. [We], who at the time had [a significant amount of our] net worths in Bitcoin, watched the $8k -> $3.5k plummet in 48 hours (after a 2 year bear market). That was, notably, also the first time that Bitcoin & crypto broadly was directly correlated to equities, the secular economy. The following months we launched full time into trying to put Bitcoin mines on gas wells.
Since then Bitcoin has clearly been correlated to traditional markets as a risk-off asset. It's also taken us much longer to deploy mines than anticipated. Certainly our initial capital raise challenges played a part. But honestly a lot of it has come down to the fact that [I’ve] been unwavering in my insistence that we achieve under a certain threshold of effective power rate to our mines. Nakamotor's whole thesis behind mining Bitcoin at the wellsite is that there is unbelievable competitive advantage in unconventional energy capture, it is just quite difficult to execute.
Many of the other companies mining off natural gas have GPAs tied to NYMEX. Many companies like ours are not insured. Many mining ops like ours with a GPA are going to discover they aren't paying royalty owners what they're likely owed. We passed up at least a dozen easy deals over the past 24 months because [Charlie] insisted we absolutely protect ourselves against a punishing bear market and [Kyle] insisted that we be fully compliant & insured. To be reductionist, Bitcoin mining is about survival. You will outperform Bitcoin, even make a return in a bear market, but you have to survive. This is the foundation we structured Nakamotor upon and I'm proud to say that it looks like we have achieved an unbelievably low effective power rate across our mining operations, however likely at the expense of rapid expansion.
—
The narrative going forward is that nobody can plug their ASICs in. It's really hard to predict Bitcoin price, but we can at least try to predict network hashrate. The big development the past few months is our industry discovering that it is much more difficult to build a Bitcoin mine than everyone anticipates. Supply chain, energy pricing, and market volatility create huge challenges. While the price of Bitcoin has not followed the path we expected, neither will the network hashrate. One of the largest public mining companies, Marathon Digital, announced a year ago that they would have 135,000 S19s online by June 2022. They have gotten some 35,000 online and the rest of the deployment looks to continue to be delayed.
That is to say that, if you reference [our] "Network Hashrate Projections” from last February, we identified a range in which we could see hashrate grow. We are almost certainly going to be on the absolute bottom of that range, which is a huge boon for [Nakamotor]. This however also implies a broader contraction across all traditional markets, not just Bitcoin & digital assets.
—
Bearish macro environment
Bitcoin's short 13.5yr existence has only seen an era of Quantitative Easing and a historically bullish stock market. We're entering into a new era of possible recession, stagflation, volatility, or whatever it may actually be. This new era means Bitcoin could behave differently. New market forces drive Bitcoin price, thus making it harder to predict on a shorter timeline. The focus for miners, then, becomes to remain agile and resilient rather than just resilient. If the world does enter an extended recession, many bets are off. An optimistic scenario would be Bitcoin decoupling to the upside from traditional markets. However, history demonstrates that in the worst market downturns there are very few safe havens. Rather, the goal is to figure out how to position coming out of the downturn. Bitcoin mining vs spot exposure to Bitcoin allows cashflow during such downturns, and when credit/lending dries up, cash is king.
—
For those outside the loop:
2 defining events so far: First, the Terra/Luna ecosystem collapse. Think $60b ponzi scheme involving some of the biggest funds in crypto, all of whom ignore basic seigniorage mechanics. Then, just 3 weeks later, one of the largest domestic crypto custodians, Celsius, could be a sort of Lehman to Terra/Luna's Bear Sterns. We will see how this plays out, but many billion dollar funds are fighting for survival right now. There was an insane amount of leverage in the crypto ecosystem and we've experienced a massive unwinding of it the past 40 days. However, the Bitcoin network chugs along as it has the past 13.5 years, without skipping a block.
We could see a continued route of leveraged entities, custodians. This could cause unprecedented price action to the downside. Each Bitcoin cycle, we have never fallen below the high of the previous cycle. Currently, the 2017 cycle high is $19,600 and we are right on that. While I refrain as much as possible from Technical Analysis, there is an important level around $14,000 that many insightful analysts have identified. At this time [we] don't know what to expect.
