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Large institutional investors are studying options to shed stakes in illiquid private equity funds after the rout in global financial markets pummelled their portfolios, according to top private capital advisers.
The calls by pensions and endowments seeking ways to exit their investments, probably at discounts to their stated value, is a bad sign for the $4tn buyout industry. Industry giants such as Blackstone, KKR and Carlyle all saw their stocks plunge by about a fifth in value this week.
The race to find liquidity signals that investors in private equity funds increasingly expect to receive few cash profits from their holdings this year and may face liquidity pressures that cause them to further retrench from making new investments. Last year, the private equity industry’s assets dropped for the first time in decades, according to Bain & Co, as fundraising plunged 23 per cent from 2023.
Executives had expected that a revival of dealmaking and initial public offerings under US President Donald Trump’s administration would help firms return profits to their investors, bolstering a spurt of new investment activity. But the opposite has happened, leaving the private equity industry in one of its most vulnerable states ever.
The stresses in the industry are drawing parallels to the onset of the 2008 financial crisis, or the early days of the coronavirus pandemic.
“The amount of calls I’ve received from limited partners seeking liquidity in the past few days is the most since the first days of Covid,” said Matthew Swain, head of private capital at Houlihan Lokey. “People were banking on IPOs to meet their liquidity needs and now need to raise cash just to meet capital calls.”
Many large investors in private equity funds entered the year with record levels of exposure to unlisted assets. While the exposures often stretched beyond investors’ risk limits and even led to a wave of borrowing by many institutions, they had bet the situation was manageable and would be quickly resolved by a revival of dealmaking.
Now, after global stock markets dropped by trillions in value, these institutions face a double hit.
Dealmaking and IPO activity has ground to a halt, minimising cash returns. Moreover, pensions’ exposure to unlisted assets swelled this week as the plunge in public markets has created a “denominator effect”, in which private market holdings that are only marked quarterly rise as a percentage of their overall assets, skewing desired allocations.
“If the public market keeps going down and down, the denominator effect will become an issue again,” said Oren Gertner, a partner specialising in secondaries at law firm Sidley Austin.
Many large investors are speaking to advisers and considering options to sell their stakes in funds at discounts on second-hand markets, top industry bankers told the Financial Times.
“The denominator effect is going to mean a lot of people are over-allocated,” said one adviser, who forecast endowments would be the first to consider new sales of assets on second-hand markets.
“Everyone was hopeful the private machine would restart. But now the pressure is very real” said another adviser, referring to firms’ ability to return cash to investors.
Both advisers expected endowments, already facing financial challenges from Trump’s threats to tax such portfolios and cut federal funding grants, would be the first to dump assets.
Sunaina Sinha Haldea, global head of private capital advisory at Raymond James, expected an investor sell-off of fund stakes if public stocks continued to fall, or did not recover by the end of the month.
Investors that choose to sell their stakes will face a brutal marketplace, advisers warned.
The prices of second-hand private equity fund stakes, which had risen to nearly 100 cents on the dollar in recent quarters, could fall to levels below 80 cents on the dollar, they forecast.
“Most people don’t want to sell below 80 per cent of a fund’s net asset value or less, but this time could be different,” said one top banker.
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Your guide to what the 2024 US election means for Washington and the world
Tens of thousands of anti-Trump demonstrators gathered in cities around the globe on Saturday, as the impact of tariffs and cuts to government agencies galvanised the first big wave of protest against the administration.
The rallies came days after Trump upended the global economy by using rarely invoked emergency powers to unleash tariff hikes on almost every country in the world, wiping out trillions of dollars in market value.
Those who attended the protests cited a list of administration policies, from the aggressive trade levies, lay-offs across the federal workforce, deportations of legal immigrants, attacks on the transgender community, and threats to invade Greenland, as well as Elon Musk’s so-called Department of Government Efficiency.
Protesters also gathered in European cities including London, Lisbon and Paris, and demonstrated in front of a Tesla showroom in Berlin. The electric-vehicle maker has become a focus of protests against its billionaire chief executive, and there have been multiple attacks on vehicles and dealerships across the US.
Protesters on the National Mall in Washington — the largest gathering — held placards with slogans including “Penguins against Tariffs,” “Send Musk to Mars” and “Make my 401k Great Again.”
Peter, who asked for his last name not to be used, said that had come from Annapolis in Maryland to attend the rally in response to what he saw as an “attack on democracy” by both Trump and Musk.
