Bitcoin miners upgrade power centers and get into AI to brace for slashed revenue post halving
AUSTIN, TEXAS — Adam Sullivan left investment banking to mine bitcoin at an awkward time. It was May 2023, bitcoin was trading at around $21,000, U.S. regulators were in the thick of cracking down on the sector writ large, and Core Scientific, the company he had agreed to take over, was battling angry lenders in a Texas bankruptcy court over tens of millions of dollars in outstanding debt.
But Sullivan knew that, with a lifeline, he could get the business to a much better place. That’s because the halving was on the way, and with it would likely come a big rally in bitcoin.
Late Friday night, the bitcoin code automatically cut new issuance of the world’s largest cryptocurrency in half. It happens roughly every four years, and in addition to helping to stave off inflation, it historically precedes a major run-up in the price of bitcoin.
The technical event is relatively simple: Bitcoin miners get paid in bitcoin to validate transactions, and after 210,000 blocks of transactions are computed and added to the main chain, the reward given to the miners securing bitcoin is ‘halved.’
There are more than a dozen publicly traded miners on the network and thousands of smaller, private ones around the globe, constantly racing to process transactions and get paid in new bitcoin. Because the event leads to a cut to rewards paid to miners directly, they’ll be the first ones to feel the impact of the halving.
The price of bitcoin has touched new all-time highs after each “halving” event.
CNBC
Typically, when the halving cuts supply, it’s led to huge rallies for bitcoin.
In fact, the previous (and only) three halvings in the chain’s history have come before every bull run, in which the coin has touched new all-time highs and a surge of investors have entered the market for the first time.
That rapid price increase has helped many miners stave off the worst since it tends to offset the impact of having the block prize cut in half.
“As a company that was already in the process of scaling our infrastructure during the previous halving, we know the toll that halvings can take on a company if it is not adequately prepared,” Core’s Sullivan told CNBC.
The aggregate market cap of the 14 U.S.-listed bitcoin miners tracked by JPMorgan analysts, which accounts for around 21% of the global Bitcoin network, declined 28% over the first half of April to $14.2 billion, reaching year-to-date lows. Bitdeer was the best-performing stock over the period, down around 20%, versus Stronghold Digital, which was 46% lower.
Some have billed the 2024 bitcoin halving as a seminal moment for the mining sector. Depending on how much prep work miners have done, it could easily make or break them.
“Being prepared for a halving means evaluating all of your power strategies, all of your software capabilities, all of your operations,” continued Sullivan.
Others are less concerned given recent price moves in bitcoin.
In a research note from Needham on Apr. 16, analysts said they expect the halving to only have a modest impact to miners’ estimated EBITDA margins, despite the 50% reduction in revenue, since the price of bitcoin has been trading in the range of $60,000 to $70,000.
“We expect geopolitical tensions and interest rate policy to be the biggest near-term drivers of crypto price action,” Needham analysts wrote, adding that at a bitcoin price above $60,000, the halving is “derisked for nearly all public miners.”
The bank did, however, single out their preference for low-cost bitcoin producers like Riot Platforms, Bitdeer, and Cipher Mining. Meanwhile, if bitcoin prices fall, Needham says the most outsized native impact will be felt by higher cost producers that are also levered to higher bitcoin prices via large treasury holdings.
Analysts from JPMorgan echoed a similar sentiment, writing in an Apr. 16 research note that they think “recent weakness offers an attractive entry point” for investors and that they are “especially bullish” on Riot, which they believe offers attractive relative valuations.
Power supply for Whinstone’s bitcoin mine in Rockdale, Texas.
Years spent bracing for the halving
Miners have had years to prepare for the halving, including seeking lower power costs and upgrading their fleets to more efficient machines.
“Bitcoin’s halving happens like clockwork every four years,” said Haris Basit, chief strategy officer of Bitdeer Technologies Group. “It’s a known variable that is a benchmark for us to remain focused on operational excellence.”
To that end, the Singapore-headquartered mining firm has invested in new data centers, but its core strategy has been to increase vertical integration through research and development. 25% of its staff is focused on R&D efforts, which Basit says have “led to new innovations and revenue pathways, such as our recently announced 4nm mining rigs and AI Cloud offerings.”
Analysts at Cantor Fitzgerald recently named Bitdeer as having one of the industry’s lowest “all-in” cost-per-coin.
Greg Beard, the CEO and Chairman of Stronghold Digital Mining, tells CNBC that miners whose only lever is more efficient machines will be at a disadvantage.