It often helps to zoom very far out and look at the Bitcoin price on log scale, the scale we use when measuring the adoption of a new technology. The long term logarithmic adoption trend remains clear.
There are very few certainties about the future, but we can be sure about Bitcoin's monetary policy for the rest of our lives and our children's lives. As long as Bitcoin blocks are produced, this is the monetary policy of the Bitcoin network no matter what happens:
We're still getting used to providing useful market commentary to our partners, but hopefully this helps. ASICs are historically cheap right now, and the risk/reward for deploying more capital into mining is quite disproportionate to the upside.
Charlie, Kyle, & Nathan
A new kind of Pumper in the oilpatch.
Bitcoin mining and the “Dawn of the ‘Digital Pumper’”
Bitcoin mining and the “Dawn of the ‘Digital Pumper’”
There’s a generational divide in oil & gas, a “changing of the guard” from the Baby Boomer to the Millennial. We see this transition both in the office and out in the field. The Offshore Technology Conference attendance declines while the Digital Wildcatters rise. SPE meetings are great and all, but the real alpha is on that one podcast episode you listened to while stuck in Houston traffic.
One of the types of oilfield jobs we’ll see emerge this decade is the “Digital Pumper”.
As the oilpatch becomes increasingly networked and Bitcoin mines go from being prototype to industry standard, we’ll need a new kind of labor to keep the well online and the ASICs hashing.
The Digital Pumper can restart a compressor engine and troubleshoot a hashboard
It just makes sense that you send 1 guy out to the wellsite instead of 5. The pumper of today can fix just about anything mechanical, it’s not that big of a transition to add some networking, hashboard maintenance, and general tech troubleshooting to the skillset. The pumpers today grew up figuring out how to reset the family router, they may wear blue jeans but they’re already digital natives.
The Bitcoin miner of this decade drives a white F150, not a smartcar.
When every little ol 20mcfd well has a hash hut on it, you gotta at least go out there every few weeks to replace the air filters or pull a bad ASIC off the shelf. You might replace/repair the cell antenna in between checking pressure gauges.
The pumper’s toolbag now has a roll of Cat 5 and a splice kit.
Next week, a case for why the best Bitcoin miners will come from the oilpatch and not from tech.
Charlie Spears, Strategy
Mainstream news actually talks to miners
WSJ with a good hashrate migration piece
Riot’s Chad Harris is able to get a word in. Go Chad!
Transparent vs opaque mining in Rockdale, TX (another Chad story)
Market Insights —
Bitcoin mining is crazy profitable right now.
Jeffries publishes a 24-page primer on Bitcoin mining.
There’s a Land Run
There’s a land run happening, and it’s not just in Oklahoma this time.
There’s a Land Run happening and it’s more than just Oklahoma this time.
Bitcoin is kinda like land — “They ain’t makin’ more of it”
On April 22 of 1889, 50,000 people lined up in Northeast Oklahoma and raced to settle the most prime farming land in North America at the time, the “Unassigned Lands”. By the end of the day, entire new towns had sprung up where there was barren land before.
As Harper’s Weekly reports: “At twelve o'clock on Monday, April 22d, the resident population of Guthrie was nothing; before sundown it was at least ten thousand. In that time streets had been laid out, town lots staked off, and steps taken toward the formation of a municipal government.“
The same thing is happening right now for Bitcoin miners across the American Frontier.
This time, the Sooners aren’t after prime land, but cheap energy.
From major public companies to scrappy upstarts, everyone and their dog is racing to hook up ASICs to natural gas, hydro, wind, and anything that produces cheap megawatts.
Bitcoin miners kick up dust as they race to grab the best substations & stranded gas assets
If you work anywhere along the power energy chain you already know this is happening. Here in Oklahoma, the public utility last week told me they are “flooded with inquiries from Chinese miners”.
Nakamotor will follow this narrative ad nauseum over the next several years, but the key takeaway for everyone should be this: if you’re anywhere near the energy industry you need to be paying attention. In 20 years energy producers, utilities won’t be defined by “incorporating Bitcoin mining” or not, similar to how we don’t think of companies today as “using the internet or not”.
Bitcoin mining, or “Satoshi Nakamoto’s Motor”, will integrate at every point along the entire energy production stack. Right now, you only just heard the gun go off.
