Cryptocurrency miners began
flocking to Texas
in the past five years, drawn by the state’s
low energy costs
and relaxed regulations. As they began setting up shop, lawmakers and local officials were touting the boom as an economic lifeline for the state’s struggling rural communities where many landed.
Nearly 30 crypto mines set up shop in Texas, big data centers that consume tremendous amounts of energy to run banks of computers humming away to mine new bitcoins.
But now, many — if not most — are struggling to stay afloat amid the
plummeting value of the commodity
they create and soaring electricity costs.
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“Bitcoin miners are operating under the very slimmest of margins right now,” said Lee Bratcher — president of the nonprofit
Texas Blockchain Council. “There are not many bitcoin miners that are making profits similar to what we would have seen. The bitcoin mining industry, as a whole, is tightening the belt.”
That’s a big turnaround from 2021, when bitcoin’s value peaked at $68,000 and miners collectively earned more than $60 million a day, according to data from
Blockchain.com. By the end of 2022, the value had plummeted to less than $17,000 — and miners’ take was $10 million a day. As a result, mining companies that borrowed millions to set up during the bull run now are facing uncertain futures. Several have gone bankrupt. Others are trying to sell off assets. Some have started returning equipment to bankers who financed it.
Shares in Riot Platforms Inc., which operates the state’s
largest bitcoin mine
northeast of Austin, are down about 60 percent from this time last year. They closed Thursday at $6.13.
Still, many in the crypto mining industry and those who support it remain optimistic it can weather the downturn, saying that it provides a side benefit for Texas as a means of managing the state’s electrical grid, which can also be an occasional source of substantial revenue for the mining companies.
Texas welcome mat
When China banned crypto miners two years ago, companies sought locations in the U.S. and other countries — and in Texas.
Gov. Greg Abbott and other Republican elected officials were quick to tout crypto mining as a boon to the state’s economy.
In October 2021, Abbott
tweeted
about hosting the Texas Blockchain Council at the governor’s mansion — comparing it to the state’s energy backbone. Texas is a national leader in oil, gas and wind power, he said, predicting that “soon we will be #1 for blockchain & cryptocurrency.”
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Amid such statements, miners poured into the state, mostly to rural areas where county judges eyeing increased property valuations and new jobs “are singing the praises, despite the downturn,” Bratcher said.
He estimated that bitcoin mining created about 2,000 direct and 20,000 indirect jobs statewide.
“It’s still contributing to the Texas economy at a pretty significant clip,” he said. “The miners are still following through on their aspirations to be good citizens and good corporate citizens.”
Opponents, though, have decried crypto miners as profiteering on the state’s electrical grid while generating a dubious product.
Ed Hirs, an energy fellow and economics lecturer at the University of Houston, said crypto
enables
bad actors to avoid local and state taxes and hide activities when engaging in criminal activities. And bitcoin miners, he said, have been striking moneymaking deals with the state’s struggling power grid to buy energy at low rates to make bitcoins.
“They remind me of used car salesmen,” he said during a recent interview.
Bankruptcy woes
Proponents of crypto mining attribute bitcoin’s declining value in part to investors pulling back from risky business ventures amid higher interest rates and inflation. They also cite the industry’s tarnished reputation after developments such as the collapse of FTX Trading Ltd. and fraud charges against Sam Bankman-Fried, the crypto trading platform’s founder. Such factors have led to layoffs and bankruptcies across the industry, and more to come.
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In September, Minnesota-based Compute North,
one of the largest operators
of crypto-mining data centers in the U.S., filed for Chapter 11 bankruptcy protection in Texas. The company said it owed as much as $500 million to 200 creditors.
Marathon Digital Holdings, another miner operating in Texas, reported an $80 million exposure to the firm.
In December, Core Scientific in Austin, one of the largest bitcoin mining companies in the U.S.,
filed
for bankruptcy protection in Texas.
That same month, Galaxy Digital Holdings Ltd. founder and CEO Michael Novogratz told
Bloomberg
the fall of FTX cost his company $77 million.
“The toxic masculine side of me would like to punch them both in the jaw,” he said of Bankman-Fried and Barry Silbert, founder of Digital Currency Group, a conglomerate of five cryptocurrency-focused companies.
Despite such financial failures, crypto miners maintain faith that Texas is an ideal place for their industry, as some see others’ struggles as opportunity.
Novogratz said he managed to pull out $1 billion-plus in 2021 and was looking to buy assets during these distressed times.
“I think when we get through the mud, it’s gonna be really sunny,” he said.
Texas acquisition
Galaxy Digital agrees.
Just after Christmas, it
announced
it bought Argo Blockchain’s Helios mining facility in Dickens County for $65 million. The deal called for Galaxy to provide Argo with a $35 million loan secured by a “collateral package” to include 23,619 mining rigs at the facility and additional machines at its data centers in Canada.
“At Galaxy, with a large balance sheet and a history of structuring and risk management, we said, ‘Let’s look around. There could be an opportunity somewhere to put forward our growth plan in a place where we originally weren’t thinking about,’” said
Amanda Fabiano, Galaxy managing director and head of mining.
Galaxy plans to expand operations at the Helios facility, which is already about the size of three football fields. It plans to increase its maximum consumption of energy to 800 megawatts from 180 megawatts, pending approval from the Electric Reliability Council of Texas.
