The new trend in the Bitcoin mining market: computing power and RWA

Author: Sharon, BlockBeats

Editor: Jack, BlockBeats

With the approach of the fourth Bitcoin halving, a new paradigm shift has emerged in the Bitcoin and its hash power market.

On June 20, Bitcoin mining company HAG Holding Limited (HAG) announced the official issuance of the world's first compliant digital security (STO) based on Bitcoin perpetual hash power, providing investors with monthly Bitcoin dividend payouts; on September 23, the decentralized hash power routing protocol Lumerin announced the launch of a decentralized Bitcoin hash power market on Arbitrum; on October 2, the Bitcoin RWA project Merlin Protocol announced the completion of testing on its testnet.

Tether, the issuer of the US dollar stablecoin USDT, is also actively laying out its strategy, announcing the launch of a Real World Ecosystem (RWE) while also intensively developing Bitcoin mining operations.

Compared to profiting through traditional centralized Bitcoin mining companies (hereinafter referred to as mining enterprises), Bitcoin hash power and RWA may be becoming a new trend in the Bitcoin mining market.

Centralized Mining Enterprises: Leveraging in Bull Markets, Seeking Solutions in Bear Markets

Since the comprehensive ban on Bitcoin mining activities in inland China in June 2021, the center of Bitcoin hash power has shifted from China to North America. This shift in hash power centers actually began in 2020, and by the end of 2021, the change was visibly apparent. According to the Cambridge Bitcoin Electricity Consumption Index's Bitcoin mining map, if we take the average monthly hash rate share as a standard, the global Bitcoin mining center was still in China in January 2021, but by December 2021, this center had moved to North America.

Left image: January 2021; Right image: December 2021. Image source: Cambridge Bitcoin Electricity Consumption Index

Behind this change is the continuous rise of mining enterprises in North America. Since 2020, North American mining companies such as Core Scientific (NASDAQ: CORZ), Riot Platform (NASDAQ: RIOT), Bitfarms (NASDAQ: BITF), and Iris Energy (NASDAQ: IREN) have begun to purchase mining machines in large quantities and have successively gone public in North America, embarking on a path of compliant operations.

In February 2020, Bit Digital (NASDAQ: BTBT) went public; In June 2021, Bitfarms, Hut 8 (TSE: HUT), and HIVE Digital (CVE: HIVE) went public; In November 2021, Iris Energy went public; In January 2022, Core Scientific went public; Riot Platform, originally a biopharmaceutical company, also took off after entering the mining wave.

These mining enterprises primarily engage in Bitcoin mining, so their development is highly correlated with Bitcoin prices. During the bull market from January 2021 to May 2022, the stock prices of these companies soared. According to Nasdaq data, compared to their initial public offering prices, Core Scientific, Bitfarms, Hut 8, and HIVE Digital saw their stock prices rise by as much as 57%, 707%, 371%, and 228% respectively during the crypto market bull run.

Bull market conditions from January 2021 to May 2022. Image source: Coingecko

During this period, most mining enterprises achieved profitability through a combination of hash power mining and debt/equity financing. For example, Marathon Digital (MARA) primarily engages in self-operated Bitcoin mining, with a strategy of financing to purchase mining machines and deploy mining farms, holding Bitcoin as a long-term investment after paying operational costs. Data shows that in 2021, Marathon Digital spent $120 million to purchase 30,000 Antminers from Bitmain and obtained a $100 million revolving credit line from Silvergate Bank, planning to raise $500 million in debt through the issuance of senior convertible notes to continue purchasing mining machines, becoming the largest Bitcoin holder among North American mining enterprises.

Similarly, Core Scientific was even more extravagant, operating over 200,000 Bitcoin mining machines across five states in the U.S., producing over 7,000 Bitcoins in just June 2022. Additionally, Core Scientific received a $54 million investment from Celsius and signed a $100 million equity investment agreement with investment bank B. Riley.

However, due to their high-leverage business nature, the sudden bear market caught these mining enterprises off guard.

First, Marathon Digital recorded a net loss of $686.7 million for the entire year of 2022; Riot Platform had a net loss of $509.6 million in 2022; Bitfarms reported a net loss of $239 million in 2022; Core Scientific lost over $1.7 billion in just the first nine months of 2022, leading to Core Scientific being on the brink of bankruptcy by the end of 2022.

According to a report from Hashrate Index, the total collective debt of mainstream centralized mining enterprises exceeded $4 billion by the end of 2022, with Core Scientific having the highest debt, owing creditors $1.3 billion as of September 30, 2022; Marathon Digital owed about $851 million, most of which was in convertible notes; the third largest debtor was Greenidge Generation, which owed $218 million.