Charlie Spears, Strategy
Thank you, Nic Carter, for the Nakamotor shoutout at the Texas Blockchain Summit this week!
Big announcements for Texas
Core Scientific building 300 megawatts in Denton.
Lancium estimates 5,000 megawatts of interruptible load opportunity in Texas
Research —
The Lightning Network is growing fast.
Lyn Alden on the “trillion dollar coin”
Will the “Hashrate Recovery” stall out?
Chinese miners jumped ship, but how long will it take them to land somewhere?
Chinese miners jumped ship, but how long will it take them to land somewhere?
China banned Bitcoin again today and nobody blinked. We’ve seen this a thousand times before and we know how this plays out.
The “China ban" is, however, on the heels of a real expulsion of miners from the country. Maybe there is some more teeth to the recent action from the State, but at this point China is probably pushing on a string. Western & Developing nations have taken up the banner and hopped on the Bitcoin rocket. We’ve probably reached escape velocity.
Hashrate has recovered 60% since the July low of 88 Exahash, a sharp bounce that has the 30 day moving average at 136 Eh.
However, we’re hitting capacity everywhere you look. How many more ASICs can be plugged in by EOY?
Hashrate only up 8% since 2020 halving.
Even Compass Mining, an industry-leading company, is running into capacity issues. ASIC plugin timelines are now creeping into late spring 2022. Public miners like Marathon are finally getting hooked up after significant hashrate sat idle as timelines were delayed. We’re hitting peak capacity, everything beyond this point has to be built from scratch.
Smaller miners can find a few extra kilowatts somewhere, a garage or empty warehouse. But that’s a far cry from the additional 50 Eh needed to get back to the 2021 all time high.
To put that into perspective, that’s about 2 Gigawatts of additional power & infrastructure that needs to be capitalized and built. Ballpark 10 football fields of additional warehouse space.
But the hashrate “recovery” June -> September is probably not Chinese miners plugging back in. Yes, some have managed to sneakily turn back on in mainland China, but the majority of hashrate this summer has come from existing projects that are 10 to 12 months into deployment.
It is quite possible that the majority of Chinese ASICs have not been plugged in yet.
As desperate as miners are, there is still a physical infrastructure constraint and multi-month timelines that are required before these ASICs aren’t idle.
I have more faith in the resourcefulness & agility of Chinese miners than I do the CCP banning Bitcoin, so perhaps we could actually see market incentives work some big magic before the end of the year.
Hashrate EOY prediction: 165 Eh.
Charlie Spears, Strategy
Food for thought
Nikolai Tesla described Bitcoin a century ago. Maybe Elon’s Tesla should take note.
NYDIG mining report: “Bitcoin Net Zero” widely circulating among institutions.
Miners break ground
Lancium expands in Texas.
ConocoPhillips & EOG are mining Bitcoin.
ASIC pricing for dummies
A newbies guide to how ASIC efficiency determines spot price.
A newbies guide to how ASIC efficiency determines spot price.
Explaining Bitcoin mining can be a full-time job. It’s a challenge of finding the appropriate analogies and helping others connect the dots. This week, we’re going to dive into the pricing schema of Bitcoin mining machines, or “ASICS”. The audience here is someone who’s interested in mining Bitcoin, knows what a Bitcoin mine might look like, but doesn’t know why one mine might cost $1.5 million per Megawatt and another might cost $250k/MW.
The first ASIC I ever bought back in 2017, the Halong Dragonmint T1. Still runs great.
Different ASICs, like different personal computers, are faster or slower depending on when & how they were manufactured. The measure of production of an ASIC is “Terahash” or “Th”, and is comparable to horsepower for an engine. More Th, the more Bitcoin mined.
Each ASIC also consumes different amounts of power, typically 1,300 Watts to 3,400 Watts. The primary expense of running an ASIC is its power consumption, and therefore the “cost” to run an ASIC is a function of energy price * power draw, expressed as $/kWh * kWh.
ASICs are priced by their profitability. An ASIC that uses 3,350W to produce 64 Terahash is priced lower than an ASIC that uses 3,350W to produce 90Th.
