George Kaloudis is a research analyst for CoinDesk Research.

Crypto mining companies have struggled mightily in 2022. But over the last week or so the tide may be turning. One shred of evidence came from Barclays, which initiated equity research coverage on Core Scientific (CORZ) earlier last week, issuing an “overweight” rating.

Now, an “overweight” rating isn’t a “Buy this now, oh my goodness, what a steal! This stock is liable to rip your face off” rating; instead it’s more of a “Hey, this thing will perform well compared with its peers.” Basically, “If mining stocks don’t all go up, at least CORZ won’t go down as much as the others.”

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Not exactly a strong suggestion that mining is back, but it’s objectively better than, “Everything is going to zero and our best days are behind us.” But beyond this one stock rating and otherwise positive stock performance the last two weeks (see below), the tide against mining is turning. Mining is cool again.

Banks’ equity research teams spend time writing about companies because a) the banks think the companies operate in an important industry and b) the covered companies might need to raise capital some day, and they just might choose that bank to raise capital on their behalf if they get a nice writeup.

Barclays initiating coverage on Core Scientific itself isn’t too far out of bounds. But what was a bit surprising (at least to me) was the report mentioning that “we remain positive on the long-term viability of bitcoin” and “We view CORZ positively in light of … our long-term bullish view on BTC …”

Barclays isn’t some nobody bank pandering for clout, so if the idea that bitcoin has long-term viability penetrates more and more banks, the financiers at these banks will be excited about the opportunity of servicing the mining businesses that secure the Bitcoin network. But for now, let’s put Wall Street aside and shift our focus to Africa.

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Crypto mining stocks and bitcoin price since Sept. 26, 2022 (TradingView)

Forget Wall Street, let’s talk about Africa

Chainalysis, a blockchain forensics company, published a report two weeks ago suggesting that crypto is thriving in sub-Saharan Africa. Of the regions Chainalysis studied, data showed that sub-Saharan Africa accounted for the least amount of transaction volume of any region. But a deeper look at the data shows the region is experiencing a grassroots crypto movement.

Africans conduct the world’s highest proportion of retail payments of less than $1,000 (80%) and carry out far more peer-to-peer transactions proportionally (6%) than all other regions. The report was well-summarized by my colleague Frederick Munawa.

CoinDesk Managing Editor Christie Harkin added important color on CoinDesk TV by comparing El Salvador’s crypto adoption (where bitcoin is legal tender) with African adoption. She said:

“[With El Salvador] we’re looking at a situation where the use [of] bitcoin was implemented in a top-down way … to contrast that, the strong crypto usage and adoption rates in African countries is from [the] bottom up. In fact, [adoption] is going against what their governments would prefer them to do, in many cases.”

I think that’s an important point. While the Salvadoran legal tender law was sparked by a circular bitcoin economy that cropped up at Bitcoin Beach in El Zonte (a coastal town in El Salvador), it’s still a law that requires the adoption of bitcoin.

Back to mining.

Bitcoin mining and the turning tide

Last Tuesday, there was a video making the rounds on Twitter of a micro-hydro plant in rural Kenya implemented by a company called Gridless.

This is great. A village in Kenya that doesn’t have reliable electricity now has it in a way that isn’t completely obtrusive to the surrounding ecology. The kicker? The hydro plant is also mining bitcoin with the excess electricity to offset costs. The plant was intentionally overbuilt and, according to tweets from Luxor Technologies CEO Nick Hansen, the mined bitcoin could effectively reduce power prices by up to 90%.

This is really one of the coolest things I’ve seen in a long time. Partially because electricity is awesome, but also because it gives credence to a popular Bitcoin trope: Bitcoin mining provides an ideal way to monetize otherwise-stranded cheap, renewable energy. As I wrote in April for CoinDesk Research: “[Bitcoin mining] could be economically impactful to communities near these stranded energy sources as they are able to monetize their proximity to cheap energy sources.”

And here it is. This is just one example, but a rural community can now enjoy cheaper electricity because of bitcoin mining. Surely there are more out there and there are more coming. Another reason why this is cool is because it is emblematic of how fragmented, and therefore decentralized, bitcoin mining can be. Yes, there are sleek, put-together and publicly traded corporations mining bitcoin in big warehouses, but there are also rural communities that can just as easily mine bitcoin.

Bankruptcies and increasing difficulty are happening, but there’s reason for optimism

Of course, even though I offered positive stories above, there’s still the reality that the mining business has taken a hit this year. As I wrote in May:

“All said, there is no particular reason to worry about the mining industry as a whole. Bitcoin mining will be fine, but the cast of characters might change since the capital markets are available up until the moment they aren’t. Bitcoin will be better for it, but there might be some pain coming at the company level.”

And we saw that pain. We’ve already talked about stock performance, but there’s more.

Last week CoinDesk reported that bitcoin mining company Marathon (MARA) had invested $31.3 million in Compute North, which filed for bankruptcy last month. CoinDesk also reported that publicly traded crypto mining company Argo Blockchain (ARGO) raised $27 million in equity capital due to “liquidity pressures” in tandem with selling 3,400 of its mining machines. On top of the corporate pain, bitcoin mining machines have been offered for sale on third-party selling platforms (like Kaboomracks) at steep discounts. Clearly, things are tough right now and the consensus seems to be it’ll get worse before it gets better.

But I think mining is on the come up.

On Oct. 2, Luxor Technologies’ head of research, Colin Harper, wrote: “Bitcoin’s hashrate is absolutely popping off right now, rising some 8% over the week to a new all-time high this morning.” On Oct. 7, hashrate (the total computational power being used to mine bitcoin) was around 260 exahash/second. That marks a ~24% increase over the last three months. Due to the increase in hashrate, the Bitcoin network is set to make it harder to mine bitcoin. This is the so-called “Mining Difficulty Adjustment” performed automatically by Bitcoin’s code roughly every two weeks, and because it’s a relatively aggressive upward adjustment, there is a pessimism around the short-term prospects for mining.

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Bitcoin network hashrate (Luxor)

But here’s why I’m not pessimistic.

Things got tough for mining companies, and the companies that have survived are the companies that were operating responsibly and prudently. Some companies were taking advantage of the cheap capital available to them because of low interest rates to run their business, and that’s simply not possible anymore in a rising interest rate environment. The mining companies that have endured this shakeout are simply the best of the bunch.

On top of that, creative ideas, like rural micro-hydro plants that mine bitcoin in Kenya, are cropping up and the injection of creativity into the space gives me optimism.

To cap it off, the network’s hashrate is growing quickly in spite of the fact that bitcoin’s price isn’t really exploding – typically a higher bitcoin price would encourage more people to mine since the rewards are potentially greater. So instead of miners simply piling into the network in a quest for massive gains in bitcoin, they are joining because it is a prudent business decision now that the network has proven staying power.

Not to mention, October is a historically positive performing month for bitcoin, so bitcoin trading in a tight band between $19,000-$20,000 might not last very long.

So, with all of these things in, I’ll say it again: Mining is cool again.

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George Kaloudis is a research analyst for CoinDesk Research.