Next wave of expansions might give North America a bigger share of hash rate
To view this email as a web page, go here.
July 20, 2020
Sponsored by
By the CoinDesk Markets Team
Edited by Bradley Keoun
If you were forwarded this newsletter and would like to receive it, sign up here
TODAY:
  • Prices: Bitcoin (BTC) $9,192 (-0.31%) | Ether (ETH) $239 (-0.31%)
  • Big-money players are extending financing to bitcoin miners for the next wave of equipment upgrades, even though prices are still languishing below $10,000 two months after the quadrennial halving event. 
  • What's Hot: PayPal looks to have partnered with Paxos for its coming crypto services, Chinese drug traffickers used bitcoin, and how the Twitter hack could have been a lot worse.

MARKET MOVES

Even as bitcoin prices languish below $10,000, North American cryptocurrency mining companies are tapping into a flurry of fresh financing from investors to pay for new equipment upgrades, bolstering the blockchain network’s resilience and reducing its reliance on Chinese operators.  

More than $1 billion of new bitcoin-mining computers will be purchased for North American bitcoin mining in the next two years, several people familiar with the industry told CoinDesk. That’s about five times the publicly traded mining-equipment maker Canaan’s revenue for all of 2019. 

“North America is not going to completely take over mining, but there is going to be growth,” Trevor Smyth, managing partner of San Francisco-based Arctos Capital, said in a phone interview. In April, Arctos funded a $1 million sale-and-leaseback transaction for Blockware Mining, a bitcoin mining and rig-hosting company, according to a press release at the time

The trend shows that entrepreneurs and investors are undaunted by the recent doldrums in the bitcoin market, where for the past month prices have remained stuck – almost uncannily quiet for the historically volatile cryptocurrency – in a range between roughly $9,000 and $10,000. It’s been a big disappointment for many bitcoin bulls, after a slew of predictions earlier this year that the May’s once-every-four-years “halving” might send prices to $90,000 or higher.
  
But the availability of financing for upgrades could put pressure on industry players to keep investing in new equipment, perpetuating the hardware arms race even without fresh price signals. It’s sort of like purchasing a new smartphone every year just to avoid falling behind the cutting edge. 
  

Countries with the most hash rate. (Cambridge)

Dave Perrill, CEO of Compute North, a Minnesota-based data center operator that offers hosting services for bitcoin miners, estimates that at least 2 million new-generation mining rigs will be produced during the current hardware cycle, with at least 400,000 units landing in North America.

“We believe that upwards of 20% of the new equipment will be operated there,” Perrill said. 

Blockfills, a Chicago-based cryptocurrency market maker, says it will provide equipment financing for North American bitcoin miners who can obtain power-purchase agreements and secure base facilities in the U.S. or Canada. 

“We expect to fund approximately $250 million ourselves in the next 12 months,” Neil Van Huis, director of sales and institutional trading at Blockfills, told First Mover in a phone interview.

Smyth, of Arctos Capital, said his firm is financing North American bitcoin mining equipment purchases in the range of $1 million to $2 million per deal. 

Investors looking to gain a yield in a low-interest economic environment are investing in bitcoin mining – more so than ever before, Smyth said. Lenders can earn an attractive return from the interest charged in the deals, known as commercial leasing, he said. 

“We raise capital through multiple sources,” Smyth said. “Ultimately they find our business is able to generate attractive risk-adjusted yields that can help diversify their investment portfolios.” 

The investment proposition has become even more enticing since the coronavirus-induced economic crisis led to a collapse in yields on everything from U.S. Treasury bonds to mortgages. Smyth says his investors are seeing “non-correlated, steady returns.”

Arctos gets debt capital from institutions like banks and securitization partners. There is also a private Regulation D fund, which has exemption from SEC registration for small firms like Arctos to raise capital, he said.

The investment push could also give North America a bigger share of the bitcoin mining industry, historically dominated by Chinese operators, many of them with ready access to cheap electricity from hydropower plants. Currently, China has 65% of the geographical mining market share. 

Smyth pointed to the entry into the bitcoin market of high-profile investors like Paul Tudor Jones III as a sign that more institutional capital is coming to crypto, despite the lack of price action.

The debt financing deals may be easier for many investors to understand than, say, taking a flyer on bitcoin perpetual derivatives on a Seychelles-based exchange. 

“There’s certainly going to be hedge funds coming in and directly holding bitcoin,” he said. “But I actually see more opportunity for the bitcoin industry to attract institutional investors through structured debt products such as lease financing.”

Smyth says he sees a continuation of the “survival of the fittest” dynamic in the industry, where only the most efficient operators can keep up with the Bitcoin blockchain’s ever-increasing computational power, known as the hash rate.


Bitcoin mining difficulty the past year. Dotted line is the May 12 halving event. (Glassnode)

The halving, which occurred on May 12, was the latest such milestone for the bitcoin blockchain, as programmed into the network’s 11-year-old code. The number of bitcoin produced as the reward for mining a new data block – roughly every 10 minutes – dropped to 6.25 from 12.5. 

Ahead of the event, miners scrambled to upgrade their equipment to avoid becoming obsolete. And the amount of power used in bitcoin mining subsequently declined 43% in late May, according to the Cambridge Centre for Alternative Finance, in what might be an indication of the efficiency gains from the new generation of machines. 

The hash rate is currently around 120 million terahashes per second, close to record highs. And that has caused a self-regulating mechanism coded into the Bitcoin blockchain, a factor known as “mining difficulty,” to hit new highs as new, more efficient machines are put into service. 