Image source: Hashrate Index

Many institutions believe that the development of centralized mining enterprises is highly correlated with Bitcoin prices, thus "the business model of financing to purchase Bitcoin mining machines is very challenging for cash flow management during bear markets," and it is also easy to face the risk of insolvency.

Related Reading: "The Life-and-Death Speed of Bitcoin Mining in the Winter: Analysis and Investment Insights on Marathon Digital Holdings (MARA)"

Many publicly listed Bitcoin mining companies took out large loans during the bull market in 2021, leading to very negative impacts on their profitability during the subsequent bear market.

The business models of purchasing mining machines to mine and hoard Bitcoin (Mara, Hut 8, Riot) and producing and selling mining machines (Canaan) differ in that they have low R&D expenditures but high capital expenditures, and their revenues lack resilience, relying solely on improving BTC mining efficiency and BTC appreciation for profits, with high debt ratios and significant leverage. Therefore, the revenue of mining publicly listed companies is more strongly correlated with Bitcoin prices, and price fluctuations are more severe, while facing potential insolvency threats during bear markets.

Now, Core Scientific is facing restructuring, Marathon Digital is struggling to survive through selling Bitcoin and private financing, Riot Platform is seeking strategic transformation by changing its name (formerly known as Riot Blockchain), and Iris Energy is looking to transition into the generative AI market. Some centralized mining enterprises are seeking new paths in the bear market, while others continue to advance their layout in the Bitcoin mining market, holding on in the darkness before dawn, waiting for the arrival of the bull market.

Beyond the narrative of centralized mining enterprises, the value of Bitcoin itself is still viewed positively by the entire market. It is precisely for this reason that even in the current bear market, new narratives are still emerging.

Bitcoin RWA: A Paradigm Shift in Decentralized Dividends

Centralized mining enterprises finance through listing on U.S. stock markets, allowing investors to buy their stocks and profit from rising stock prices. This also leads to mining enterprise stock prices soaring during bull markets and plummeting during bear markets. Therefore, many who hope to profit from mining and rising coin prices have turned to a new paradigm outside of centralized mining enterprises—Bitcoin and its hash power RWA.

RWA (Real-World Assets) refers to mapping traditional market assets onto the blockchain in the form of tokens for Web3 users to buy and sell, and is seen as a gateway for traditional financial markets to enter the Web3 industry.

BlockBeats has learned that there are currently two new approaches to Bitcoin RWA: one is anchored to Bitcoin hash power, and the other is anchored to Bitcoin prices.

Anchored to Hash Power: Tokenizing Mining Dividends, Arbitraging Based on Mining Machine Price Fluctuations

As "the world's first STO issued in accordance with U.S. securities law, based on perpetual Bitcoin hash power," HAG Holding Limited's core members come from Goldman Sachs, TSMC, SoftBank, and Bitmain, issuing STO (security token) through SEC-compliant means, and then bringing Bitcoin hash power income into the Ethereum and DeFi world through a "holding token dividend" model.

On June 20, HAG Holding Limited issued a total of $500 million worth of HAG tokens on the U.S. digital securities issuance platform INX, with each HAG token anchored to 1TB of Bitcoin hash power from the company's operational mining farm. Of the Bitcoin produced by the mining farm, 30% is used for project operation and maintenance, while 70% is distributed to HAG token holders in the form of WBTC.

According to the HAG team, this distribution is paid monthly through INX's compliant transfer agent, with all income and distributions being transparent and public. HAG's founding member Joe revealed to BlockBeats that the team is negotiating the purchase of new mining machines S21 from Bitmain, with more developments expected in January 2024.

Through this model, HAG's underlying value is highly positively correlated with mining machines. "We use decentralized crowdfunding to bring more Web2 people into the Web3 world, allowing them to purchase and hold Bitcoin and profit from it," Joe told BlockBeats in an interview.

Traditional mining enterprises hold a large amount of hash power and are highly centralized. Today's Bitcoin RWA may, to some extent, drive Bitcoin back onto a decentralized path, iterating the narrative of Bitcoin mining.

"The liquidity in web3 is still insufficient, and efficient economies of scale + effective mining farm operations are key," Joe believes. Current Bitcoin mining needs to accommodate more participants from outside the crypto industry for greater scale and development, while mining farm operations need to be sustainable. Therefore, to some extent, the "mining holding coins + bond financing" model of certain centralized mining enterprises cannot achieve sustainable development.

