Bitcoin’s ‘Fundamental Value Is Not in Line With Market Price’ — Crypto Miner
Profitable bitcoin mining is essentially a result of an efficient and highly skilled team of professionals that can maintain runtime, a founder of a Bitcoin mining company has asserted. Therefore, even when the price is hovering around $20,000, a bitcoin miner with these attributes can still operate profitably.
‘Bitcoin Fundamentals Rarely Change’
The drop in value of bitcoin from just under $30,000 at the start of June to below $20,000 by mid-month is believed to be one of the factors that contributed to the collapse and insolvency of large crypto entities like 3AC and more recently Voyager. These two high profile entities, however, are by no means the only ones seriously affected.
Besides having to deal with lower prices, many market participants, including bitcoin miners, have had to contend with the elevated risk of becoming insolvent. As the situation with 3AC has shown, many market participants were, or are still, over-leveraged. Another significant drop in prices could result in more insolvencies.
However, for other market participants like BTC miner Permian Chain, a further drop in the price of the top crypto is unlikely to have much impact on the company’s long-term plans. According to the founder and CEO of the Canada-based cryptocurrency mining firm, Mohamed El-Masri, the fundamental value behind bitcoin is what motivates them. El-Masri also explained to Bitcoin.com News via email that the short-term price volatility of the crypto asset and the accompanying media headlines alone cannot cause Permian Chain to change course.
Below are the rest of the Permian Chain CEO’s responses to questions sent to him by Bitcoin.com News via email.
Bitcoin.com News (BCN): The continuing downward trend of crypto asset prices has already led to the collapse of some major players in this space. There is no doubt Bitcoin miners too are facing the heat. Can you explain to our readers how a bitcoin price of under $20,000 affects miners?
Mohamed El-Masri (MM): The over-leveraged situation that some of the major bitcoin miners are facing is widely a result of global macroeconomic factors that drove energy prices to the roof and put downward pressure on equity stocks and crypto markets. The major sell-off on crypto exchanges was widely triggered as a result of the vulnerabilities, and to a certain extent, the negligence of over-leveraged market participants that were forced to liquidate some or all of their bitcoin and other digital assets to cover debt payments.
A sub-$20,000 bitcoin price will definitely not provide the outstanding returns that bitcoin miners experience above $45,000. However, most industrial bitcoin miners are running new generation and highly efficient ASIC equipment, where they can still remain profitable, assuming they can maintain power costs within $0.05/kWh and $0.10/kWh. Smaller miners that don’t have economies of scale and low-cost energy sources are mining below their break-even point for sure. However, profitable bitcoin mining is widely a result of an efficient and highly skilled team of professionals that can maintain runtime, even during a $20,000 bitcoin market.
We shouldn’t forget one of bitcoin’s key features, its Difficulty Adjustment Algorithm, which rewards miners that stay online during low market cycles as other miners turn off their equipment due to lack of profitability, defaults, insolvency or whatever… The key to gaining and benefiting from the upside is to stay online with the most hashrate possible for as long as possible.
BCN: What has been the impact of the depressed crypto prices on Permian Chain’s operations?
MM: Permian Chain will continue to mine bitcoin, regardless of market prices. Headlines and market conditions change, but fundamentals really rarely change. The fundamental value behind bitcoin is what we are in this business for.
As for our mining sites, we have established a streamlined relationship with our energy provider(s) by implementing our energy-as-a-service and bitcoin mining platform to streamline our efforts. For example, Permian Chain works closely with our energy producer and site manager in Alberta, Brox Equity, to streamline a vertically-integrated value chain; from onsite fieldwork to online software solutions, we are able to keep mining and maintain operations.
BCN: If prices were to go down even further, will it still be profitable for Permian Chain to continue mining?
MM: It all depends on what you view to be profitable. If we are talking about a dollar value to assess profitability, then probably not. However if we look at profitability in terms of bitcoin, then yes. In my personal opinion, the fundamental value is not in line with bitcoin’s market price. Fundamentals take time to become obvious to the masses.