“Miners who own their low-cost power are better positioned,” said Beard. “Operational costs will be lower, allowing them to be more flexible with their capital.”
Core’s Sullivan agrees, noting that bitcoin mining data centers in the future will work hand-in-glove with power generators and grid operators to serve as a virtual battery for grid operators – allowing them to increase base load, curtail bitcoin data centers when they need to, and avoid peak generation loads, which he says are dirty and expensive.
“We own and operate our infrastructure, giving us greater control over operational and strategic decisions, such as the potential to expand into high-performance computing hosting,” said Sullivan.
Core Scientific, which launched in 2017 and now manages seven mining sites in five U.S. states, also owns the full technology stack. The company has been looking to diversify its revenue streams beyond purely bitcoin. Sullivan says that existing data centers offer reconfiguration opportunities to accommodate new types of high-value compute.
“Certain data centers are located in close proximity to major metropolitan areas, making them candidates for low-latency, high-value compute applications,” said Core’s CEO.
Bitdeer’s bitcoin mine in Rockdale, Texas.
Riot Platforms CEO Jason Les told CNBC that preparation for the halving came down to the company’s long-standing focus on achieving a low cost of power, strong balance sheet, and significant scale of operations. Les says that’s what has positioned the firm to both withstand the halving with positive margins and be well positioned for upside on the other side of it.
“Our new Corsicana Facility was energized just this week, and we will be significantly scaling up our hash rate with next-generation equipment at that new site over the remainder of the year,” said Les. “As a result, we are positioned to mine more bitcoin per day at the end of the year than we do today, despite the halving.”
Marathon Digital, which has seen its stock rise more than 70% in the last year, took a different approach to scaling the business than its rivals. CEO Fred Thiel tells CNBC that the company grew quickly using an asset-light approach, where Capex was spent on mining rigs rather than infrastructure.
“In December, we owned less than 5% of the sites where we were hosting our miners,” said Thiel. “Today we now own 53% of our total 1.1 gigawatts of capacity, having purchased it at less than the build and replacement cost.”
Owning sites lowers Marathon’s cost to mine by up to 20% on a marginal cost basis. Thiel also noted that by the end of 2024, Marathon expects to further improve efficiency by 10% to 15% as they deploy the next generation rigs across their new sites.
That boost to efficiency isn’t just about new gear, however. The firm is deploying its own custom firmware, which allows it to operate even more efficiently.
Marathon, along with other mining firms, has begun diversifying its business model into ancillary operations beyond purely bitcoin mining, as well.
Thiel says the company recently launched an energy harvesting division, where they are compensated for converting stranded methane and bio-mass into energy, which they then sell heat back into an industrial or commercial process. The service essentially subsidizes and lowers Marathon’s cost to mine significantly. The company expects this new business line to generate a significant portion of its revenues by the halving in 2028.
Diversifying revenue
The April 2024 bitcoin halving looks a lot different than the three that came before it.
For years, increased competition resulting from new miners coming online has been cutting into profits, because more miners means more people are sharing the same pool of rewards.
In a research note from JPMorgan on Apr. 16, analysts note that the network hashrate, a proxy for industry competition and mining difficulty, was up 4% in April from the month before. Stronghold’s Beard says the halving is a headwind dwarfed by the global hashrate increasing nearly five-fold from the last one in May 2020.
“Mining is a tough industry especially because there are a lot of nation states that have extra power power and they’re dedicating it to mining,” said Nic Carter of Castle Island Ventures. “It’s a free market, anybody can enter into it as long as they have the basics.”
U.S. spot bitcoin exchange-traded funds have also significantly shifted the pricing dynamics. In years past, the price of bitcoin didn’t surge until after the halving. But in the wake of record flows into these spot bitcoin funds, the world’s largest cryptocurrency touched a fresh all-time-high above $73,000 in March.
“The recently approved bitcoin ETFs have proven to be huge pipelines of capital into bitcoin and that universe of ETFs continues to grow with the recent approvals in Hong Kong as well,” said Riot’s Les. “We think the price action we’ve seen in bitcoin year-to-date reflect that and has us very optimistic on what bitcoin mining economics can look like in the months and years post-halving.”
Blackrock’s ETF reached $17 billion in net assets within a few months of launching. Beard of Stronghold tells CNBC that if Blackrock added even just a billion dollars more of bitcoin in April to its ETF, it would single handedly create demand for more coins than the mining industry will supply post halving.
What is also different this time around is that the block reward is no longer the primary form of miner revenue. Recent programming innovations in bitcoin have given way to a burgeoning ecosystem of projects building on top of bitcoin’s blockchain, which has translated to greater transaction fee revenue for miners.