ASICs are priced based upon their return over the next year given the profitability today, which is a function of Bitcoin price and network hashrate.
That brings us to the emerging pricing schema for ASICs as currently exists today in North America.
ASICs are divided into 4 tiers by efficiency (J/Th), Terahash produced is priced differently by tier.
Efficiency is defined by the ratio of Watts to Terahash produced, or Joules/Terahash (J/Th). The cutoff & pricing for each tier is not an exact science, but it looks a little like this:
Tier 1: <38 J/Th
Tier 2: 38 - 60 J/Th
Tier 3: 60 - 100 J/Th
Tier 4: >100 J/Th
At today’s profitability, the “Tier 1” ASICs are priced at about $93/Th. For example, the most popular ASIC in the category, the Bitmain S19, will produce 110Th. So one Bitmain S19, delivered today, will cost $95 * 110Th, or $10,450 (assuming you have the best deal available which is not always the case).
The most famous ASIC to-date, the Bitmain S9, is Tier 3 and produces 13.5Th. Tier 3 currently runs about $41/Th, so an S9 delivered today would be about $550.
ASIC delivery time is also a price factor. An ASIC purchased & delivered today will cost more than an ASIC purchased today and delivered in 6 months. The reduced price for a future delivery is a function of the lost revenue had the ASIC been mining for the number of months delayed. So the S19 from earlier would cost about $10,450 delivered today and about $7,500 delivered in 6 months.
This is just a crash-course overview of the emerging ASIC pricing convention. In future memos we will talk about how this pricing convention may evolve and where the ASIC market overall is headed.
To learn more about the ASIC marketplace, see a previous memo, Bitcoin Miners are the new Horse Traders.
Charlie Spears, Strategy
Noteworthy stories this week
Natural gas Bitcoin miners meet in Houston.
Forbes article on the NFT Generative art movement, quoting “limp”, cousin of Nakamotor Strategy, Charlie Spear
Proof of Work
Compute North explains Proof of Work & Proof of Stake
Compass Mining “What Mainstream Media Gets Bitcoin Mining Wrong”
Why mine when you can buy?
Mining Bitcoin allows exposure to the whole Bitcoin ecosystem.
Mining Bitcoin is a way to gain dynamic exposure to the Bitcoin ecosystem.
A question we at Nakamotor are often asked to defend:
Why is it better to mine Bitcoin rather than buy it outright?
Buying Bitcoin directly requires 0 carry cost, 0 operation, and you are only exposed to price risk. Why would anyone in their right mind want to go to the extra work mining it? In short, it’s a way to gain dynamic exposure within the Bitcoin ecosystem and capitalize on industries of scale.
We’ll answer with a few high points pulled from our pitch deck:
Mining Bitcoin is a way to have a cashflow generating asset tied to the growth of Bitcoin. Hard assets (ASICs + mining infrastructure) inside of a corporate structure allow a lot of optionality, tax advantages, or synergy with non-Bitcoin assets (e.g. oil & gas production). Many investors/companies are prevented from buying Bitcoin directly. Mining creates more options for exposure to the Bitcoin ecosystem.
Historically, mining has actually outperformed Bitcoin’s average ~200% CAGR. A miner who thinks strategically can enjoy periods of massive upside where the cost of “producing” a Bitcoin is dramatically under spot. A well-executed mining operation is expected to outperform a direct investment in Bitcoin over the lifetime of the deployment.
Miners trade price risk for operational risk. As miners budget on longer timelines (quarterly, annually, & project lifetime) the intraday/month price volatility is less important, and more so the aggregate annual profit.
Summer 2021 may go down as important to mining as the formation of OPEC was to global oil production. For North America, this means for the next 2 to 3 years we should see massive domestic growth of Bitcoin mining. This creates a once-in-a-lifetime opportunity to build in the space and define it over decades to come.
It is very possible that this current bull cycle might be the first time it still makes sense to deploy ASICs at the “top”.
The theme of 2021, 2022, and possibly 2023 is build-build-build. It’s more exciting than ever to be a Bitcoin miner as capital floods into the space.
Charlie Spears, Strategy
Big money moving in North America
Blockstream raises $210 million for their own ASIC production.
