Is Texas the new promised land for Bitcoin miners? The backers of several big-money projects are betting yes, thanks to the state’s cheap electricity and unique regulatory environment. If their ambitious plans come to fruition, it could lead to a profound shift in the geographic distribution of an essential component of the world’s most popular cryptocurrency network.
Bitcoin mining success depends heavily on how much electricity a given facility can devote to the task, which explains why the announcements of new mining sites often read like announcements of new power plants. A project that went live last week in west Texas has drawn particular attention, thanks to backing by investor Peter Thiel. Layer1 Technology, which recently raised $50 million from Thiel and other venture capitalists, has launched a facility that it says will soon have 100 megawatts of electricity devoted to mining Bitcoin.
Leading mining chip maker Bitmain, which is based in China, has also moved into Texas, opening a facility with 50 MW of power in a town called Rockdale in October that it says can eventually scale up to 300 MW. A third big player, a German firm called Northern data, says it plans to build the largest mining facility in the world, also in Rockdale, which it says will devote a full gigawatt (1,000 MW) to cryptocurrency prospecting. Today, Bitcoin’s network is using just over 10 gigawatts, according to an estimate by researchers at the University of Cambridge.
These are just the most high-profile mining operations laying claim to the Lone Star State. A number of other firms are either planning (or rumored to be planning) to set up facilities there, all chasing inexpensive power.
Bitcoin’s heavy electricity consumption—the same researchers estimate that the network’s annual use of power ranks it between the Philippines and Belgium—stems from the way it secures its public accounting ledger, called the blockchain, without relying on a central authority. To demonstrate their trustworthiness to the network, Bitcoin’s miners, thousands of which are distributed all over the world, constantly consume huge amounts of computing power as part of a competition to solve a complicated cryptographic puzzle. Every 10 minutes, a winner earns the right to add a “block” of new transactions to the ledger, and in return they receive newly minted bitcoins. Essentially, the system deters attacks by making them very expensive.
For miners, the difference between their operating costs and the amount of money they generate from mining is their profit or loss. So firms race to deploy the most efficient mining hardware at the largest scale; the more they have running, the greater their chances of solving a block. To power them, they seek out the most inexpensive electricity available. This helps explain why an estimated 65 percent of the system’s total mining capacity (a metric called “hashrate”) is located in China. Not only are the top hardware manufacturers located there, but cheap electricity is available in certain areas, often in the form of coal or hydropower.
Texas’s own cheap electricity is largely thanks to an abundance of natural gas and a boom in the development of wind power over the past decade. But what may be particularly attractive to Bitcoin mining businesses are certain unique characteristics of Texas’s wind power market. Thiel and other investors seem to be betting that these characteristics are enough to substantially dilute the Bitcoin mining network’s concentration in China.
“Texas has a lot of wind,” says Joshua Rhodes, an energy analyst at Vibrant Clean Energy, which builds forecasting software for electricity grid operators. The state leads the nation with more than 28 GW of wind power capacity, mostly located in west Texas. Besides the high winds, pro-renewables policies by the federal and state governments have helped fuel the boom.
Then there’s another factor, which likely appeals similarly to miners as it does to electricity producers: Texas’s electricity market is deregulated. Whereas in most areas of the country, electricity generation and distribution is controlled by a single entity, usually a utility company, in Texas the market for these services is open to whichever businesses wish to compete to offer them. That means, for instance, that it’s much easier from a regulatory standpoint to build and operate a power plant, says Rhodes.
It also means big electricity consumers like Bitcoin mines can negotiate power purchase agreements—contracts that stipulate that they will buy power at a certain price for a certain amount of time—directly with electricity producers, instead of having to deal with intermediaries like utilities. That can be great for businesses trying to keep their energy costs low, says Rhodes.
Here’s why: many of the state's wind farms are far to the west of its biggest population centers, particularly the Houston area. Transmission lines that stretch across the state can move the power to where there is demand for it, but sometimes there's so much wind power that there’s not enough transmission capacity to carry it all. That means power producers are eager to find customers closer to them who will purchase that excess electricity. In theory, that could give miners leverage to purchase wind power at very low prices.
Alexander Liegl, CEO of Peter Thiel-backed Layer1, recently told Fortune that “the cheapest electricity in the world, at scale, is in west Texas right now.”
Texas’s unique wind resource is not new, but in the past miners have avoided the area because of its sweltering heat. One of the challenges of mining is keeping the hardware from overheating. “But we know how to deal with that here,” says Jesse Peltan, CTO of HODL Ranch, a company that sets up data centers for cryptocurrency miners in west Texas. He says the arid climate in that part of the state makes it possible to use evaporative cooling, a process that takes advantage of the physics of water evaporation, to cool mining machines at a very low cost. Other operations are pursuing different approaches. Layer1, for instance, has developed a system that uses liquid to cool the hardware.
But there’s one more big variable that all Bitcoin-mining businesses must account for: the volatile price of the cryptocurrency. A quick drop in the coin’s value can have a severe impact on a firm’s profit margin.
Peltan argues that in the long run what matters most is not Bitcoin’s price but “the cost of your production relative to other producers.” With low enough operational costs, larger producers will be insulated against price drops by marginal producers, which will get forced to shut down, he says. Bitcoin is programmed to automatically reduce the difficulty (and thus cost) of mining in response to drops in the network’s total capacity (and vice versa). “The industry is really competing on moving toward lower cost of power and then larger scale of operation to spread that cost of operation over more megawatts,” Peltan says.
No wonder the windy Lone Star State has never looked more inviting.