If you have a ten-year outlook for your bitcoin investment, then I believe bitcoin mining is a strong value creator. It is also very important to realize that if the bitcoin price continues to drop, it is very likely that a lot of miners will start shutting down globally. If enough miners shut down their operations, that will put downward pressure on the difficulty adjustment. As the difficulty rate drops, the process of mining becomes less difficult. As a result, this increases a miner’s chances of earning bitcoin more often than when the difficulty rate is high.
The difficulty rate measures how hard an ASIC mining machine would have to work to verify transactions on the blockchain (solving blocks of transactions in exchange for bitcoins as rewards). With lower difficulty rates, miners can find and solve blocks faster, allowing them to earn more bitcoin in the same timeframe for the same energy cost, hence more profits.
BCN: Permian Chain uses what you call low-cost energy which is derived from flared and stranded energy resources for its data-mining centres. Can you explain why Permian Chain has chosen to use this energy source?
MM: Permian Chain is an energy-as-a-service platform for compute infrastructure, starting with bitcoin mining. We aggregate all sources of energy onto the platform to help the world’s energy producers monetize and capitalize on their wasted and stranded resources through our tokenization processes and Smart Off-Take Agreement (SOTA). We focus on taking bitcoin mining off-grid and it just so happened that we started with natural gas as our first natural energy source, because that is where the challenges are most important to solve from an ESG perspective, which makes our solution a very obvious use case.
BCN: At which geographical locations is it possible to mine bitcoin profitably using flared and stranded energy resources?
MM: It depends on several factors as each jurisdiction has its different standards from regulations, costs of labour, cost of raw material, overheads, etc… All of which affect your net power cost. I hear a lot of talk around low-cost power in certain areas, but I can easily assume that most of these so-called “opportunities” do not factor in other costs that I mentioned. To actually give you a clear understanding of your operational expenses you have to factor in all those costs. Having said that, I believe anywhere between $0.05 and $0.10/kWh should be considered low-cost and shows effective overall cost management. Considering that we are also off-grid.
BCN: Some environmental groups have said a change in the coding of bitcoin will most likely eliminate its environmental impact. Do you agree with this argument?
MM: Change in coding? Change from what to what? I don’t believe Bitcoin should or would change… it’ll only continue to grow in adoption rate and improve its efficiency through Layer 2 technologies and improved new generation equipment. Companies such as Intel and Samsung continue to manufacture new generation chips that’ll improve mining efficiency.
As for the environmental impact, just as the internet runs on data centre facilities consuming 2% of the world’s on-grid power, Bitcoin will continue to require mining “data centre” facilities. However, Bitcoin is the largest computer in the world and only consumes approximately 0.4% of the world’s electricity. The majority being off renewable and clean energy sources. The trend of bitcoin mining is also leaning towards off-grid energy sources such as clean hydro, solar, and most likely in the near term, responsibly produced natural gas.
BCN: Can you briefly explain how your tokenization platform works?
MM: Energy companies register themselves and their resources onto our platform. We review the submissions prior to approval. Once approved the resource projects can undergo two tokenization routes; (1) by way of a security token offering offered to accredited investors with the help of broker-dealers that are registered on our platform; and (2) by issuing Smart Off-Take Agreements (SOTAs) allowing our network of mining partners who join our mining pool aggregator to stake their stablecoin on energy projects that they are interested in placing their ASIC miners on. This second process allows energy companies to receive early support from miners and to commercialize their energy resources by deploying onsite off-grid power for bitcoin mining.
BCN: Both Africa and the MENA region — where solar energy is seemingly plentiful — still account for an insignificant portion of bitcoin mining. What could be the reasons for this or what do you think needs to be done to attract miners to these two regions?
MM: In countries and regions like North America where energy is predominantly private, innovation and new business models are easier and quicker to understand and implement. The MENA region nationalizes energy resources. It takes longer for governments and regulators to pursue innovation at the same rate as free markets. I believe once the MENA governments openly announce regulatory frameworks around bitcoin mining specifically, we could expect to see an influx of miners and foreign investments from around the world. PermianChain makes it possible for regulators and governments to maintain a clear understanding of projects, enjoy low-cost reconciliation and allow for enhanced transparency.
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