FTX buys LedgerX. Not too long before they buy the whole world.
On-chain metrics at full-send—
Capriole hash ribbon signal flips to “buy”
We’re at $50k and transaction fees still at rock bottom.
Hash is King
The coming geopolitical transition from oil -> hashrate as the defining global commodity.
The coming geopolitical transition from oil -> hashrate as the defining global commodity.
We have fought wars to secure access to oil and to preserve the status of the petrodollar, but that era is waning. The death knell of the United States’ nation-building attempt in Afghanistan is the last chapter in a long story of empires’ futile efforts to control the region.
The fall of Siagon heralded the beginning of the great fiat experiment as we “temporarily” left the gold standard and the fall of Kabul poetically marks the end.
What comes next?
The scarce resource nation-states used to compete for was oil, now it is compute & semiconductors.
Most of the world hasn’t realized it yet, but we’ve entered into a new era not defined by the Exxons or Saudi Aramcos, but by our FAAMG and “Tech Overlords”. This means the most important commodity of the future is within tech: compute & semiconductors.
From Meltem Demirors, CSO Coinshares.
Bitcoin mining is already the largest and most powerful compute network in the world, consuming as much energy as the entire country of Sweden. It is also the most demanding & hungry for compute & compute infrastructure, namely semiconductors.
As the world’s nations wake up to realize that their goal is not to secure oil interest, but rather silicon & metals related to compute production, geopolitics will shift to prioritizing foundries, mining, and compute supply chain.
Bitcoin mining is at the intersection of this transition. Perhaps nation-states will project their force by producing hashrate instead of foreign occupation.
The incentive model changes in this “multi-polar world" away from securing energy abroad and towards securing energy domestically. Now that power can now be communicated digitally in the form of hashrate & compute, this bodes well for innovation in energy, manufacturing, and chip fabrication.
I, for one, am optimistic that this will lead to fewer resources being spent towards never-ending wars and more focus on building infrastructure domestically. Build mines not bombs.
-Charlie Spears, Strategy
Legacy industries still don’t get it —
Chase bank shuts down Compass Mining’s accounts.
The best and brightest leave Wallstreet for crypto.
Trends —
Corporate holdings of Bitcoin plateau.
Texas is winning the great hashrate migration.
Think Inside the Box
The Anatomy of a Bitcoin Mining deployment at the wellsite.
The Anatomy of a Bitcoin Mining deployment at a wellsite.
This one’s a bit longer.
For all the focus we place on Bitcoin's market, being a miner really comes down to one thing: running the mine. That means our #1 priority is successful deployment of ASICS at the wellsite.
The overview of the setup is quite straightforward. This is a good thing since simplicity is best for uptime and uptime is the #1 profit metric miners have any real control over. Today, six figures will get you into the smalle(r) size deployments with decent efficiencies of scale.
Let's see what a deployment looks like at a gas well.
Produced gas is piped into a manifold, which is a series of valves connected together to direct flow. Then it goes into a natural gas powered generator. Most off-grid Bitcoin miners appear to be using reciprocating generators, which operate like an oversized Chevy engine, though some have begun using turbines. Turbines are less economically efficient at small scale (<1 MW) but more forgiving on gas quality and require less maintenance. Generators may be mounted on a trailer or skid and create the power required for the ASICs.
ASICs are typically housed in a container, though compressor houses and trailers have also been used. Proper airflow & power distribution are key design factors. Operators may build their own containment or outsource it to a third party depending on preference. All containers are effectively a box to shelter ASICs organized on racks with massive airflow keeping the container cool.
Beyond this, there are four primary systems to make a functioning container, whether it’s a WD-40 and duct tape model or a UL-rated import: power distribution, network connection, cooling, and security. Power distribution is tied to ASIC type and preventative maintenance style, with smart PDUs allowing for more remote maintenance than simple direct wiring. Network connections tie the ASICs to a cellular or satellite network and have varying amounts of redundancy as the operator feels the need to reduce risk of isolation downtime. Most container cooling is simple convection heat transfer, with massive, filtered air intakes on one side and circulation fans on the other. Liquid cooling is gaining traction, though there are environmental and regulatory risks still being explored as well as cost, design challenges.