Washington resident Maya, who also asked for her identity to be concealed, said that she was protesting against “billionaire oligarchy” and added that “tariffs hurt the working class”.
The ‘Hands Off!’ movement, which organised the protests in more than 1,000 cities and towns across the US, is backed by advocacy groups focused on everything from abortion rights to climate change. It has sought to reach Americans across the political spectrum, however, by placing most emphasis on economic issues, including tariffs, the plunging stock market, and feared changes to Social Security.
“This mass mobilisation day is our message to the world that we do not consent to the destruction of our government and our economy,” read one digital flyer for the rally in Washington.
Organisers and Democrats have seized on Musk’s unpopularity to energise protesters and voters. On Tuesday, his preferred candidate, Brad Schimel, was trounced in a Supreme Court race in Wisconsin that was widely seen as a referendum on the controversial billionaire.
The protests on Saturday are the first large-scale demonstrations against the administration since Trump began his second term in January. The president’s return to power has so far been greeted by a muted and largely disorganised response from America’s left, in contrast to the mass unrest, including the Women’s March, that greeted his first presidency.
The Democrats, meanwhile, have been gripped by factional fighting over how to respond to the administration’s agenda, which has made it difficult to present a coherent message or strategy.
Speakers at the rally in Washington called on Democratic and Republican representatives alike to use their powers in Congress to oppose Trump’s economic policies.
“The tariffs are not only imbecilic, they’re illegal, they’re unconstitutional, and we’re going to turn this around,” said Jamie Raskin, a representative for Maryland who led the Democratic impeachment effort against Donald Trump over the January 6 riot.
Blockchain intelligence platform SpotOnChain reported that North Korea’s state-backed hacking group, Lazarus, has pocketed over $2.5 million in profit from a recent sale of wrapped Bitcoin (WBTC).
On April 3, the group sold 40.78 WBTC for 1,857 ETH, worth roughly $3.51 million. The sale marks a sharp return on their February 2023 investment, when they spent around $1 million in USDT to acquire the assets at an average price of $24,521 per WBTC.
In this recent transaction, each WBTC was sold for approximately $86,170—over 250% more than the original purchase price.
After the sale, the group distributed the ETH across three wallets. Two of the wallets are newly created, while the third has already been linked to the group in past activities.
While the transaction might appear routine, market observers have suggested that funds movement hints at preparations for future operations.
Lazarus Group
Over the past few years, Lazarus has steadily built a reputation as one of the most dangerous black-hat organizations targeting the financial and crypto i0ndustries.
Their activities, supported by the North Korean regime, have contributed to the theft of more than $6 billion in digital assets over the past decade, according to an April 3 report by the Wall Street Journal.
Their most notable attack to date was the recent Bybit hack, where they stole $1.5 billion in a single exploit. These stolen funds are believed to fuel North Korea’s nuclear weapons development and support the country’s efforts to evade global sanctions.
Lazarus continues to rely on stealth, patience, and deception to infiltrate companies. Members often pose as recruiters on platforms like LinkedIn or pretend to be remote IT workers. These social engineering tactics have helped them gain access to internal systems and execute large-scale attacks.
Meanwhile, the group’s effectiveness is tied to the resources behind them. Estimates suggest North Korea operates a cyber force of over 8,000 individuals trained to breach systems globally.
The hacking group reportedly operates with the structure and discipline of a digital military, making them a sustained threat to the global financial system.
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This is the second article in aseriesdeep diving into individual covenant proposals that have reached a point of maturity meriting an in-depth breakdown.
CHECKSIGFROMSTACK (CSFS), put forward by Brandon Black and Jeremy Rubin with BIP 348, is not a covenant. As I said in the introductory article to this series, some of the proposals I would be covering are not covenants, but synergize or interrelate with them in some way. CSFS is the first example of that.
CSFS is a very simple opcode, but before we go through how it works let’s look at the basics of how a Bitcoin script actually works.
Script is a stack based language. That means that data is “stacked” together on top of each other on the stack, and operated on by removing an item from the top of the stack to operate on based on what an opcode does, either returning the data or a result from it to the top of the stack.