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“Our intention is to grow and extend” the Helios site, Fabiano said.
Galaxy said the Dickens County site is its second in Texas. It declined to disclose the location of its initial mine.
But it’s struggled, too. The company’s stock, which is listed in Canada, fell 83 percent last year, having peaked at more than $27 in March. But since it
announced
buying the Helios facility, its share price — which fell as low as $3.33 in December 2022,
has risen. It closed Thursday at $5.23.
Good fit for Texas?
Many in Texas who support the bitcoin industry say they do so based on a libertarian belief that the unregulated digital currency can provide transparent, egalitarian alternatives to traditional finance.
“I believe in bitcoin,” said Grant Weston, who hosted a recent
San Antonio Bitcoin Club
meeting that drew dozens to the downtown Geekdom Event Centre. “As long as bitcoin exists, mining is not going to go away.”
Weston, son of San Antonio real estate developer Graham Weston, moved to Austin, where he’s found himself among the crypto elite.
Last year, he was chosen by the governor to join the
Texas Work Group on Blockchain Matters, which in November released an 84-page report aimed at expanding the industry in Texas. Bratcher, of the Texas Blockchain Council, is also on the roster stacked with academics, lawyers, government officials and elected officials. Blockchain isn’t cryptocurrency, but the technology that powers it.
Somewhat echoing Abbot, he said he sees similarities between bitcoin mining and oil drilling.
“Wildcatters, just like bitcoin miners, they’re people who search for riches,” he said. “In order to get rich, unless you have money to burn, you got to go level up. But if you do that, you can also lose everything. So, it’s just about how much your risk appetite is.”
Murtuza Jadliwala, an associate professor who taught an undergraduate class on cryptocurrency at the University of Texas at San Antonio, said he supports research into the “groundbreaking” blockchain technology — a digital ledger that enables bitcoin by recording the history of transactions. But he’s not a fan of bitcoin itself.
“Do we need cryptocurrencies in our life? I don’t think so,” he said. “There are already good forms of currencies that humans have gotten used to.”
As part of his academic research, Jadiwala has interviewed state comptrollers around the nation to assess economic arguments for bitcoin mining.
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“From the states’ perspective, I presume bitcoin mining can be profitable as a business,” he said. “In Texas, we already have pollution and a climate crisis, and on top of it you’re creating this additional pressure on a delicate energy ecosystem. Is it worth it? It might have been worth it if it’s basically doing something good for humanity. I personally don’t see that.”
Gaming the grid?
Crypto enthusiasts maintain that bitcoin mining operations have a spinoff benefit: providing stability to the state power grid by virtue of their flexibility to shut down during peak electricity demand.
With that in mind, ERCOT has agreements with mining companies that involve paying them to reduce energy use when needed.
In that way, Bratcher said, bitcoin mining is “an energy optimization and optionality play” — and a potentially lucrative one for mining operations.
“Initially, you would imagine a bitcoin miner just running 24/7 and consuming energy,” he said. “But they’re actually going to be more profitable if they’re very conscious of their energy consumption and use energy when demand is low and turn off when demand is high.”
But Hirs, the energy expert in Houston, said bitcoin miners have simply “made money through an arbitrage with the electricity market.”
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But mining’s use of the state’s power grid has ignited debate among state and federal politicians.
“Texas has emerged as an increasingly attractive location for crypto-asset mining, which uses about 3 percent of local peak electricity demand,” according to a
report
from the White House Office of Science and Technology Policy. “Over the next decade, Texas may see an additional 25 GW of new electricity demand from crypt-asset mining — equivalent to a third of existing peak electricity demand in Texas.”
That increase raises potential challenges for maintaining the electrical grid’s reliability, according to the report.
In October, U.S. Rep. Al Green from Houston joined U.S. Sen. Elizabeth Warren and five other lawmakers in writing a
letter
to ERCOT that sought information about its ties to crypto miners and how operations are impacting the state’s power grid.
Lawmakers said Texas houses about one-quarter of the nation’s bitcoin mining and uses 9 percent of crypto mining computer power in the world — a share expected to increase to 20 percent by the end of this year.
“In simple terms, the bitcoin miners make money from mining that produces major strains on the electric grid,” the lawmakers said. “And during peak demand when the profitability of continuing to mine decreases, they then collect subsidies in the form of demand response payments when they shut off their mining operations and do nothing.”
They wrote that Riot Platforms received about $9.5 million from the “demand response curtailment program” during a heat wave in July. That was more than the $5.6 million the company made from selling bitcoin that month. The lawmakers estimated the state could pay crypto miners roughly $170 million annually through the agreements in the near future.
For crypto supporters, the agreements offer miners a new money-making strategy during the bear market.
“Even if mining isn’t extremely profitable on a given day or given month,” Offord said, “by selling their excess power to meet the demands of the state, they can literally make millions of dollars per day.”
That reality bothers Hirs.
“It’s a public policy issue for electricity usage for conservation of resources,” he said. “It doesn’t make any sense in my mind. Might as well pay people to go down to the NRG (Stadium in Houston) and move poker chips from one side to the other and write it down in a spiral notebook.”
eric.killelea@express-news.net
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