Several of these new business lines are more profitable than bitcoin mining, but not all.
In the face of an icy crypto winter, Bitcoin miners are expanding the scope of their business, both in name and in practice.
The rebranding of Riot Platforms (RIOT) was to “underpin” an “increasingly diversified business,” one of the largest publicly traded bitcoin mining firms announced on Jan. 4.
It is not the only firm making a name change. Miners have also utilized energy-intensive data centers to diversify their revenue streams into other products and services. Some did so in response to brutal market conditions while others prepared for a downturn when business was still going well.
The strategy is the opposite of what we’ve seen in past bull markets, where public companies would add the word “crypto” or “blockchain” to their names and see their shares jump more than 100% in a day – even without a viable crypto-related business plan.
According to D.A. Davidson analyst Chris Brendler, “there is a general desire by companies to distance themselves from the crypto bubble of the past couple of years.”
It depends on how profitable diversification will be to determine how much of this wave of corporate rebranding and promises of new business lines are just talk to pump stock valuations in a bear market.
In the last bear market, many miners pivot their public narratives to present themselves as a diversified business instead of solely facing struggling mining valuations, said Ethan Vera, chief operating officer of Luxor Technologies, a mining services company.
Bitcoin mining generates a finite amount of revenue
Bitcoin mining is an extremely competitive and capital-intensive business, with miners competing for a limited supply of bitcoins.
After the Bitcoin network reaches a cap of 21 million, only about 2 million more bitcoins can be mined. In the current bitcoin price of $25,000, the total amount of bitcoin to be mined is about $50 billion. That amount is “super finite,” said Lucas Pipes, an analyst at B. Riley Financial.
The limited amount of bitcoin can only be mined by many miners, so basing a whole business model on mining alone might not be feasible. So companies are looking to repurpose some of their computing power for other industries and services. This includes selling “high-performance computing” to companies in artificial intelligence and cybersecurity.
Other companies are looking to capitalize on the energy market by either owning their own assets or selling their energy back to the grid.
Pipes said, “If you want a market cap of $50 billion – and what CEO doesn’t want one – you need to do something else as well.”
D.A. Davison’s Brendler says high-performance computing services take away from miners’ core business, which could harm their diversification efforts.
According to Brendell, miners would be better off just mining bitcoin, rather than attempting to enter a new market and compete with established tech firms like Amazon and Microsoft that need high-powered computing. The miners who try to sell their energy to the grid are just another sign of difficult times, he added.
Playing with energy
Miners are diversifying their revenue by leveraging their high energy consumption and close ties to power grids.
Earlier this year, Riot acquired an electrical engineering company for its Whinstone megamine in Texas and has now offered similar services to other companies. According to the company’s third-quarter earnings report, despite the fact that gross margins for this new business (around 10%) were lower than for its mining operations (about 59%, before applying power credits), it could be an area of growth before including power credits.
During the third quarter, Riot also gained $21.3 million in power credits by shutting down its operations to redirect energy back to the Texas grid.
The strategy is not an attempt to pivot away from its mining business, but rather to gain more control over costs and turn them into a revenue stream, Riot CEO Jason Les said. Our bitcoin mining focus is vertically integrated, which means we take control of our inputs and turn them into profits.
Greenidge Generation (GREE) and Stronghold Digital Mining (SDIG) also own fossil fuel-based power generators.
Nevertheless, by 2022, both firms will see their gross margins for their power segments plunge into negative territory. According to Wolfie Zhao, Head of Research at The MinerMag, Greenidge had a gross margin of -4% in the third quarter, while Stronghold had a gross margin of -72% when maintenance costs were included.
The firm’s support services segment, which provides “customer service, sales support, and technical support,” has proved to be the most profitable, with a gross margin over 50%, compared to a mining margin of 42%.
Pipe said that miners entering the high-performance computing market are joining a “mega-trend that should last for many years.”
Since most bitcoin miners already have data centers and have access to low-cost power, they are uniquely positioned to compete in high-performance computing.
Although the high-performance computing market is extremely competitive, miners lack the infrastructure and capabilities of well-established data centers. According to Vera, the computing industry is a business geared toward customers, and many bitcoin miners don’t have sales departments.
In early 2022, Canadian mining company Hut 8 Mining (HUT) purchased five data centers from TeraGo for $22 million, which by the third quarter had grown to 14% of its revenue.
According to B. Riley’s Pipe, diversifying into the broader world of “compute” is like catching a “rising tide”; it may ebb and flow and might be riskier depending on the clientele, but it is a growing industry.
According to Zhao, Hut 8’s high-performance computing segment gross margin is expected to remain around 50% through 2022, while its mining segment margin is expected to decline to 34% in Q3. According to reports, major computing companies like Amazon Web Services and Microsoft have operating margins ranging between 25% and 40%.
It’s time to rebrand blockchain
Applied Digital Corporation (APLD) dropped the “blockchain” from its name as well. “Our next-generation data centers support many other high-performance computing applications as well,” said the company’s press release.
In 2023, we expect high-performance computing applications to contribute 10% of the company’s gross revenue, CEO Wes Cummins told CoinDesk. High-performance computing has a higher gross margin than mining.
In the first quarter of 2023, APLD plans to pilot hosting another 300 GPUs for machine learning in a retrofitted portion of an existing building in Jamestown [North Dakota] for Web3 applications. In December 2022, APLD broke ground on a 5 megawatt (MW) GPU facility dedicated to GPUs, which will house 300 GPUs.
There is a huge difference between these contracts and the 185 MW of long-term crypto mining hosting contracts the firm had signed as of October, or the 276 MW it has signed for Marathon Digital Holdings (MARA), or the 100 MW “dedicated blockchain power facility” it runs in Jamestown.
Since the Ethereum Merge effectively dismantled Hive Blockchain’s Ether mining business, it has been preparing to launch high-performance computing cloud services. As a result of the Merge, the blockchain’s proof-of-work algorithm was replaced with a less intensive proof-of-stake algorithm.
According to the company on Tuesday, the cloud offering is 25 times more profitable than mining, with annual revenue of $1 million, based on a run-rate basis under current market conditions. In addition to its fleet of 38,000 GPUs, Hive is currently using 450 of them for its cloud proof of concept, which consumes 80 kilowatts (KW) to generate $3,500 a day.
A few of these GPUs have also been deployed by Hive to mine other coins, which are later converted into bitcoin. In January, only 6% of Hive’s computing power came from alt-coin mining, as its GPU fleet was curtailed to sell energy back to the grid, which totaled $180,000. The mining of Ethereum and Ethereum Classic contributed 11% to Hive’s revenue in the quarter prior to the merger, which ended June 30, 2022.
Since then, Hive has also sold energy back to the grid at times of high demand, generating $3.15 million in December 2022 alone.
In Brendler’s view, miners may find a niche in high-performance computing, but that will never be a major trend given competition with large players.
Brendler says “the trend could have been bigger had the market been stronger. But now that the market is weak, it’s unlikely we’ll see more expansion plans.”