There are two parts of a script when it is ultimately executed and verified, the “witness” provided to unlock the script, and the script included in the output being spent. The witness/unlocking script is “added” to the left side of the locking script, and then each element is added to (or operates on) the stack one by one left to right. Look at this example (the “|” marks the boundary between the witness and script):
1 2 | OP_ADD 3 OP_EQUAL
This example script adds the value “1” to the stack, then the value “2” on top of that. OP_ADD takes the top two elements of the stack and adds them together, putting the result back on to the stack (so now all that is on the stack is “3”). Another “3” is then added to the stack. The last item, OP_EQUAL, takes the top two items of the stack and returns a “1” to the stack (1 and 0 can represent True or False as well as numbers).
A script must end with the last item on the top of the stack being True, otherwise the script (and transaction executing it) fails and is considered consensus invalid.
This is a basic example of a pay-to-pubkey-hash (P2PKH) script, i.e. the legacy addresses that start with a “1”:
First the signature and the public key are added to the stack. Then DUP is called, which takes the top stack item and duplicates it, returning it to the top of the stack. HASH160 takes the top stack item (the public key duplicate), hashes it, then returns it to the top of the stack. The public key hash from the script is put on top of the stack. EQUALVERIFY functions the same as EQUAL, it grabs the two top stack items and returns a 1 or 0 based on the outcome. The only difference is EQUALVERIFY also runs VERIFY after EQUAL, which fails the transaction if the top stack item is not 1, and also removes the top stack item. Finally CHECKSIG is run, which grabs the top two stack items assuming them to be a signature and a pubkey, and verifies the signature implicitly against the hash of the transaction being verified. If it is valid it puts a 1 on top of the stack.
How CSFS Works
CHECKSIG is one of the most used opcodes in Bitcoin. Every transaction, with almost no exceptions, makes use of this opcode at some point in one of its scripts. Signature verification is a foundational component of the Bitcoin protocol. The problem is, there is almost no flexibility in terms of what message you are checking the signature against. CHECKSIG will only verify a signature against the transaction being verified. There is some flexibility, i.e. you can decide with some degree of freedom what parts of the transaction the signature applies to, but that’s it.
CSFS aims to change this by allowing a signature to be verified against any arbitrary message that is pushed directly onto the stack, instead of being limited to the verification of signatures against the transaction itself. The opcode follows a very basic operational structure:
<signature> <message> | <pubkey> CSFS
The signature and message are dropped on top of the stack, then the public key on top of them, and finally CSFS grabs the top three items from the stack assuming them to be the public key, message, and signature from top to bottom, verifying the signature against the message. If the signature is valid, a 1 is placed on the stack.
That’s it. A simple variant of CHECKSIG that lets users specify arbitrary messages instead of just the spending transaction.
What Is CSFS Useful For
So what exactly is this good for? What is the use of checking a signature against an arbitrary message on the stack instead of against the spending transaction?
Firstly, in combination with CTV it can provide a functionality equivalent to something that Lightning developers have wanted since the very beginning, floating signatures that can attach to different transactions. This was originally proposed as a new sighash flag for signatures (the field that dictates what parts of a transaction a signature applies to). This was needed because a transaction signature covers the transaction ID of the transaction that created the output being spent. This means a signature is only valid for a transaction spending that exact output.
This is a desired behavior for Lightning because it would allow us to do away with channel penalties. Every past Lightning state needs a penalty key and transaction in order to ensure that your channel counterparty never uses any of them to try to claim funds they don’t own. If they try you can claim all their money. A superior functionality would be something that allows you to simply “attach” the current state transaction to any previous one to stop the theft attempt by distributing funds correctly as opposed to confiscating them.
This can be accomplished with a basic script that takes a CTV hash and a signature over it that is checked using CSFS. This would allow any transaction hash signed by that CSFS key to spend any output that is created with this script.
Another useful feature is delegation of control of a UTXO. The same way that any CTV hash signed by a CSFS key can validly spend a UTXO with a script designed for that, other variables can be passed into the script to be checked against, such as a new public key. A script could be constructed that allows a CSFS key to sign off on any public key, which then could be validated using CSFS and used for a normal CHECKSIG validation. This would allow you to delegate the ability to spend a UTXO to anyone else without having to move it on-chain.
Lastly, in combination with CAT, CSFS can be used to compose much more complex introspection functionality. As we will see later in the series though, CSFS is not actually required to emulate any of this more advanced behavior, as CAT alone is able to do so.
Closing Thoughts
CSFS is a very basic opcode that in addition to offering simple useful functionality in its own right composes very nicely with even the most simple covenant opcodes to create very useful functionality. While the example above regarding floating signatures specifically references the Lightning Network, floating signatures are a generally useful primitive that are applicable to any protocol built on Bitcoin making use of pre-signed transactions.