It’s another force pushing miners to continue upgrading. More record difficulty highs are likely to accompany the deployment of new machines like the Bitmain S19 Pro and MicroBT M30S++, unveiled earlier this year. 

“Miners that are more efficient and stay online actually earn more bitcoin,” Smyth said. “It’s self-adjusting.”  

– Daniel Cawrey, Senior Markets Reporter
 
SPONSORED BY BITSTAMP
Enjoy zero fee trading on all XLM, PAX and GBP pairs through September 1st! Now is the best time to join over four million traders and financial institutions that trust Bitstamp’s powerful platform, intuitive mobile app and industry-leading APIs.

Bitstamp gives you all the trading tools to effectively execute your strategy:
  • Unmatched order execution, powered by Nasdaq: Cutting-edge Nasdaq matching engine delivers optimal trading speed and efficiency in all market conditions.
  • Tradeview interface: Our powerful trading interface offers advanced order types, live charting and an array of analytical tools. Available on web and mobile.
  • Robust API connectivity: Our FIX, HTTP and WebSocket APIs are consistently rated as the fastest and most stable in crypto.
  • Advanced custody solutions: Institutional-grade custody from BitGo with 98% of customer assets in cold storage and protected by BitGo’s insurance coverage.
Download the Bitstamp app or visit Bitstamp.net/Pro to get started today!

Learn More

TWEET OF THE DAY


CoinDesk Research Quarterly Review

CoinDesk Research covers quarterly data in crypto markets including volatility, correlation, volume and returns of the CoinDesk 20 list of crypto assets.

In this report, we also cover derivatives markets, synthetic bitcoins, BTC versus ETH, central bank digital currencies, the return of aging bitcoin mining equipment and looks at the relationship – or lack thereof – between online sports betting and crypto markets.

Sign up to download the free report.

BITCOIN WATCH

BTC: Price: $9,192 (BPI) | 24-Hr High: $9,235 | 24-Hr Low: $9,119

Trend: Bitcoin is again sidelined near $9,190, having witnessed a trading range of just $325 last week – the lowest since the last week of March 2019. 

As a result, bitcoin’s Bollinger bands, volatility indicators placed two standard deviations above and below the 20-day moving average, are now even more compressed than they were last week. “Such behavior could be considered a sign that a period of high volatility is just around the corner,” said Konstantin Anissimov, executive director at the cryptocurrency exchange CEX. 

Indeed a prolonged period of low-volatility trading often ends up with a big move in either direction. The analyst community has been calling a spike in volatility for more than two weeks now. So far, however, both buyers and sellers have refrained from making big bets on the cryptocurrency, leaving prices directionless above $9,000.

Should the long-held psychological support of $9,000 cave in, stronger chart-driven selling pressure may likely emerge, pushing the cryptocurrency down to the 50-week moving average at $8,550.

Alternatively, a move above $9,480 would invalidate a bearish lower high created on July 8 and expose resistance at $9,800 (June 22 high) and $10,000. 
– Omkar Godbole, Markets Analyst
 

Introducing: CoinDesk Research Hub

CoinDesk's all-new Research Hub aims to bring under one domain a wide range of insights, contributed by the industry’s leading research teams, to offer a broad selection of topics and approaches to investors looking for deeper understanding.

On top of CoinDesk’s research reports, it includes work from Delphi Digital, Kaiko, Glassnode, Grayscale, Bitwise, TokenInsights, Arcane Research, Blockware Solutions and Burger Crypto, with new contributions added regularly.

Explore the Research Hub's quickly growing database.

WHAT'S HOT?

PayPal Picks Paxos to Supply Crypto for New Service, Sources Say (CoinDesk)
PayPal, the fintech giant planning to bring crypto trading to its massive user base, has chosen Paxos to handle the new service’s supply of digital assets, two people familiar with the matter told CoinDesk.

US Agency Says Chinese Drug Traffickers Used Bitcoin to Launder Proceeds (CoinDesk)
The U.S. Office of Foreign Assets Control sanctioned four Chinese nationals last Friday for allegedly using cryptocurrency to launder proceeds from illicit drug transactions.

What Will It Take For DeFi Protocols To Seize The Future of Loan Payments? (Hacker Noon)
While decentralized finance (DeFi) has experienced phenomenal growth throughout 2020, a lack of centralization to synergize DeFi's efficiencies may be troublesome.

Twitter Hackers Could Have Stolen A Whole Lot More (Forbes)
A group of malicious hackers overtook Twitter and tweeted bitcoin scams from prominent celebrity accounts on July 15. The scams could have been a lot worse if it weren't for exchanges blacklisting the hackers' blockchain addresses.
– Sebastian Sinclair, Reporter
 
Disclaimer: The information presented in this message is intended as a news item that provides a brief summary of various events and developments that affect, or that might in the future affect, the value of one or more of the cryptocurrencies described above. The information contained in this message, and any information liked through the items contained herein, is not intended to provide sufficient information to form the basis for an investment decision. The information presented herein is accurate only as of its date, and it was not prepared by a research analyst or other investment professional. You should seek additional information regarding the merits and risks of investing in any cryptocurrency before deciding to purchase or sell any such instruments.
First Mover
A newsletter from CoinDesk
See previous editions

Copyright © 2020 CoinDesk, All rights reserved. 

Our mailing address is: 
250 Park Avenue South New York, NY, 10003, US 

Want to change how you receive these emails?
You can update your preferences here.