A few optional pieces of equipment may show up on site depending on the unique characteristics of the well and mine design. In the event of low pressure, a gas booster or screw compressor may be set between the gas source and manifold. Transformers may be set in between the generator and container to align power needs or just clean up the natural inconsistencies in small-scale power generation. Primary disconnect panels may also appear between generators and containers for emergency shutdown purposes and to simplify exchanging generators for maintenance as quick-connect technology leads many vendors to change out generators rather than try to repair them onsite.
As with any new operational concept, mines are always developing. Heat trace wire for cold sites or tin roofs over hot sites may improve a mine’s consistency. Glycol units reduce the cost of engineered fluid for liquid cooling. New innovations are sure to spread as off-grid mining gains popularity and begins to standardize.
Backing out to a conceptual level, the entire wellsite design must be built to maximize uptime
Consistency of gas volume and pressure must align with a mechanically sound generator or fleet of generators. Power output needs to be clean and within narrow tolerance to keep the ASICs running at peak performance, but there must be enough of a safety factor on generator output to not create significant downtime from maintenance. Network structure needs to include not only redundancy, but ties to active monitoring systems for air flow, temperature, and power input from the generator. Regular preventative maintenance inside the container should ideally line up with generator maintenance to prevent power drops or surges during oil changes from leading to significant mine downtime.
As the wisest operations engineers have found over the last hundred years: focus on the things you can change that make a large impact in your success. By properly designing an off-grid mine, you can maximize uptime, allowing you to survive in the crazy volatile world of cryptocurrency.
-Kyle Drew (Operations)
Institutions are buying
Blackrock discloses 6 million+ shares of Marathon Digital Holdings.
Blockware Intelligence describes deep institutional accumulation this summer.
Longform research you should check out —
MIT Research: Bribing Miners to Regulate Bitcoin (2016)
“Work is Timeless, Stake is not” - Proof of Stake longtail attacks (2016)
Bitcoin Miners are the new Horse Traders
Miners are modern-day stockyard dealers as they scramble for the best ASICs.
Miners are modern-day stockyard dealers as they scramble for the best ASICs.
Volatility in the Bitcoin ecosystem is common knowledge. Network hashrate, miner’s fees, and value vs fiat currencies may fluctuate wildly in short periods of time from news, changes in regulation, or simple random chance. Investors are attracted in-part because mining reduces exposure to Bitcoin’s price volatility, but they still must face one fundamental risk: they must actually get the ASICs to mine with.
That’s where the neo-horsetraders comes in.
ASIC purchases look quite a bit like old fashioned horse-trading. There’s a stockyard to meet at to see what’s available; most ASIC deals are done on social media app Telegram and through 3rd-party brokers. A miner’s ability to get good “stock” largely depends on who they’re connected to on Telegram, how quickly they respond, and how much confidence the seller has in their ability to move cash quickly. Like all business, these purchases are ultimately relational.
What’s there to buy depends on the day and time you show up. Telegram may be flush with new S19s under warranty and for delivery tomorrow or there might only be some bad S17s left over. Deal volume can shift intra-day and quantities can vary between a few machines to several megawatts. Some sellers allow a deal to split and others require full volume purchase.
Prices for a particular ASIC may move 20% inside of a week and delivery times may shift from days to half a year with little notice
As with livestock, each deal is somewhat unique as the condition. Many purchases come from abroad and a seller may not disclose whether shipping, tariffs, or sales taxes are included. This is especially true for the secondary ASIC market.
Just as with livestock, the way to navigate the goofy world of ASIC procurement is to have an expert. Reputations and relationships built up over time sometimes even allow for deals to be held while cash comes in. Long-time Bitcoiners are a must-have for a company to have confidence in getting the right machine at the right price in a reasonable amount of time.
-Kyle Drew (Operations) & Charlie Spears (Strategy)
The crypto market heats back up —
NFT trading skyrockets this week, rest of crypto to follow?
Crypto Craziness in Congress.
Capital inflows to mining —
Marathon Digital purchases 30,000 S19j Pros
Stronghold going for IPO & 100MW mining.
A North American Story
How the rise of American hashrate dominance will mirror that of American crude production in the 2010s.