In addition to floating signatures, script delegation is a very useful primitive that generalizes far beyond delegating control over a UTXO to a new public key. The same basic ability to “sideload” variables after the fact into a script validation flow can apply to anything, not just public keys. Timelock values, hashlock preimages, etc. Any script that hardcodes a variable to verify against can now have those values dynamically added after the fact.
On top of that, CSFS is a very mature proposal. It has an implementation that has been live on the Liquid Network and Elements (the codebase Liquid uses) since 2016. In addition Bitcoin Cash has had a version of it since 2018.
CSFS is a very mature proposal that goes back conceptually almost as long as I have been in this space, with multiple mature implementations, and very clear use cases it can be applied to.
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In a recent video interview by Bitcoin Magazine, Troy Cross, Professor of Philosophy and Humanities at Reed College, delves into the topic of his latest article for Bitcoin Magazine’s “The Mining Issue,” titled “Why the Future of Bitcoin Mining is Distributed.” Watch the full discussion here.
In the interview, Troy explores the centralization vectors in Bitcoin mining and presents a compelling argument for the decentralization of hashrate. Despite the economies of scale that have given rise to mega mining operations, he highlights a critical—and potentially economic—imperative for distributing mining power, offering insights into the future of Bitcoin’s infrastructure.
The following article is featured in Bitcoin Magazine’s “The Mining Issue”. Subscribe to receive your copy.
Intro
When Donald Trump said he wants all the remaining bitcoin to be “MADE IN THE USA!!!” Bitcoiners cheered. Mining is good, right? We want it to happen here! And indeed, the U.S. is well on its way to dominating the industry. Publicly listed U.S. miners alone are responsible for 29% of Bitcoin’s hashrate — a percentage that only seems to be growing. Pierre Rochard, vice president of research at Riot Platforms, predicts that by 2028, U.S. miners will produce 60% of the hashrate.
But let’s be honest: Concentrating most Bitcoin mining in the U.S., especially in large public miners (as opposed to a Bitaxe in every bedroom), is a terrible idea. If the majority of miners reside in a single nation, especially a nation as rich and powerful as the U.S., miner behavior would be driven not only by Satoshi’s well-designed incentives but also by the political whims of whatever regime happens to be in power. If Trump ever gets what he said he wants, the very future of bitcoin as non-state money would be at risk.
In what follows, I outline what a nation-state attack on bitcoin through the regulation of miners would look like. Then I review the incentive structures that have pushed Bitcoin mining to large U.S. data centers under the control of a handful of companies. Finally, I make the case that the future of Bitcoin mining does not resemble its recent past. Bitcoin mining, I think, will revert to a distribution closer to its early days, where miners were as plentiful and as geographically dispersed as the nodes themselves.
I also argue that despite some Bitcoiners’ enthusiasm for “hash wars”, and despite political chest-thumping, nation-states actually have an interest in a future in which no country dominates Bitcoin mining. This “non-dominance dynamic” sets bitcoin apart from other technologies, including weapons, where the payoff for dominating drives nations in a competition to corner the market first. But with Bitcoin mining, dominating is losing. When nation-states come to understand this very unique game theory, they will help defend it against miner concentration.
The Attack
If the U.S. had the majority of hashrate, how could bitcoin be attacked?
With a single directive from the Treasury Department, the U.S. government could order miners to blacklist certain addresses from, say, North Korea or Iran. The government could also forbid miners from building on top of chains with forbidden blocks, i.e., all miners would be forbidden from adding a block to a chain containing an earlier block with a censored transaction. Large U.S. miners — public companies — would then have no choice but to follow the law; executives don’t want to go to prison.
What’s more, even miners outside the U.S., or private miners within the U.S. choosing to flout the law, would have to censor. Why? If a rogue miner snuck a forbidden transaction into a block, law-abiding miners would have to orphan that block, building directly atop of earlier, government-approved blocks. Orphaning the block would mean the rogue miner’s own reward, their coinbase transaction, would be orphaned as well, leaving the miner with nothing to show for their work.
What would happen next is unclear to me, but none of the outcomes are ideal. We would have a fork of some kind. The new fork could use a different algorithm, making all existing ASICs incompatible with the new chain. Alternatively, the fork could keep the existing algorithm, but manually invalidate blocks coming from known bad actors. Either option would leave us with a government-compliant bitcoin and a noncompliant bitcoin, where the government-compliant fork would run the original code.