There is a limit to how large the blocks can go but the value of those blocks is about to increase significantly, according to Bill Barhydt, who is the CEO and founder of Abra. From Barhydt’s vantage point, he supports miners with a mix of services, including their auto liquidations, so he has access to a lot of macro data across the sector.
“The math is simple,” begins Barhydt. “Bitcoin blocks are fixed in size and the demand for data within those blocks is going to increase significantly for several reasons, including more retail wallet holders moving their bitcoin into and out of storage, new uses cases like Ordinals (NFTs for bitcoin) and DeFi on bitcoin, institutional settlement requirements for exchange traded products in the U.S., Hong Kong, Europe, etc., lightning settlement transactions, and more.”
At the current rate of adoption, Barhydt believes that transaction fees in this cycle would likely peak within 24 months at 10 times their cost during the previous cycle peak, due to a combination of a higher price for bitcoin itself, combined with higher demand for the space inside each block.
Castle Island’s Carter isn’t so sure that fee-based revenue can completely make up for lost income post-halving.
“It’s not entirely clear that fees are fully offsetting the lost revenue, and in fact, I don’t expect that to happen” said Carter.
Fees tend to be really cyclical. They rise sharply during periods of congestion, and they fall back to near zero during other normal periods. Carter cautions that miners will see spikes in fees, but there is not yet an enduring, strong, and robust fee market most of the time.
Swapping ASICs for AI
In the last year, there has been a surge in demand for AI compute and infrastructure that can support the massive workloads required to power these novel machine learning applications. In a new report, digital asset fund manager CoinShares says it expects to see more miners shift toward artificial intelligence in energy-secure locations because of the potential for higher revenues.
Already, mining firms like BitDigital, Hive, Hut 8, Terawfulf, and Core Scientific all have either current AI operations or AI growth plans.
“This trend suggests that bitcoin mining may increasingly move to stranded energy sites while investment in AI grows at more stable locations,” write analysts at CoinShares.
But pivoting from bitcoin mining to AI isn’t as simple as re-purposing existing infrastructure and machines. The data center requirements are different, as are the data network needs.
“AI presents several challenges, notably the need for distinct and considerably more costly infrastructure, which establishes barriers to entry for smaller, less capitalized entities,” continues the report. “Additionally, the necessity for a different skill set among employees leads to increased costs as companies hire more AI-skilled talent.”
The rigs used to mine bitcoin are called ASICs, short for Application-Specific Integrated Circuits. The “Specific” in that acronym means that it can’t be used to do other things, like supporting the underlying infrastructure for AI.
“If you’re a bitcoin miner, your machines can’t be repurposed,” explains Carter. “You have to buy net new machines in order to do it and the data center requirements are different for AI versus bitcoin mining.”
Sullivan says that Core Scientific, which has been mining a mix of digital assets since 2017, began to diversify into other services in 2019.
“The company has owned and hosted Nvidia DGX systems and GPUs for AI computing, having built and deployed a specialized facility specifically for high-value compute applications at our Dalton, Georgia data center campus,” he said.
Core Scientific has also partnered with CoreWeave, a cloud provider which provides infrastructure for use cases like machine learning.
Sullivan says the combined capabilities will support both AI and High Performance Compute workloads, resulting in an estimated revenue of $100 million, though he says the total potential revenue is much higher given their significant infrastructure footprint that can be fitted to host some of the most advanced GPU compute coming to market.
“Bitcoin mining is an early example of high-value compute, attracting significant capital and a number of companies scaling their operations to support the Bitcoin network,” said Sullivan.
But Sullivan thinks few operators will be able to make the transition to AI.
Sullivan continued, “Bitcoin mining sites can only be repurposed if they meet the attributes that are required for HPC. Many existing sites across North America do not meet these needs.”
Microsoft Chief Executive Officer (CEO) Satya Narayana Nadella speaks at a live Microsoft event in the Manhattan borough of New York City, October 26, 2016.
Lucas Jackson | Reuters
Microsoft‘s Build developer conference kicks off on Tuesday, giving the company the opportunity to showcase its latest artificial intelligence projects, following high-profile events this month hosted by OpenAI and Google.
One area where Microsoft has a distinct advantage over others in the AI race is in its ownership of Windows, which gives the company a massive PC userbase.
Microsoft CEO Satya Nadella said in January that 2024 will mark the year when AI will become the “first-class part of every PC.”