Additionally, Lumerin, another Bitcoin hash power RWA project, officially launched on September 26, essentially serving as a "DEX/DeFi for hash power," commodifying Bitcoin hash power through smart contracts, allowing it to be traded by anyone. Community users have described it as "the world's first P2P exchange for mining Bitcoin on Arbitrum."

Image source: Introduction to its operating mechanism in the Lumerin white paper

Anchored to BTC: Surpassing WBTC, Seeking Compound Interest Based on Coin Standards

Compared to HAG's focus on protecting investors through compliance, the mechanism of Merlin Protocol is more akin to MakerDAO, with a stronger native attribute in the crypto industry.

Source: Merlin Protocol official website

Merlin Protocol provides space for miners to arbitrage while offering custodial and secure trading services for cross-chain traders. Its operating mechanism involves issuing MBTC, which is pegged to Bitcoin; miners can mint MBTC by locking up an equivalent amount of mined Bitcoin, and can also arbitrage using "ghost Bitcoin."

Ghost Bitcoin is a special transaction provided by cross-chain service channels that allows MBTC to be minted without real Bitcoin. Ghost Bitcoin transactions require the minting and burning of MBTC to be completed within a single block, along with the payment of corresponding transaction fees.

When there is arbitrage space for MBTC transactions on Ethereum, users can quickly conduct liquidity arbitrage using ghost Bitcoin without any principal requirements. Ghost Bitcoin is a unique technical feature of MBTC, and based on ghost Bitcoin, MBTC will gain richer market liquidity.

MBTC aims to address the existing issues and pain points of the stablecoin WBTC, "Firstly, WBTC is controlled by centralized institutions, and secondly, WBTC is difficult for users to earn returns."

Users can deposit their Bitcoin on the Merlin Bridge, which will distribute their Bitcoin across multiple cross-chain channels to ensure the safety of their funds. On the Merlin Bridge, anyone can become a cross-chain channel service provider through over-collateralization, "the collateral ratio is 150%. For example, if you want to secure 1 Bitcoin, you need to pledge an equivalent of 1.5 Bitcoins in Ethereum or USDT as collateral to become a service provider," Merlin Protocol co-founder Eason told BlockBeats. Meanwhile, service providers can earn a 1% transaction fee on each transaction, while the treasury collects an additional 0.5% from the transaction.

"Previously, we raised funds through on-chain NFT issuance and then provided the funds to miners for mining, sharing the profits with investors; in the future, our ecosystem will essentially remain the same, where everyone will raise MBTC through a DAO management system, and miners will take this MBTC to engage in real-world mining, obtaining more BTC to share with the entire ecosystem. Investors can earn more Bitcoin by raising Bitcoin. Essentially, only Bitcoin mining can achieve compound interest based on coin standards."

Image source: Merlin Protocol white paper

Building Factories, Buying Coins, Is Tether Also Laying Out Bitcoin RWA?

Compared to the aforementioned projects, Tether also seems to be quietly laying out Bitcoin RWA. Currently, Tether not only operates its own Bitcoin mining farms but has also purchased a large amount of Bitcoin, viewing Bitcoin mining and RWA as strategic focuses for 2024.

On September 22, Tether's Chief Technology Officer Paolo Ardoino stated on his social media platform that Tether's new global strategy will be fully implemented in 2024. According to his hints, the new global strategy may include investment and financing cooperation, AI, new energy Bitcoin mining, education, and global business expansion; in October, this CTO announced, "Tether's Real World Ecosystem (RWE) is about to launch."

In fact, as early as August 26, Paolo had posted on social media that Tether's Bitcoin mining farm in Latin America was set to begin operations within weeks. According to a previous report by Bitcoin Magazine reported, Tether has invested in a renewable energy power generation park in El Salvador, which plans to build 169MW of photovoltaic solar energy and 72MW of wind energy, and also plans to construct a Bitcoin mining farm within the park.

Tether has also collaborated with a licensed company in Uruguay to launch a sustainable Bitcoin mining business and initiated the "Tether Energy" program a few months ago to build renewable energy production and Bitcoin mining farms. Meanwhile, as of August 6, Tether may have become the 11th largest Bitcoin holder globally, reportedly holding 55,022 Bitcoins worth $1.6 billion.

The launch of RWE, investment in Bitcoin mining farms, and substantial Bitcoin holdings all indicate that Tether may be making a larger layout in the Bitcoin RWA market.