When I’ve heard Bitcoiners discuss these scenarios, they usually say everyone would dump “government coin”, and buy “freedom coin”. But would that really happen? Maybe we, the readers of Bitcoin Magazine, freedom seekers, and cypherpunk types, would dump the censored fork bitcoin for the new freedom variant. But I doubt that BlackRock, Coinbase, Fidelity, and the rest of Wall Street would follow suit. So the relative economic value of these two forks, particularly another five to ten years into the future, is far from clear to me. Even if a noncompliant fork of bitcoin were to survive and retain much of its economic value, it would be weakened economically and philosophically.
Now consider the same attack scenario but with well-distributed hashrate. Suppose U.S. miners represent only 25% of the hashrate. Suppose the U.S. government forces miners to blacklist addresses, and worse, orphan any new blocks containing transactions with blacklisted addresses. This is still bad. But the 75% of miners outside of the reach of U.S. law would continue to include noncompliant transactions, so the heaviest chain would still include noncompliant blocks. If there is a fork in this distributed-mining scenario, it is the government-compliant bitcoin that would have to fork away and abandon proof of work for social consensus.
This is still a dark scenario. Custodial services in the U.S. may be forced to support the new compliant bitcoin, and that would pose an economic threat, at least for a time, to the real bitcoin. But if the mining network persists outside the U.S. and has the majority of hashrate, this seems more like the U.S. opting out of bitcoin than the U.S. co-opting bitcoin, as it could with hashrate dominance.
How Did Bitcoin Mining End up in Large U.S. Data Centers?
Bitcoin mining’s evolution is a case study in economies of scale.
Let’s go back to the beginning. What we think of as the distinctive functions of miners — collecting transactions into blocks, doing proof of work, and publishing their blocks to the network — were all part of Satoshi’s descriptions of what nodes do. There were no distinctive “miners”; every node could mine with the click of a button. So in those early days, mining was as decentralized as the nodes themselves.
But CPU mining was quickly displaced by mining on graphics cards and FPGAs, and then from 2013 onward, by ASICs. Mining remained a vestigial option on nodes for many years, until in 2016 Bitcoin Core finally dropped the pretense and removed it entirely in version 0.13.0 of the software. Once mining took on a life of its own, apart from node running, using its own specialized equipment and expertise, it started to scale. This was entirely predictable.
In The Wealth of Nations, Adam Smith describes a pin factory employing only 10 people that produces 48,000 pins per day, where each employee, all on their own, could make at most 1 pin per day. By specializing in one stage of the pin-making process, developing tools for each subtask, and combining their efforts sequentially, the employees produced far more pins with the same amount of labor. One way to think about this is that the cost of increasing production by one pin is negligible for a factory already making 48,000, having already sunk cost into the equipment and skills; it would only require a slight addition of labor and materials. But for someone producing one pin a day, the marginal cost of adding one pin to production doubles.
Mining, once freed from the CPU, had many features that lent themselves to efficiencies of scale just like making pins in a pin factory. ASICs are specialized tooling, like pin-making machines. So are the data centers designed for the special power density and cooling needs of those ASICs. Likewise, compared to mining in one’s basement, mining in a multi-megawatt commercial facility spreads the same fixed costs over many more mining units. Some examples of relatively scale-indifferent expenses encountered by miners include:
Power expertise
Power equipment
Control systems expertise
ASIC repair expertise
Cooling expertise
Cooling facilities
Legal expertise
Finance expertise
In a larger operation, not only are fixed costs absorbed by a larger number of revenue-producing machines, but one also gains bargaining power with suppliers and labor. Scaling up from one’s basement to the local commercial park, one gets a better price on electricity. Scaling up from an office park presence to a mega-center, one begins to employ power specialists who draw up sophisticated contracts with power suppliers and financially hedge against price movements. Sending one machine off for repair whenever it breaks down costs more — per repair incident — than simply hiring a repair specialist to find failing ASICs and fix them on-site, provided the scale of operation is large enough. And when dealing with ASIC manufacturers, pricing is relative to the size of the order. Major players can drive a harder bargain, squeezing smaller miners like Walmart squeezed main street shops by negotiating lower prices for their wares.
