Bitcoin mining stocks could rally on PoW change
As the climate crisis worsens, the world is responding on many fronts. Governments are just part of the action as we saw yesterday in the hearings in the House — regulators and policymakers are taking crypto’s carbon impact seriously. More encouraging is the dramatic increase in private businesses and foundations addressing the problem.
One of the more contentious climate debates has been the legacy problem of Bitcoin’s Proof of Work (PoW) method and its enormous energy use. This debate has intensified as China, once the dominant bitcoin mining region, banned the practice earlier this year. China’s ban resulted in an explosive increase in U.S. mining operations including a growing list of publicly traded mining companies. Questions and letters from policymakers show that they are looking deeper into the practices of these U.S. miners. Globally, we’ve also seen countries like Iceland and Kazakhstan cap the amount of energy that bitcoin miners can use, due to energy shortages.
The emerging solution among climate experts is that Bitcoin’s code needs to be changed to a low energy consensus algorithm like those used by nearly all other major crypto protocols. For example, while Bitcoin uses the energy of approximately 12 million US homes per year, other methods could drive that to fewer than 100 US homes. Ethereum, the second-largest cryptocurrency, is in the process of doing just that, which would make Bitcoin a climate outlier within a $2–3 trillion dollar (and growing!) industry.
One challenge of making such a code change is the assumed opposition by bitcoin miners — especially given the enormous and growing investment in US mining operations. Notable U.S. listed mining stocks include Stronghold Digital Mining (SDIG), Hive Blockchain Technologies (HIVE), Canaan (CAN), Riot Blockchain (RIOT), BIT Mining (BTCM), Bit Digital (BTBT), Bitfarms (BITF), and Marathon Digital Mining (MARA). Why wouldn’t these miners resist any attempt that would supposedly make their investments worthless?
It might seem counterintuitive, but shareholders in bitcoin miners should be very happy with a move away from PoW as any new code proposal would almost certainly have to include lucrative incentives to gain their support.
Today, the Bitcoin network rewards 900 bitcoin per day to miners based on their relative hash rate, which requires computing power and therefore massive energy use. Approximately 2.1 million additional bitcoin are to be distributed through the year 2140, so any code change away from PoW would still need to establish a method to distribute these coins. The least disruptive code proposal would simply take a snapshot of the current hash rate of existing miners and then reward miners on a pro-rata hash power basis through 2140. Existing miners would simply have rights to future bitcoin rewards without the need to expend additional energy or make additional investments in mining rigs. These rights could be subject to staking rules to further secure the network. This is fair because it compensates existing miners for their commitment and risk-taking in support of the bitcoin ecosystem.
Under such a proposal, miners would gain additional economic benefit — gaining the same revenue with substantially less operating costs. More importantly, they would gain valuable rights to all future rewards that could be held and tokenized.
How might such a system work? Consider Marathon Digital, which runs 8% of the current global hash rate, earning 75 BTC per day as of November 1, 2021. Under such a code change, Marathon would continue to earn 8% of daily Bitcoin rewards but would not need to expend any energy to receive this reward. Marathon’s current variable mining costs were $6,235 per bitcoin (according to its latest 10Q) and it earned 2,516 bitcoin YTD through November 1, 2021. Therefore its pre-tax income should increase by this much immediately. Longer-term, it also saves huge amounts avoiding the fixed costs of building and operating mining equipment.
More importantly, Marathon would also enjoy a long term revenue stream, as its right to receive 75 BTC per day (subject to the halving schedule through 2140) amounts to a new asset that could be tokenized and sold to others, including mining pools, funds, or even individuals (subject to local regulatory requirements).
Today, a person wanting to earn bitcoin could join a mining pool or become a miner, requiring investments in computers and huge amounts of energy. Under this proposal, with the existence of mining reward tokens, someone looking to earn bitcoin would simply buy such tokens on an exchange, requiring no equipment or energy. These assets could be extremely lucrative to existing miners, especially as bitcoin goes from its current climate disaster status to a truly green financial technology of the future.
In summary, miners should see a change away from PoW as a net positive for their longevity. While the process to enact these plans with consensus across the bitcoin community will take time, the benefits far outweigh the risks.
