I just finished reading Bitcoin Mining Economics by Daniel Frumkin. It's a good read! My biggest takeaway is that large mining farms are the Ghost of Bitcoin Past. Convertible debt offerings to buy bitcoin are the Ghost of Bitcoin Present. Smaller, more distributed mining is the Ghost of Bitcoin Future. Here's why.

Large mining operations are simply not profitable to run on a bitcoin standard. They never have been. After you spend all the capital to buy machines, site hosting, cooling infrastructure, and power purchase agreements (PPAs) you start your business of accumulating bitcoin deep in the red. In order to reach net positive profits you have to dig out of this debt hole AND earn a profit on top of it.

But ASICs depreciate rapidly and network difficulty continually explodes upward so mining farms are working against a very significant headwind. They are racing to accumulate a bitcoin stockpile before their investment depreciates. Frumkin runs the numbers, it almost never works out in real terms. You pretty much always get to keep more bitcoin in the long run by simply buying and holding with that upfront capital.

So why are there so many large mining farms? Because of fiat debt financing models. If you can get someone else to loan you the dollars to build out a farm you can win in the long run thanks to Gresham's Law.

It's the same fiat game every intelligent investor with an appetite for risk is playing. Get as much fiat denominated debt at the best terms possible that you can service without defaulting. Use that money to accumulate assets that increase in value. Denominate your liabilities in a depreciating unit of account and transfer all your wealth into appreciating assets. This is how the Cantillionaires benefit from the money printer. It's a story older than bitcoin, but the strategy is turbocharged with bitcoin's unbelievably rapid price appreciation.

This model has worked for 10 years with mining farms because the big money was too stupid to just buy and hold bitcoin. They weren't comfortable with this risky new asset. They wanted to see a business model with cashflow, financial prospectus, and, most importantly, assets to hold as collateral.

That's all changing now. Saylor has upended the model. Now, even mining farms are skipping the mining part and jumping straight to the Saylor strategy. Today Riot, operator of the largest mining farm in the world, announced they are raising half a billion dollars. Are they investing in ASICs? More mining sites? Research and development? lol not a chance. They are buying bitcoin. The dumb money phase is over. Smart money wins from here on out.

What does this mean for the mining industry? I don't have a crystal ball but I think a good educated guess is that the largest bitcoin mining farms will stop getting larger. The business of paying for electricity solely to mine bitcoin is going away. Bitcoin mining will enter an era where the only profitable way to mine is to make use of it's positive externalities: exhaust heat, demand response, and stranded energy.

The future is putting an ASIC in every water heater and HVAC unit. ASICs in every windmill and solar panel. ASICs on every oil well flare stack. ASICs on every new nuclear plant, but only until demand ramps up and a higher paying customer displaces them.

The declining block subsidy will reinforce this trend. As mining becomes less profitable, only the miners who don't rely on mining profits will survive.

In a nutshell: decentralization is coming. I am so fucking here for it.

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