Economies of scale should surprise no one, as they apply to some degree to almost all manufactured goods. The benefits of size naturally explain how mining went from something I did with graphics cards in my basement 13 years ago to facilities approaching 1 GW today.
But that is why mining has scaled up, not why it has concentrated in the U.S. and in large public companies. To understand the latter requires noticing two more factors. The first is another good that scales: financing. Large public companies can raise cash through diluting their stock or issuing bonds. Neither of these fundraising mechanisms is available to a small-scale miner. True, they can borrow, but not on the same terms as a large company, and the U.S. has the deepest capital markets in the world. Secondly, the U.S. has “rule of law”, a relatively stable legal system, reducing the risk that, for instance, the state would seize a mining operation or that regulators would arbitrarily halt operations.
The other feature that drew mining to the U.S. in the past few years was the availability of power infrastructure. After China banned Bitcoin mining, it became profitable to mine virtually anywhere in the world with basically any ASIC. But the U.S. had available power infrastructure, much of it in the rust belt, left behind when U.S. manufacturing made an exit for China. The U.S. also had abundant power in West Texas, stranded wind and solar energy incentivized by subsidies but insufficiently interconnected to East Texas and to the rest of the country. In the wake of the China Ban, miners quickly occupied the underutilized rust-belt infrastructure and took advantage of the abundant power and cheap land to build data centers in West Texas.
The ability to raise and deploy large amounts of funding is a striking advantage, and one that compounds with others, given Bitcoin mining’s fixed, global reward. With ample funding from the markets, the largest public Bitcoin miners were able to secure the newest, most efficient, and most powerful ASICs as well as negotiate the best power contracts, hire the best experts on firmware and software, and so on. Not only did this put smaller miners at a disadvantage, but the large miners could then boost global hashrate significantly, driving up difficulty. When the price of bitcoin fell, with a debt-fueled ASIC fleet already deployed, margins shrank to almost nothing for miners that did not have the advantages of scale. Even a public miner in bankruptcy could continue running their massive fleet of machines during restructuring, driving out their smaller competitors while navigating the legal system.
Thus did mining grow from hobbyist scale to gigawatt scale, and thus did it settle in America. Mining is a brutally competitive commodity business, and the efficiencies afforded by scale proved decisive, especially when funded by debt and dilution.
Why Mining Will Be Distributed and Small-Scale Once Again
Just as there are economies of scale, there are also diseconomies of scale, where unit production costs actually increase with size at a certain point. For instance, it’s obvious why there isn’t just one gigantic food factory that feeds everyone in the world every meal. Yes, there are efficiencies in the factory production of food — witness the average farm size over the past century — but there are limits too. Fresh ingredients must be shipped to a factory and the final product then must be shipped to consumers. Both the inputs and the outputs of a food factory are perishable and heavy. Shipping costs to and from a single factory would be exorbitant, and quality would suffer in comparison to more local markets with fresher food. Similar factors explain why sawmills and paper mills are near forests, and why bottling plants are near fresh water.
But shipping bitcoin costs nothing: It’s a simple matter of making a ledger entry on the Bitcoin blockchain itself, which takes mere seconds. And although I like to brag about mining our artisanal Portland bitcoin, there are actually no local flavors of bitcoin that differ depending on where it’s made. All bitcoin is qualitatively identical. This is all the more reason global bitcoin production should centralize to the single, very best place to make bitcoin.
There’s just one problem with centralizing all mining into a single plant: Bitcoin mining is energy-intensive. In fact, it already uses more than 1% of the world’s electricity. Electricity is the primary operating cost of mining bitcoin, often representing 80% of operating expenses. And unlike bitcoin, electricity does not travel well. Not at all. In fact, electricity is a lot like food that perishes instantly and requires expensive, specialized infrastructure to transport. For electricity, that infrastructure is wires, transformers, substations, and so on — all the elements of an electrical grid.
Shipping electricity is actually much of the cost of electricity. What we call “generation” is often a minority of the total cost of electricity, which also includes “transmission and distribution” charges. And while the cost of generation continues to fall with advances in technology and manufacturing efficiency for solar panels, grid investments are only becoming more costly. So it makes no sense to ship electricity around the globe to a single bitcoin factory. Instead, bitcoin factories should sit at the sites of generation where they can avoid transmission and distribution costs altogether, and then ship the bitcoin from those sites for free. This is already happening, in fact. It’s called putting your Bitcoin mine “behind the meter”.