Whether it's HAG, Merlin Protocol, Lumerin, or Tether's layout, despite their different operational mechanisms and profit models, it is evident that Bitcoin is becoming an important part of the RWA narrative, with many teams choosing to enter the market at this time for multiple reasons.

Market Size Far Exceeds $9 Billion, Imagination Space for Bitcoin RWA

In fact, it is not difficult to understand why this timing is chosen to enter the Bitcoin RWA market. On one hand, during the bear market, mining machine prices are at market lows, allowing for the purchase of a large number of mining machines at relatively low prices, thus lowering the basic costs. On the other hand, as the RWA concept gradually gains popularity, a good underlying asset can help project parties achieve stable development and allow investors to profit with lower risks, and Bitcoin is widely recognized as a "good underlying asset" in the cryptocurrency industry.

Moreover, it is worth noting that the future space and scale of this market may exceed many people's expectations.

Mainstreaming RWA Narrative

In addition to the renewed attention on the value of Bitcoin itself, the RWA concept, which has been increasingly mentioned in recent years, is also a major reason driving the rise of Bitcoin RWA.

Related Reading: "RWA Discussion: Underlying Assets, Business Structure, and Development Path"

The crypto market is not currently in a bull market, and even within the crypto-native market, there is a lack of sufficient narratives. RWA is one of the few tracks with solid revenue support that may achieve explosive growth in business.

HAG's founding member Joe pointed out that with the recent resurgence of the RWA narrative, Bitcoin hash power is receiving renewed attention, and how to involve ordinary people in hash power while protecting investors is a key focus for HAG. Merlin Protocol also expressed agreement, stating, "As the cycle rotates, RWA will become a narrative that remains long after the waves, just like public chains, DeFi, and GameFi." Merlin co-founder Eason told BlockBeats in an interview.

Eason also mentioned MakerDAO, the most well-known entity in the RWA field, believing that its greatest success lies in empowering its DAI ecosystem through U.S. Treasury bonds: "Finance is about higher utilization of funds and greater release of productivity. MakerDAO is quite meaningful. It uses its own issued equivalent to conduct RWA investments, which is something most projects do not possess. Therefore, we also want to issue a stablecoin pegged to Bitcoin to deeply develop and expand the RWA industry in the future."

Imaginative "Bitcoin Financial World"

"This market is actually very large; over $9 billion worth of Bitcoin needs to be 'processed' every year, and over 70% (100,000 to 200,000 miners) of BTC is traded OTC rather than on exchanges. If we capture just 10%-20% of this market, the annual returns will be quite considerable," Merlin co-founder Eason told BlockBeats. According to the team's estimates, the annual revenue from cross-chain service fees alone for the Merlin protocol could reach $14 million, while node revenue could reach $30 million.

Additionally, BlockBeats has learned that the OTC market for Bitcoin mining is even larger, with some To G business involved. An insider revealed to BlockBeats that the scale of these transactions far exceeds many people's imaginations.

Eason pointed out that the future financial market based on Bitcoin RWA is very promising. Especially for many miners, as the fourth Bitcoin halving approaches, miners need to strategize for the situation in 2024, seeking new revenue opportunities while improving machine efficiency, reducing power costs, or finding ways to cut other operational costs.

Furthermore, there is an increasing number of voices in the industry suggesting that Bitcoin may achieve a "revival," which has also contributed to the expansion of the Bitcoin RWA market. On October 20, Tether CTO Paolo Ardoino stated in an interview that he expects a "huge leap" in the adoption of Bitcoin scaling solutions in the coming years.

On the same day, Lightning Labs CEO and co-founder Elizabeth Stark also stated in an interview that Taproot Assets could help Bitcoin achieve a "revival," making the Lightning Network a multi-asset network and potentially solidifying Bitcoin's position as the currency of the internet: "With the next halving approaching, now is the time to accelerate Bitcoin's development."

According to BlockBeats' observations, the topic of "Bitcoin revival" is driven not only by the development of the Bitcoin network and ecosystem itself but also by traditional world support. Similarly, on October 20, Coinbase Chief Legal Officer Paul Grewal expressed confidence in the approval of Bitcoin ETFs by the U.S. Securities and Exchange Commission in an interview with CNBC. Previously, JPMorgan analysts also predicted that Bitcoin ETFs would be approved in the coming months.

With the arrival of the halving cycle, if Bitcoin ETFs are officially approved, it may bring more opportunities and positive sentiment to the Bitcoin mining market. Additionally, as miners seek diversified profit methods, mining machine prices are at market lows, and the RWA narrative becomes mainstream, the Bitcoin and its hash power market may welcome greater changes and a "revival."