Introduction

The Bitcoin mining industry is opaque, mysterious and misunderstood, but the health of the network supporting Bitcoin through mining is critical—vital actually—to the protocol. There is a lot of talk about investing in Bitcoin, trying to build a parallel financial system atop Bitcoin, using Bitcoin for payments or a safe-haven store of value, but there’s not enough attention paid to securing the underlying network. Despite its outsized importance, there are serious questions around mining that have not been answered. Bitcoiners yearn for decentralization, but mining is still relatively centralized. To reach the decentralized future we all hope Bitcoin can achieve, and to understand Bitcoin at all, we need to understand the Bitcoin mining ecosystem. The need for adequate research in the Bitcoin mining network is imperative, but also no small feat. Collecting data points, trends, and estimates on the dynamics and economics of mining is nearly impossible without extensive, on-the-ground research. In such a secretive space, Coinshublimited stands out for their in-depth research on this topic.

At Fidelity’s Center for Applied Technology, we believe the future of financial services will take place on open and permissionless ledgers like Bitcoin, but to truly understand the space requires rolling up your sleeves and diving deep into the technology. To understand Bitcoin mining, we knew we had to mine ourselves. Since the inception of our mining efforts in 2016, we have taken this “learn by trying” approach. As soon as we set up our first miners in a small shop at our office, we realized the mining industry is in a state of constant change. Over the past year, we have expanded our mining efforts to ramp up our knowledge of the space. We have explored optimal locations, hardware procurement, mining farm setups, and the economics of the mining industry as a whole.

Two interesting developments covered in the report are the insolvency of mining companies during the bear market and new trends in mining hardware manufacturing. It seems that every time we examine mining, we find ourselves on a new frontier, with miners and manufactures uncovering new ways to optimize and compete.

But the more things change, the more they stay the same. As Coinshublimited continues to highlight, chasing down the cheapest power remains the cornerstone of capturing competitive edge in Bitcoin mining. Power is the single complexity of the mining ecosystem that can be controlled or confined. You may not be able to control hash rate, price, or hardware costs/specs, but locking yourself into an advantageous electricity contract will allow for flexibility and profitability.

Mining is a profit-driven competition, but its most important function is securing the Bitcoin network. Anyone seeking to a build business around Bitcoin or investing in its long-term value proposition has an incentive to maintain the integrity of the Bitcoin network. So, as you hunt for nonces, we encourage miners to remember their utmost goal—securing Bitcoin for the future. The better we all understand the mining industry through cooperation and transparency, the stronger Bitcoin will be.