Three-decade-old energy company Beowulf Mining seized on an opportunity to mine bitcoin following the construction of a data center in Montana for Marathon Digital Holdings.
Beowulf had direct access to electricity for a potentially profitable mining venture. Having been privy to clients’ ventures into mining, it gambled by taking its crypto side business Terawulf public in 2021.
“Energy companies tend to be very conservative by nature, and they are often regulated,” said Paul Prager, CEO of Terawulf. “We are early adopters because we had a front-row seat in our partnership with Marathon.”
Beowulf is one of a niche group of energy companies whose foray into the mining space was heavily influenced by their clients’ businesses. Lower risks and the potential for wide profit margins have made companies like CleanSpark Inc., Stronghold Digital Mining Inc. and Iris Energy Ltd notable players in the mining industry.
Unlike traditional mining companies, who must enlist the help of a third party to resolve an electrical problem, incurring costs and downtime, the energy companies can mitigate the downsides by calling on in-house expertise.
“When a transformer goes out on-site, you are not calling a third-party service firm to come in to repair it, putting in a change order, paying them overtime, and hoping that in two to three weeks that the transformer is repaired,” Prager said.
Stronghold says that energy companies, with their direct access to energy, can get a better margin than the five cents per kilowatt experienced by other miners who have to purchase electricity from a service provider.
“If you are buying power from a producer and paying a third-party operator to manage the data center, you are going to have lower margins than those who do it themselves,” says Gregory Beard, CEO of Stronghold.
External pressure weighs on margins
The once-lucrative margins for mining companies have shrunk from 90% to 70% thanks to soaring energy prices and bitcoin’s current price.
More squeezing is on the way, as block rewards will be algorithmically halved in under three years.
Bitcoin, the monetary network, is programmed to give a fixed number of coins as rewards to miners who succeed in processing a block of transactions.
The more computing power mining collectives possess, the greater the chance of earning those rewards. Beowulf initially projected that their mining business would claim 10% of the bitcoin network’s computing power with its 800 megawatts of power for mining.
Raising capital through selling mined crypto
Companies like Marathon and Riot Blockchain have the most computing power. However, the costs of constructing and maintaining data centers have grown since China’s ban on miners, causing firms to turn to debt and equity markets to raise capital.
In contrast, CleanSpark has sold no equity since last November but is willing to sell the bitcoin it mines to raise money. “It costs us about $4,500 at our company’s own facilities to mine bitcoin at today’s price; that is a 90% margin.
“I can sell bitcoin and use that to pay for my facilities, operations, personnel, and growth, and not dilute my shareholders,” said Matthew Schulz, CleanSpark executive chairman.
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