Mining companies will play up their differences: firmware, pools, cooling systems, finance, power expertise, management teams. But at the core of what they do, there is little to separate different mining companies from one another: The product is identical, it costs nothing to ship, and they use exactly the same machines (ASICs) to convert electricity to bitcoin. Differences in electricity cost largely determine which miners will survive and which will not. In a prolonged period of price stagnation, or even a steady rise, only those companies with access to the cheapest electricity will be operating.
The master argument, then, for a global distribution of miners in the future goes as follows. First, Bitcoin mining, by design, is driven to the cheapest energy in the world. Second, cheap energy is distributed around the world, and also “behind the meter”. So, third, mining will be geographically distributed and behind the meter too.
For the sake of argument, imagine Donald Trump’s wish is granted and all mining is in the U.S. and that mining is in equilibrium, i.e., mining margins are extremely tight. If someone finds power elsewhere in the world that is cheaper than the average U.S. miner’s, and deploys ASICs there, hashrate will increase and some U.S. miners (those with the highest expenses) will go out of business. This process will repeat until mining only happens on the cheapest energy in the world.
Cheap energy takes different forms: gas in the Middle East and in Russia; hydro projects in Kenya and Paraguay; solar in Australia, Morocco, and Texas. The reason energy is distributed is that nature has distributed it. Rain and elevation changes (i.e., rivers) are everywhere. Fossil fuel deposits are everywhere. The wind blows everywhere. The sun shines almost everywhere.
In fact, the global distribution of energy is somewhat guaranteed by the solar path around the planet. As the sun shines most brightly, its energy is bound to be wasted by solar-powered systems, as power infrastructure is never designed for peak generation. I predict that in the future, a substantial portion of the hashrate will follow the solar path, with machines using the excess solar either overclocking during that period or, if they are older and otherwise unprofitable, turning on only for that brief period when the system is producing more electricity than the grid demands.
The master argument above can be slightly modified to reach other conclusions about the future of mining. I also think, for example, that there is abundant cheap power at a small scale, and a limited amount of cheap power at a truly massive scale (100 MW+). It follows that, provided Bitcoin mining continues to grow, small-scale mining will make a return and the trend toward megamines will reverse as large-scale sources of cheap power disappear.
To see why cheap power exists mostly at the small scale, we could go on a case-by-case basis. For instance, we could look at why flare-gas waste happens in a distributed small-scale way, and why solar inverters are undersized, leading to clipped power all over the system. But I would rather think about the broader principle. Where we have cheap power at scale it is a massive mistake. For instance, the mistake may be building a dam or nuclear plant no one really needed. Massive mistakes are limited in number: They’re expensive! There is a limit to fiat stupidity.
Smaller-scale mismatches of supply and demand are going to be more common, all else equal. If gas production at an oil well is big enough, for instance, it will make sense to build a pipeline to ship it out; if it’s relatively small, it will not make sense to build the pipeline and the gas will be stranded. Likewise for landfills. The largest landfills have generators and are grid-connected, but the smaller landfills often fall short of even collecting their methane, let alone generating electricity with it and feeding that electricity to the grid. The same is true of dairy farms.
Further, bitcoin is not the only form of energy-intensive computation. If there are large quantities of cheap energy, other forms of computation will take up residence there and, being less sensitive to the price of electricity, they will outbid bitcoin miners. Those other forms, at least at present, do not scale down as well as bitcoin. It follows that the days of mining on supercheap, large-scale power are numbered. On the other hand, if you are mining bitcoin by mitigating flare gas on a desolate, windswept oil patch far from a pipeline, there is virtually no chance anyone will outbid you in order to do AI inference at your location. The same is true if you are mining on overprovisioned home solar. Small-scale energy waste is far less appealing to competitors but usable for Bitcoin miners. Mining can scale down enough to reach into these crevices of energy, whereas other kinds of energy consumers cannot.
Another version of the argument above trades on the distributed demand for waste heat. All of the electrical energy entering a bitcoin miner is conserved and leaves the miner as low-grade heat. With this waste energy, miners are heating greenhouses, villages, and bathhouses. But heating needs can typically be met with a small deployment of machines. An ASIC or two can heat a home or a swimming pool. Yet using waste heat to substitute for electrical heating improves the overall economics of mining. Other things equal, a miner selling their heat will be more profitable than a miner not selling their heat. So here is another argument that mining will be globally distributed and smaller scale: The demand for heat is globally distributed — though greater in the far north and south — and at a very limited scale.