The company already offers its Copilot chatbot assistant in the Bing search engine and, for a fee, in Office productivity software. Now, PC users will get to hear more about how AI will be embedded in Windows and what they can do with it on new AI PCs.
Build comes days after Google I/O, where the search giant unveiled its most powerful AI model yet and showed how its Gemini AI will work on computers and phones. Prior to Google’s event, OpenAI announced its new GPT-4o model. Microsoft is OpenAI’s lead investor, and its Copilot technology is based on OpenAI’s models..
For Microsoft, the challenge is twofold: keeping a prominent position in AI and bolstering PC sales, which have been in the doldrums for the past two years following an upgrade cycle during the pandemic.
In a recent note on Dell to investors, Morgan Stanley analyst Erik Woodring wrote that he remains “bullish on the PC market recovery” due to commentary from customers and recent “upward revisions to notebook” original design manufacturer (ODM) builds.
Technology industry researcher Gartner estimated that PC shipments increased 0.9% in the quarter after a multi-year slump. Demand for PCs was “slightly better than expected,” Microsoft CFO Amy Hood said on the company’s quarterly earnings call last month.
New AI tools from Microsoft could offer another reason for enterprise and consumer customers to upgrade their aging computers, whether they’re made by HP, Dell or Lenovo.
“While Copilot for Windows does not directly drive monetization it should, we believe, drive up usage of Windows, stickiness of Windows, customers to higher priced more powerful PCs (and therefore more revenue to Microsoft per device), and likely search revenue,” Bernstein analysts wrote in a note to investors on April 26, the day after Microsoft reported earnings.
While Microsoft will provide the software to handle some of the AI tasks sent to the internet, its computers will be powered by chips from AMD, Intel and Qualcomm for offline AI jobs. That could include, for example, using your voice to ask Copilot to summarize a transcription without a connection.
What’s an AI PC?
The key hardware addition to an AI PC is what’s called a neural processing unit. NPUs go beyond the capabilities of traditional central processing units (CPUs) and are designed to specifically handle artificial intelligence tasks. Traditionally, they’ve been used by companies like Apple to improve photos and videos or for speech recognition.
Microsoft hasn’t said what AI PCs will be capable of yet without an internet connection. But Google’s PIxel 8 Pro phone, which doesn’t have a full computer processor, can summarize and transcribe recordings, recommend text message responses and more using its Gemini Nano AI.
Computers with Intel’s latest Lunar Lake chips with a dedicated NPU are expected to arrive in late 2024. Qualcomm’s Snapdragon X Elite chip with an NPU will be available in the middle of this year, while AMD’s latest Ryzen Pro is expected sometime during the quarter.
Intel says the chips allow for things like “real-time language translation, automation inferencing, and enhanced gaming environments.”
Apple has been using NPUs for years and recently highlighted them in its new M4 chip for the iPad Pro. The M4 chip is expected to launch in the next round of Macs sometime this year.
Windows on Arm
Qualcomm, unlike Intel and AMD, offers chips powered by Arm-based architecture. One of Microsoft’s sessions will talk about “the Next Generation of Windows on Arm,” which will likely cover how Windows runs on Qualcomm chips and how that’s different from Intel and AMD versions of Windows.
Intel still controls 78% of the PC chip market, followed by AMD at 13%, according to recent data from Canalys.
In the past, Qualcomm has promoted Snapdragon Arm-based computers by touting their longer battery life, thinner designs and other benefits like cellular connections. But earlier versions of Qualcomm’s chips were limited in what they offered consumers. In 2018, for example, the company’s Snapdragon 835 chip couldn’t run most Windows applications.
Microsoft has since improved Windows to handle traditional apps on Arm, but questions remain. The company even has an FAQ page dedicated to computers running on ARM hardware.
AI everywhere else
Microsoft will also be hosting sessions like “AI Everywhere” covering how to “accelerate generative AI models” on devices that run in the cloud.
An “Azure AI Studio” session will look at how developers can create their own Copilot chatbots, which may be similar to what Google and OpenAI are doing with Gemini and ChatGPT. Imagine, for example, a company creating a chatbot that can help employees select health benefits.
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Boaz Weinstein, founder and chief investment officer of Saba Capital Management, during the Bloomberg Invest event in New York, US, on Wednesday, June 7, 2023.
Jeenah Moon | Bloomberg | Getty Images
Boaz Weinstein, the hedge fund investor on the winning side of JPMorgan Chase’s $6.2 billion, “London Whale” trading loss in 2011, is now taking on index fund giant BlackRock.