How the rise of American hashrate dominance will mirror that of American crude production in the 2010s.
In 2018, the EIA declared the United States as the global leader in crude production. Sometime this decade we expect to see the same but for hashrate. This is driven both by increased domestic investment in mining, but also by a decrease abroad.
The shale boom in the early 2010s saw an explosion in domestic drilling while other oil producing nations slowed. A decade later, a more dramatic shift has happened in the world of Bitcoin mining.
Hashrate by country just before Chinese mining collapse. Source: Cambridge
China, like OPEC, dominated and defined the global mining industry for years. Since 2018 mining had slowly been increasing abroad, but a sudden expulsion of miners by the Chinese govt this past spring turned this leak into a cascading waterfall.
To draw a comparison, imagine that OPEC suddenly stopped producing oil while domestic investment in O&G skyrocketed.
Continuing with the oil & gas analogy — what does that mean for US producers?
It means domestic energy producers have a once-in-a-generation opportunity to take advantage of this massive transition in global hashrate production.
The future of Bitcoin mining is a North American one.
-Charlie Spears, Strategy @ Nakamotor
Research drops this week —
Galaxy Digital Venture Capital report
Hashrate Index collates all Bitcoin mining stocks.
Surprising media takes —
Forbes “To Invest in Carbon Neutral Bitcoin Mining is to Invest in Women”
Elizabeth Warren wants to regulate crypto.
A Tale of Two Miners
Let’s compare this new 21rst century commodity with the most-traded commodity of the previous century, Oil —
The coming bifurcation of on & off-grid mining.
We are entering into a new era of institutionalized Bitcoin mining. The past decade mining was characterized by scrappy DIY datacenter startups and immature corporate feuds. This decade we’re getting serious.
Institutionalization & financialization of mining is only just beginning. This brings innovation across the full Bitcoin mining stack — in particular, the energy side of things.
The industry looks on track to bifurcate into 2 types of miners: on-grid & off-grid.
We could (again) draw an analogy to oil & gas with land & offshore drilling. Both extract oil, but are dramatically different all the way from the capital structure to the engineering challenges.
Historically, miners have been straightforward purchasers of electricity from the grid. Let’s visualize this with some graphics pulled from the handy-dandy Nakamotor pitch deck:
As miners prioritize inexpensive energy, they are beginning to move “behind the meter”. That is, either integrating with the grid, or moving entirely off of it onto self-generated power sources.
Off-grid, at the source of energy production
Off grid miners will need to operate like energy producers. Energy producers themselves will likely become “producers of hash” instead of oil/wind/nuclear/etc.
Grid-integrated, solving distribution & demand response inefficiencies.
Grid-integrated miners will think more like power plants & grids, responding to variable load and energy transfer challenges.
Because the engineering and specialization for solving these problems are so specific, these two types of energy integration may become wholly separate industries over the coming years. Similarly, the financialization of the two will evolve differently.
Nakamotor is currently focused on the former, thinking & operating like an energy producer. With over 500 billion cubic feet of gas vented or flared each year, there should be plenty of energy to capture. That’s something like 2000 Gigawatts of wasted energy.
The entire Bitcoin network uses about 15GW. You do the math.
-Charlie Spears, Strategy @ Nakamotor
Going public —
Core Scientific going public via SPAC
Green energy mining ETF $RIGZ
Iris Energy also going the SPAC route.
Relavent thoughtpieces —
Nic Carter responds to Janet Yellen on stablecoins.
Bitcoin mining’s Three Body Problem
Hashrate vs Oil: A Commodity Comparison
Let’s compare this new 21rst century commodity with the most-traded commodity of the previous century, Oil —
Let’s compare this new 21rst century commodity with the most-traded commodity of the previous century, Oil —
Producing hashes for Proof of Work algorithms, or “mining”, is the industrial production of a virtual commodity within the mining ecosystem.
Hashrate is the virtual commodity produced by miners and sold to the network as a consensus & security mechanism for the native token of that network. It’s just one of several new commodities within the mining sector and has some unique properties never seen in history.
