The Economic Realities of Competitive Bitcoin Factory Mining

Henry Ford would recognize the financial and operational dynamics. JL

Stephanie Yang reports in the Wall Street Journal:

The most popular mining machine costs $2,300 but can go for $5,000. Retail clients can rent (one) for $4,800 for one year. Miners set up shop in places with low-cost electricity and cool climates to accommodate the heat given off by the mining rigs. The  rise in bitcoin has afforded more location flexibility. The price at which miners can  profitably run rigs varies depending on electricity costs, scale and the difficulty of mining. Some estimate the cutoff to be $1,000 per bitcoin.At $10,000 bitcoin prices are  nine times their value versus a year earlier. Michael Poteat, an engineering student at Old Dominion University in Norfolk, Va., decided to start mining bitcoin four months ago.
Using some of his bitcoin holdings, he purchased 20 “mining rigs,” computing boxes that solve complex equations to generate new coins.

But while running one rig, he kept tripping the circuit breaker in his home. So the 20-year-old looked into leasing commercial space but struggled to find a large-enough place without neighbors who would mind the noise.
As the dramatic surge in bitcoin’s price lures both individuals and corporations to try their hand at mining cryptocurrencies, many people are facing similar problems to Mr. Poteat. That’s giving rise to “hosting” or “colocation” services that make mining easier for the masses by providing ready infrastructure, security and electricity.
In February, Mr. Poteat moved his equipment into a data center run by Bcause , a five-year-old company that is laying out plans to build the largest bitcoin mining operation in North America.
It’s just difficult as an individual to handle all the logistics,” Mr. Poteat said.
Bitcoin mining can be expensive and cumbersome, requiring specialized hardware and massive amounts of power. Such challenges have long prompted miners to share space and resources. Now, companies that harbor mining equipment are fielding more requests than ever.
Even as bitcoin prices have tumbled about 40% from a December peak, the amount of computing effort expended by miners, also known as the hash rate, has continued climbing. That likely indicates more miners are jumping into the network, according to market observers.
Miners are rewarded with new coins and transaction fees for performing the calculations that make the bitcoin network tick. The more valuable a bitcoin is, the greater the incentive to start mining. But the more miners who participate, the more computations are needed to earn rewards.
Bcause is one of the firms that have sprung up to cater to aspiring bitcoin miners. In an old beverage warehouse in Virginia, the startup is running thousands of rigs for clients from the U.S. to Asia. It has received $5 million in Series A funding, led by Japanese financial services firm SBI Holdings Inc., and plans to raise more.

The Race to Mine Bitcoin

Bitcoin was designed to operate without any central party controlling it. To achieve that, it relies on an intricate competitive process called mining.

Bcause has contracts with wholesale clients to house about 60,000 mining rigs, and will serve retail clients by renting out spare machines, a process known as “cloud mining.” It has about 5,000 machines up and running and plans to outfit another site in eastern Pennsylvania.
The company was initially founded to provide bitcoin options contracts for investors trying to hedge their cryptocurrency investments. But the team decided to incorporate hosting services last year as bitcoin surged and mining became profitable again.
“The demand is overwhelming,” said Fred Grede, chief executive officer of Bcause and a former executive at the Hong Kong Exchange and Chicago Board of Trade. “That’s where the revenue is.” 
One of the most popular mining machines, known as the Antminer S9 and manufactured by Chinese firm Bitmain, is frequently sold out, forcing customers to wait months for delivery. Each rig costs about $2,300 but can go for as much as $5,000 on the secondary market.
Bcause’s retail clients can rent a Antminer S9 for about $4,800 for one year. The company declined to provide prices for institutional clients, who purchase their own machines.
Traditionally, the world’s biggest bitcoin miners have set up shop in places with low-cost electricity and cool climates to accommodate the heat given off by the mining rigs. However, the spectacular rise in bitcoin has afforded more location flexibility, miners say.
China’s crackdown on domestic mining could also lead many in the country to consider alternative areas to run their operations.
“A lot of people don’t trust going to China and putting all that investment into China,“ said Michael Adolphi, chief operating officer at Bcause. “We’ve made it economically feasible for them to bring it here.”Still, the extreme volatility of bitcoin has some questioning how long the mining boom will last.
In mid-2014, when bitcoin fell more than 50% from the end of 2013 to about $500, mining operations were forced to consolidate, said Garrick Hileman, chief executive of research firm Mosaic.io.
“A combination of inefficient hardware and declining bitcoin price led a lot of them to close up shop,” Mr. Hileman said. The industry could experience a similar shakeout if prices start to drop again, he said.
The bitcoin price at which miners can still profitably run rigs varies depending on electricity costs, scale and the difficulty of mining. Some miners estimated the cutoff to be around $1,000 per bitcoin, though one small-scale miner pinned his exit level around $4,000.
At about $10,000 late Friday, miners point out bitcoin prices are still almost nine times their value versus a year earlier.
“Mining is still insanely profitable at the moment,“ said a spokesman for Genesis Mining, a cloud mining company that rents computing power to customers. ”One of the biggest challenges in the space is just building out the mining capacity to meet the demand.”
As a hosting service, Bcause says it is insulated from major price shocks, since it doesn’t invest in the mining equipment or the cryptocurrency itself.
It plans to build out a one-stop shop for trading bitcoin, with spot and derivatives exchanges, as well as a clearing house, pending regulatory approval.
David Bowman, who operates a small mining facility in Plattsburgh, N.Y., said he started selling contracts for cloud mining for the steadier revenue. However, he acknowledged the risks.
“The difficult part is the price,” said Mr. Bowman, who has 30 machines running in an office space. “The price is anyone’s guess. It’s kind of a shot in the dark sometimes.”

A worker walks through a warehouse that will hold bitcoin-mining rigs at Bcause’s Virginia facility.

Individuals, nicknamed miners, compete to earn rewards for recording transactions in bitcoin's open ledger.

Miners collect individual transactions into batches called blocks.

Before they can get the reward they have to be the first to solve a complex and random mathematical puzzle.

Other miners

must verify that

the winner’s

answer is correct.

The first miner to collect all the transactions into a block and solve the puzzle wins new bitcoin!

The winning miner adds their block to bitcoin’s transaction history, which because it is laid out chronologically resembles a long chain of these blocks.

block chain