The Challenges of Industrial-Scale Bitcoin Mining

By Abdumalik Mirakhmedov, Executive Chairman & Co-Founder of Genesis Digital Assets

Bitcoin is the future of money, but it doesn’t exist without mining it.

There was a time when someone could mine from a laptop in their home, but competition forced operations to scale and hardware to get faster and more efficient in order for miners to stay profitable. This resulted in Bitcoin mining becoming a multi-billion dollar business in just a decade, with mining operations needing the right architecture, energy sources, management software, upgraded hardware, and more to stay profitable.

But while it’s a big, capital-intensive industry, there are big returns as well, and in just a decade of existence, Bitcoin has grown to a market cap of over $1 billion dollars. It's also attracting more interest and larger investments as its adoption spreads.

We've been mining for seven years, and have scaled our operations along with Bitcoin’s growth — which means we've faced every issue there is to face when it comes to equipment, sourcing, locations, and more. Here are some challenges of large-scale mining, and how we've handled them.

6 Challenges of Large-Scale Bitcoin Mining

In order to stay profitable, Bitcoin mining requires operational excellence, a deep understanding of needs, and the flexibility to adapt. While Bitcoin mining is helping to revolutionize money, technology, and exchange of value, there are still many operational challenges that the industry faces today.

Challenge 1: Access to hardware

Mining operations need the fastest, most advanced technology out there in order to stay quick, efficient, and profitable. But it's not as easy as simply ordering the latest model of miner when they need it. The fastest chips out there are in limited supply, and are controlled by only two companies, making “innovation in the space is somewhat hostage to a duopoly,” according to ARK Invest. These chip foundries only allot them to certain customers, too, with hardware batches only produced during certain times of the year. And short supplies result in frequent sell-outs of needed equipment, like with the current shortage of Bitmain ASIC miners. This means that if mining operations are able to get a hold of the newest hardware, they need to put orders in advance, and anticipate when the new machines will be available.

Challenge 2: Access to capital

Bitcoin mining is a capital-intensive business, and requires access to investments as well as sourcing the most efficient locations, energy, and supplies to keep costs low. This often means signing contracts for long-term hardware deals over multiple innovation cycles. As CoinDesk reports, debt financing is often the way mining companies get up and running, but “the mining industry is volatile and loans generally carry high interest rates and strict collateral requirements, making it a double-edged sword for those that borrow to expand.”

Challenge 3: Access to energy

Bitcoin mining requires a lot of energy to keep miners running efficiently, and those costs can add up quickly, which means that in order to keep mining profitable, operations need to source not just cheap energy, which is often sustainable energy. This means turning to wind or water power to increase efficiency while having minimal impact on the environment. While the UN released a statement believing “that cryptocurrencies and the technology that powers them (blockchain) can play an important role in sustainable development, and actually improving our stewardship of the environment,” there are many mining operations still using dirty energy sources.

Challenge 4: Access to talent

As mentioned before, this is such a new industry that there's no historical precedent for how to run, scale, and optimize operations. All talent is still on a learning curve, so finding anyone with the exact technical expertise is a challenge. While no crypto mining degrees exist yet, universities and educational organizations are scaling course offerings, and organizations are creating platforms for open source innovation to train newcomers.

Challenge 5: Political risk

Not all countries are on board with the future of cryptocurrency. As we've seen recently with Iran’s ban on crypto mining and China’s order for mining operations to be shut down, countries can change their policies overnight and not only malign the mining industry within its borders, but can affect the price worldwide as well. In many ways, it's shown which countries are open to having mining companies — Canada even deemed crypto mining companies “essential” during the pandemic — and many operations are moving to places where the political risk is much lower.

Challenge 6: Price volatility

Another challenge is the dramatic fluctuation of the price of Bitcoin, which can change with a single tweet. Price drops mean not being as profitable while still maintaining the same level of operations, and price drops often result in miners leaving the industry for good. Surviving price drops until the next price rise simply requires being more efficient with operations.

Overcoming the Challenges

Bitcoin mining is still a young, evolving industry, and many of these challenges stem from the simple fact that we’re creating a new industry as we go. More widespread awareness, good problem solving, and collaboration to overcome these challenges will be the way to stay competitive and create the future for Bitcoin.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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