First, hashrate is an ephemeral asset. It cannot be stored but can be delivered anywhere in the world instantly. It’s comparable to electricity except with no transfer cost nor infrastructure required. It must constantly be consumed in order to have market value, and hashrate has no value if it was not produced within the past blocktime period (~10 minutes for Bitcoin). This is the inverse of crude, which can be stored indefinitely and which delivery of is a logistical feat.
The entire world economy pauses as tugboats attempt to unplug the global hashrate delivery infrastructure.
Second, it almost always trades in backwardation. The future expected value of a unit of hashrate is lower than spot because the difficulty is always increasing as miners are added to the network. This has some interesting implications for financial instruments built on Proof of Work. Oil, on the other hand, is comparatively cyclical (and might be looking up the next few years)
Third, the global state of hashrate production can always be known. Because of the public nature of block production, we can know global hashrate in real time. While we can reasonably intuit current oil production, we rely on market analysts and statements from OPEC+. Hashrate production can be watched in real time and is statistically derived from cryptographically proven rules. However, both industries are similar in that the opaque nature of ASIC manufacturing/mining infrastructure mirrors that of planned drilling & production — we can only peer through a glass darkly to estimate the future and is often at the whims of nation state geopolitics.
We can consider hashrate to be a raw, unrefined commodity until it is submitted & accepted by the network. Mining pools are the primary buyers of “raw” hashrate, and do the job of collating + “delivering” it to the network. Here the analogy breaks down. In mining, there isn’t really an equivalent to midstream crude transportation because there is no transportation. However, the future of “refining” hashrate could be very interesting, especially with the advent of “Miner Extractable Value”.
Later this summer we’ll take a look at Compute infrastructure as it compares to O&G.
-Charlie Spears, Strategy @ Nakamotor
Week in review —
Compass inks deal to mine off nuclear.
Cambridge data & timeline on China’s Bitcoin mining exodus.
Texas celebrates Bitcoin miners setting up shop.
Relavent thoughtpieces —
Ethereum miners grapple with MEV. Good time to review this piece.
Schumpeterian destruction in Bitcoin.
Liability to Asset
Low-rate, isolated wells may not justify massive capital expenditure to reconnect pipelines, but there is a solution.
Houston, we have a problem.
Many operators in the continental US are beginning to grapple with the implications of more stringent regulations on inactive wells. These are wells that are not currently producing (and often haven’t been for some time) but are not yet plugged and abandoned according to regulatory guidelines.
The Corporation Commission, which governs oil and gas operations in my home state of Oklahoma, shows over 200,000 active wells across the state. Over 800 are on the list to plug and another 12,000 are considered “orphaned”, without current production or funds to abandon. Bond requirements call for $25,000 per operator to cover plugging costs, but that amount may not even cover a single well in some areas. EPA estimates count upwards of 2.1 million “idle” wells in the US. Certainly a block of these are mechanical problems, but many are simply isolated from markets.
The Well Done Foundation team plugging Anderson #7.
Internally, these wells reflect a liability for the operator. A permissive auditor or equity backer may have overlooked idle wells in the past, but many now reflect the liability in financial models and reductions to bank revolvers as ESG initiatives become omnipresent. In addition to lost revenue, these wells now reflect lost opportunity.
Low-rate, isolated wells may not justify massive capital expenditure to reconnect pipelines, but they do need another look.
Enter Bitcoin mining.
With containerized Bitcoin mining datacenters, we can revitalize whole fields of idle wells with minimal infrastructure since the gas can be consumed directly on the location. If you can’t get your gas to market, let a better market come to you and change those liabilities back into productive, book-able assets.
Houston, we have a solution.
-Kyle Drew, Operations @ Nakamotor
Week in review —
The Difficulty Adjustment to beat all other Difficulty Adjustments
Coinshares with some fantastic Bitcoin introductory products
Alex B with some scathing Ethereum criticisms
Free alpha —
Compass’s North American Bitcoin Mining Index
Layer1 sneak peak at Texas immersion setup
Miner economics presentation by AJ Scalia on the Galaxy Digital research desk
Last but not least…. the team over at Glassnode points out that the Hash Ribbon has inverted again.
The Hash Ribbon, an on-chain indicator developed by Charles Edwards and presented by Glassnode, suggests that the flagship cryptocurrency tends to hit bottom during miner capitulation.