Will Industrial Mining Become the Next Big Bitcoin Investment Sector?
Published on June 15, 2014 at 13:45 BST
Investment interest in the bitcoin ecosystem has skyrocketed in 2014, with this year's investment figures already having surpassed 2013s totals due to major investments in merchant processor BitPay, secure wallet provider Xapo and e-commerce and online banking platform Circle, which have accounted for a combined $67m in fundraising.
This list of more well-known, merchant or consumer-focused bitcoin companies was joined more recently by a sizeable investment in bitcoin mining hardware manufacturer and industrial mining facility operator BitFury, which announced it had closed a $20m round on 30th May.
Though bitcoin mining has long been a point of emphasis for the bitcoin ecosystem, BitFury's investment round may be evidence that VC investors are giving more credence to companies providing fundamental services to the greater bitcoin business ecosystem.
The recent activity suggests institutional mining may be the next point of emphasis for the investment community, and industry observers already seem to have sensed the trend.
More rounds expected
This shift toward large-scale mining was underscored on 12th June by a $400,000 investment in bitcoin mining rig hosting firm HashPlex.
One of the US company's principal investors, SecondMarket CEO Barry Silbert, noted the trend to CoinDesk, suggesting his investment was in part a move to counter this effort:
"As digital currency mining has shifted to larger, well-funded ‘industrial’ mining companies, I was attracted to the idea of giving the little guy the opportunity to participate by hosting their mining equipment at professionally run, low energy cost facilities."
While well-intentioned, the investment may do little to stem coming investments in the growing sector.
US-based industrial mining facility operator MegaBigPower – which once earned more than $8m a month from its mining efforts each month at peak bitcoin price levels, told CoinDesk it is currently working to finalize an investment round, which it estimates will be of comparable size to BitFury's.
Though owner Dave Carlson did not provide further details, BitFury's major investors were eager to point out the reasons they expect similar investments in such industrial-scale operators to become more commonplace.
Industrial mining arms race
The driving force behind this potential increase in investment was perhaps best articulated by Binary Financial managing partner Harry Yeh. Speaking to CoinDesk, Yeh indicated that the window for industrial mining facilities to capitalize on the market for maximum returns is dwindling due to increased competition, which could lead to more immediate investments.
Citing figures culled from his talks with investors, Yeh stated:
"Last year, if you wanted to be a big player in the mining space, you probably had to fork out anywhere between $3-$5m to get into industrial mining. This year, that amount is about $10-20m; next year, it will be $30-$40m and up."
Further, as the market expands, Yeh said he believes that rising bitcoin prices will force more mainstream companies to invest in large data centers with bitcoin mining capabilities:
"You're going to start seeing IBM and bigger companies getting into the game. Right now, the market is still too small, and this is just my opinion, [but] as the price moves up you'll have more interest."
Risk and reward
Georgia Co-Investment Fund CEO George Bachiashvili, whose firm also invested in BitFury's latest round, believes that this escalation is forthcoming, simply due to bitcoin's finite nature and the huge potential for profit it brings.
"I think mining will become more like a commodity because more people will get into it and it will be harder to get a market share. Then, there's the price of the bitcoin itself. If it rises and reaches several thousand per bitcoin, I think good revenue can be generated," he said.
Given this upside, Bachiashvili stated that his company was happy to take the risk. He also suggested that investors may be beginning to look at bitcoin as a property with intrinsic value beyond its price, adding:
"Bitcoin is more of a medium of exchange, something that has a utility that can be applied. That's why we don't look at it as a commodity. We look at it as a medium of exchange and that it will be used for money and signing transactions and proof of ownership and property."
Given that industrial mining facilities are so close to the core element of the bitcoin ecosystem, Yeh noted that BitFury, and by extension other similar operators, may have the ability to tap multiple markets, even threatening more consumer-oriented mining companies and services.
"What I see as happening is that [BitFury is] going to produce so many ASICs and there's only so many 1MW, 20MW or large megawatt facilities. It's just physically impossible to bring up that many facilities in a short span of time," he states.
Bachiashvili went further to suggest he believes it's not out of the question for the company to begin providing bitcoin wallets or other services for the ecosystem given its position.
Proven track record
Of course, BitFury's investors were also keen to point out that the large investment round is evidence of the work being conducted by the company – which has two large data centers in Finland and Iceland, and another nearing completion in Georgia.
Bachiashvili, for example, noted that his firm conducted stress tests on the company, and were pleased with the results.
"We've done several stress tests of the company and included that into our calculations and they have proven to be pretty stable even at a low bitcoin price, it would have to go down close to zero in order for us not to recover the loan," he said.
The investors also spoke highly of the BitFury management and the company's ability to deliver on its products. This comes in spite of some more recent mainstream criticism of the founders.
Though the question of whether mainstream investors will begin gravitating to mining is still uncertain, there are potential upsides for early adopters.
BitFury investor Bill Tai, whose portfolio includes investments in such successes as Scribd and Twitter, also suggested that investing in bitcoin's ground-level infrastructure can help investors become more informed about future movements in the industry, saying:
"The appeal of BitFury to me goes beyond their expertise in mining, gear and silicon. In my opinion, they are one of the important central nodes of information in the bitcoin community in general. Their activities will expose me to many opportunities in the years to come."
Still, he acknowledges that bitcoin is still polarizing, even if investors are catching on to potential opportunities in the space. BitFury's investment team, for example, consists of investors who have a more established knowledged of the ecosystem.
He concluded: "The interest from VCs in bitcoin is very binary. Either you love it or are afraid. I definitely am not afraid."
Data center image via Shutterstock
Mining Roundup: BBB Warning, Alpha Technology and a Pool...
DigitalBTC Makes History With Australian Stock Market Debut