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The success of Bitcoin mining largely depends on the amount of electricity a given facility can devote to the business, which explains why announcements of new mining sites often read as announcements of new power plants. A project started last week in West Texas has attracted particular attention, thanks to the support of investor Peter Thiel. Layer1 Technology, which recently raised $ 50 million from Thiel and other venture capitalists, has launched a facility that is expected to soon have 100 megawatts of electricity dedicated to Bitcoin mining.
Leading China-based mining chip maker Bitmain also moved to Texas, opening a 50 MW facility in a town called Rockdale in October that is reportedly likely to scale up to 300 MW. MW. A third major player, a German company called Northern data, says it plans to build the largest mining facility in the world, also in Rockdale, which is said to devote an entire gigawatt (1,000 MW) to cryptocurrency exploration. Today, the Bitcoin network uses just over 10 gigawatts, according to an estimate by researchers from the University of Cambridge.
These are just the highest profile mining operations that claim the Lone Star State. Several other companies are planning (or rumored to be planning) to create facilities there, all on the hunt for cheap energy.
Bitcoin’s heavy electricity consumption – the same researchers estimate that the grid’s annual energy use places it between the Philippines and Belgium – comes from the way it secures its public ledger, called blockchain, without relying on an authority central. To prove their reliability to the network, Bitcoin miners, thousands of whom are distributed around the world, are constantly consuming huge amounts of computing power as part of a competition to solve a complicated cryptographic puzzle. Every 10 minutes, a winner earns the right to add a “block” of new transactions to the ledger and in return receives freshly minted bitcoins. In essence, the system deters attacks by making them very expensive.
For miners, the difference between their operating costs and the amount of money they generate from mining is their profit or loss. So companies are racing to implement the most efficient mining hardware at scale; the more they run, the better their chances of solving a block. To power them, they look for the cheapest electricity available. This helps explain why about 65% of the system’s total mining capacity (a metric called “hashrate”) is in China. Not only are major hardware manufacturers located there, but cheap electricity is available in some areas, often in the form of coal or hydroelectricity.
Texas’ cheap electricity is largely due to the abundance of natural gas and the boom in wind power development over the past decade. But what can be particularly attractive to Bitcoin mining businesses are some unique features of the Texas wind energy market. Thiel and other investors appear to be betting that these characteristics are enough to substantially dilute the concentration of the Bitcoin mining network in China.
“Texas has a lot of wind,” says Joshua Rhodes, an energy analyst at Vibrant Clean Energy, which makes forecasting software for grid operators. The state leads the nation with over 28 GW of wind capacity, mostly located in West Texas. In addition to strong winds, pro-renewable policies by federal and state governments have helped fuel the boom.
Then there is another factor, which miners probably like as well as electricity producers: the Texas electricity market is deregulated. While in most areas of the country the generation and distribution of electricity is controlled by a single entity, usually a utility company, in Texas the market for these services is open to any company wishing to compete to offer them. This means, for example, that it is much easier from a regulatory perspective to build and operate a power plant, Rhodes says.
It also means that large electricity consumers such as Bitcoin mines can negotiate energy purchase agreements – contracts that provide that they will buy energy at a certain price for a certain period of time – directly with electricity producers, instead of having to deal with. intermediaries such as utilities. This can be great for companies looking to keep energy costs down, Rhodes says.
Here’s why: Many of the state’s wind farms are located far west of its major population centers, particularly the Houston area. Transmission lines extending through the state can move energy to where it is needed, but sometimes there is so much wind energy that there is not enough transmission capacity to carry it all. This means that energy producers are eager to find customers closer to them who will buy the excess electricity. In theory, this could give miners the ability to purchase wind power at very low prices.
Alexander Liegl, CEO of Layer1, backed by Peter Thiel, recently told Fortune that “the world’s cheapest large-scale electricity is in West Texas right now.”
Texas’s unique wind resource isn’t new, but miners have avoided the area in the past due to its sweltering heat. One of the challenges of mining is to prevent hardware from overheating. “But we know how to deal with it here,” says Jesse Peltan, CTO of HODL Ranch, a company that creates data centers for cryptocurrency miners in West Texas. He says the arid climate in that part of the state makes it possible to use evaporative cooling, a process that takes advantage of the physics of water evaporation, to cool mining machines at a very low cost. Other operations are pursuing different approaches. Layer1, for example, has developed a system that uses liquid to cool hardware.
But there is another big variable that all Bitcoin mining businesses need to take into account: the volatile price of the cryptocurrency. A rapid decline in the value of the coin can have a serious impact on a company’s profit margin.
Peltan argues that in the long run what matters most is not the price of Bitcoin but “the cost of your production compared to other producers”. With sufficiently low operating costs, the largest producers will be isolated against the price drops of marginal producers, who will be forced to close, he says. Bitcoin is programmed to automatically reduce the difficulty (and therefore the cost) of mining in response to drops in the total network capacity (and vice versa). “The industry is really competing to move towards lower energy cost and then larger scale operations to spread that cost across more megawatts,” says Peltan.
No wonder the windy Lone Star State has never been more inviting.