As I’ve said, I believe Bitcoin mining will be driven to the world’s cheapest energy. But this is the trend only if the price of bitcoin rises slowly. In an aggressive bull market — and we have seen several — Bitcoin miners will use any energy available, wherever they can plug in machines. If bitcoin’s price rockets to $500,000, all my models are destroyed. But in this bullish scenario, too, mining becomes globally distributed, this time not because the cheapest power is distributed but because available power is distributed. Bitcoin at $500,000 means all ASICs are profitable on any power, and the U.S. alone does not have the infrastructure to handle that kind of demand shock even if it wanted to. So, bitcoin will be distributed either way.
It is worth noting, too, that high-margin times are short-lived, as ASIC production will always catch up, in the pursuit of profits, driving margins back down. So, over the long term, the distribution of Bitcoin miners will still be determined by the distribution of the world’s cheapest energy.
For my arguments to work, the diseconomies of scale must outweigh the economies of scale listed above. To determine the balance of these two requires nothing less than a deep dive into the spreadsheets of each kind of mining business, which would be inappropriate here.
Suffice it to say I believe that if the difference in the cost of electricity is great enough, then it outweighs everything else. But I can’t pretend to have provided anything like a proof here. These are the broad strokes; the finer details remain an exercise for the reader.
Geopolitics
Thus far, I’ve contemplated miner incentives without regard to nation-states themselves. We know that just as some countries are buying bitcoin, others are mining bitcoin with their energy resources. Nation-states have incentives independent of anything Satoshi contemplated. For instance, Iran may mine bitcoin in order to monetize its oil because sanctions make selling it on the open market impossible, or expensive at any rate. Russia may mine for similar reasons. Such nation-state actors could “mine at a loss” relative to a miner paying for their own power, because the nation-state’s cost of energy is subsidized by the taxpayer. Their mining at scale, in turn, could make it less profitable for everyone else, and push marginally profitable miners out of business.
I do not see nation-state mining as ultimately concentrating hashpower, however. As things stand, mining in Russia and Iran is actually good for bitcoin, as it checks the advance of mining by U.S. public companies, which dwarf them in scale. Moreover, if some nation-state begins to produce a disproportionate share of the hashrate, while bitcoin is an important piece of the global economy, I expect other nation-states with a stake in bitcoin’s success — or even large bitcoin holders — would also begin to mine at a loss in order to keep mining decentralized.
The game theory here is not intuitive. Rather than a competition to dominate, bitcoin is a game in which everyone wins when no one dominates and everyone loses when anyone dominates. For virtually every other technology or weapons system in the world, the best strategy is to achieve global dominance. Thus, we see a race to dominance in battery technology, chip manufacturing, drones, AI, and so on. This is called the “Thucydides trap” in foreign policy because it dictates a preemptive attack on a rising rival: The reward is immense for coming in first, and the loss is incalculable for coming in second.
But if you dominate Bitcoin mining, that is bad for Bitcoin mining, and therefore bad for bitcoin and therefore bad for you. As Bitcoin mining concentrates in one nation, everyone sees the possibility of an attack on the neutrality of bitcoin, which lies at the core of its value proposition. For instance, Russia might hold bitcoin to avoid the U.S. freezing its reserves, as the U.S. did with Russia’s fiat reserves upon their invasion of Ukraine. But if mining is concentrated in the U.S., Russia could not trust that their addresses wouldn’t be blacklisted by the U.S. Treasury Department. Russia, therefore, would dump its bitcoin for some other asset if it saw this threat arising. Miners in the U.S. would see their share of block rewards rise as they achieved dominance over other miners, but the value of their block rewards would drop as the price of bitcoin itself dropped. Other things equal, then, miners in the U.S. would not want Russians to stop mining and dump their bitcoin. U.S. miners should not want to “win”, at least not in this way. And if bitcoin is a meaningful enough part of the U.S. economy, the U.S. itself should not want its miners to win. Rather, if any nation approaches dominance, we should expect those heavily invested in bitcoin, including nation-states, to mine enough to prevent losses to their own investments.
Bitcoiners should hope that the USA will mine enough bitcoin that no country, including itself, mines a majority of it. That’s a terrible slogan for a campaign rally, and it doesn’t capture the imagination like “hash wars”. But as a Bitcoiner, it is the only rational preference one should have.
Disclaimer:Opinions expressed are entirely the author’s and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
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