On Friday, Weinstein‘s Saba Capital detailed in a presentation seen by CNBC its plans to push for change at 10 closed-end BlackRock funds that trade at a significant discount to the value of their underlying assets compared to their peers. Saba says the underperformance is a direct result of BlackRock’s management.
The hedge fund wants board control at three BlackRock funds and a minority slate at seven others. It also seeks to oust BlackRock as the manager of six of those ten funds.
“In the last three years, nine of the ten funds that we’re even talking about have lost money for investors,” Weinstein said on CNBC’s “Squawk Box” earlier this week.
At the heart of Saba’s “Hey BlackRock” campaign is an argument around governance. Saba says in its presentation that BlackRock runs those closed-end funds the “exact opposite” way it expects companies to run themselves.
BlackRock “is talking out of both sides of its mouth” by doing this, Saba says. That’s cost retail investors $1.4 billion in discounts, by Saba’s math, on top of the management fees it charges.
BlackRock, Saba says in the deck, “considers itself a leader in governance, but is crushing shareholder rights.” At certain BlackRock funds, for example, if an investor doesn’t submit their vote in a shareholder meeting, their shares will automatically go to support BlackRock. Saba is suing to change that.
A BlackRock spokesperson called that assertion “very misleading” and said those funds “simply require that most shareholders vote affirmatively in favor.”
The index fund manager’s rebuttal, “Defend Your Fund,” describes Saba as an activist hedge fund seeking to “enrich itself.”
The problem and the solution
Closed-end funds have a finite number of shares. Investors who want to sell their positions have to find an interested buyer, which means they may not be able to sell at a price that reflects the value of a fund’s holdings.
In open-ended funds, by contrast, an investor can redeem its shares with the manager in exchange for cash. That’s how many index funds are structured, like those that track the S&P 500.
Saba says it has a solution. BlackRock should buy back shares from investors at the price they’re worth, not where they currently trade.
“Investors who want to come out come out, and those who want to stay will stay for a hundred years, if they want,” Weinstein told CNBC earlier this week.
Weinstein, who founded Saba in 2009, made a fortune two years later, when he noticed that a relatively obscure credit derivatives index was behaving abnormally. Saba began buying up the underlying derivatives that, unbeknownst to him, were being sold by JPMorgan’s Bruno Iksil. For a time, Saba took tremendous losses on the position, until Iksil’s bet turned sour on him, costing JPMorgan billions and netting Saba huge profits.
Saba said in its investor deck that the changes at BlackRock could take the form of a tender offer or a restructuring. The presentation noted that BlackRock previously cast its shares in support of a tender at another closed-end fund where an activist was pushing for similar change.
At the worst-performing funds relative to their peer group, Saba is seeking shareholder approval to fire the manager. In total, BlackRock wants new management at six funds, including the BlackRock California Municipal Income Trust (BFZ), the BlackRock Innovation and Growth Term Trust (BIGZ) and the BlackRock Health Sciences Term Trust (BMEZ).
“BlackRock is failing as a manager by delivering subpar performance compared to relevant benchmarks and worst-in-class corporate governance,” the deck says.
If Saba were to win shareholder approval to fire BlackRock as manager at the six funds, the newly constituted boards would then run a review process over at least six months. Saba says that in addition to offering liquidity to investors, its board nominees would push for reduced fees and for other unspecified governance fixes.
A BlackRock spokesperson told CNBC that the firm has historically taken steps to improve returns at closed-end funds when necessary.
“BlackRock’s closed-end funds welcome constructive engagement with thoughtful shareholders who act in good faith with the shared goal of enhancing long-term value for all,” the spokesperson said.
Weinstein said Saba has run similar campaigns at roughly 60 closed-end funds in the past decade but has only taken over a fund’s management twice. The hedge fund sued BlackRock last year to remove that so-called “vote-stripping provision” at certain funds and filed another lawsuit earlier this year.
BlackRock has pitched shareholders via mailings and advertisements. “Your dependable, income-paying investment,” BlackRock has told investors, is under threat from Saba.
Saba plans to host a webinar for shareholders on Monday but says BlackRock has refused to provide the shareholder list for several of the funds. The BlackRock spokesperson said that it has “always acted in accordance with all applicable laws” when providing shareholder information, and that it “never blocked Saba’s access to shareholders.”
“What we want is for shareholders, which we are the largest of but not in any way the majority, to make that $1.4 billion, which can be done at the press of a button,” Weinstein told CNBC earlier this week.
WATCH: CNBC’s full interview with Saba Capital’s Boaz Weinstein
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