Taking Advantage of the Coming Capacity Shortage

So right now is completely apocalyptic in regards to miner pricing. There is a huge discrepancy between new and used miner pricing, as the market is heavily leaning towards new generation equipment. I’m going to be talking predominantly about Bitmain machines because the other manufacturers are not coming close to competing in efficiency or price right now to the point where it’s very difficult to justify looking at anyone else.

Up until last week when Bitcoin took a dive, network difficulty was rising pretty sharply. There may be slight adjustment downwards as many miners mining at higher rates and on older equipment are really feeling the crunch.

But prior to this week, there was a 10% difficulty adjustment upwards. In previous halvings, there was often a significant downwards adjustment as unprofitable miners turned off, but this halving the economics are significantly different. Hash rate, despite profitability being abysmal for most people, is continuing to trend upwards at breakneck pace. Bigger money is coming in, and more infrastructure is getting deployed. At the same time, the data center industry is exploding with this AI boom.

I would like to think big money is coming into the mining space because people with a lot of money are realizing that the fiat system is completely screwed. Are they looking at mining as the ability to acquire Bitcoin at a significant discount and one of the best vehicles to accumulate? Speculating on motives is pretty difficult because everyone has different motives and perspectives, and I struggle with confirmation bias. But regardless of what the motive is, it’s happening. Retail miners have stopped buying, but massive institutions are buying up all the mining capacity in the United States. This is happening outside of the United States as well, but my perspective is largely on the US market because that is where I focus.

What I’m about to explain is a speculative strategy that I think can make a lot of money really fast. I will detail pretty thoroughly what I think some of the risks are, and ultimately for most people, just buying Bitcoin is a significantly better strategy. I live in a world where I speculate on mining hardware for a living so this is just where my brain is at and this post might be interesting even if you are not wanting to or should not enter the market. Mining is one of the tougher industries to operate in because there is a significant learning curve with a ton of variables and risks a lot of people don’t even know exist when they enter. That’s just a nice way to say that liking Bitcoin is not necessarily a qualification for being an effective operator in mining.

The Trade

• Buy new generation mining hardware and put it in hosting or a site you operate
• Hopefully mine profitably until the market turns around
• Wait for people to start feeling the fomo and come into the market (Don’t fomo into retail hosting in the bull market please for the love of God)
• Exit your position selling your machines after they explode in valuation in place with the capacity as it will carry a higher premium than if it’s just sitting in a warehouse unplugged

The general landscape of mining is looking pretty bleak for the small/medium scale miner, and I think it’s important to understand that if things trend the way they are, it’s going to be significantly worse 4 years from now. I believe pretty strongly that retail individuals will generally have a really hard time post next halving, unless this trend of miners becoming larger scale changes unexpectedly.  

Retail miners with higher costs on machine acquisition, power costs, and fleet management will get demolished. The market is changing. A good example is how Swan and Tether quietly deployed $100 million worth of miners from seemingly out of nowhere. There will be other institutions doing this and the scale at which mining is going to happen will be mind blowing. Hash Price is plummeting and difficulty is rising.

The average individual  should avoid entering this market because there are so many risks to navigate, and you can get destroyed financially by what you do not know. Arrogance in believing you know more than you do is deadly in this industry and the best skill to have is admitting where you do not know something. A lot of these risks can be mitigated right now by taking the strategy of taking advantage of inevitable crunches on hardware and capacity that are soon coming to the industry, instead of finding yourself in a hosting contract as the market corrects after a blow off top, holding unprofitable and quickly devaluing equipment.

This cycle the manufacturers are better positioned to produce significantly more equipment, and the market is also positioned to consume significantly more equipment. There will be more institutions like Swan and Tether, and Tether isn’t even done deploying. Right now, new equipment has a very inflated price, compared to most miners expectations of a sub 2 year ROI on hardware. On paper, miners should be getting destroyed right now, but difficulty is continuing to increase at a ridiculous rate. This is likely because individuals that are well capitalized understand what I’m describing right now and are trying to get as much hash online before the miner bull market begins.

The second people start to get bullish, all the capacity available will get bought up. There are already people extremely bullish buying it all. Mining capacity is super illiquid because it’s real. You need real skilled people to build real infrastructure. A lot of this is in rural places where there are not a lot of qualified people. The infrastructure needs to come from all over the world, and there are a ton of moving pieces to get it all in place. Building things is really difficult when you live in a world where Atlas Shrugged looks like a prophecy. Historically, the mining bull market has been pretty short and the ability to build infrastructure will lag significantly behind the market demand for it.

Machine prices will definitely increase in value, and could triple compared to what they are today. There were $10,000 and $15,000 S19 J Pros last cycle, and in today’s devalued dollar prices, it’s not unreasonable to think that S21 prices could double or triple from where they are today. A good portion of the market will be attempting to buy these machines, but will run into issues with finding where to plug them. If you have machines hosted in place, you will likely be able to sell them for a significant premium.

I predict retail hosting almost across the board will sell out completely very quickly. FOMO will be completely out of control, and while individuals expose themselves to a ton of risk they don’t understand, and probably shouldn’t be buying miners, they will be. People who have been in the fiat world will be told by the TV that Bitcoin is cool. Having a boomer like Trump talking about it at a Bitcoin conference is pretty indicative of that.

Hosts that want to expand, will be faced with a shortage of skilled laborers, shortages of infrastructure, long lead times for everything, and the bull market if it performs like prior cycles, will be a short window. It’s possible there is a super cycle, but people who bet on that last cycle did not do very well. Individuals who take this trade have the ability to multiply their investment in a pretty short time period if they position themselves correctly.

Risks and Variables

I’m feeling a sense of massive fomo right now because I believe the window to be able to capitalize on this trade is closing. I don’t think we have enough hosting capacity right now to fully take advantage of this market, nor do I think anyone else does. Big players have the opportunity to buy capacity in one swoop. One large institution like Swan has the ability to buy all the capacity at once in the US if they really wanted to, and whether or not it is them, someone will likely do it.

• Shortlist of risks:
  Operator failures
• Bad operating conditions
• Bitcoin doesn’t rally like many of us are expecting, or in the timeline we are expecting
• Lemmon machines which break at high rates
• Regulatory risks
• Geopolitical chaos
• Erratic Power Markets

Let me blast through these real quick because this is already long winded.

If you are deploying miners into hosting, you are still taking on all the risks that you would be if you deployed yourself. Just because it’s someone else managing your machines that is hopefully more experienced and knowledgeable than you, doesn’t mean you aren’t assuming the risk or it won’t be a headache. You can try to mitigate this in multiple ways. You could learn the intricacies of this industry and red flags to look for, and just do general good due diligence. The problem with this is that there is not much time to figure this out and if you don’t already have a good foundation, it’s going to be really difficult. You can ask individuals who are more experienced and listen to them while hoping what they are telling you is accurate or helpful. Or you can just buy Bitcoin and avoid the risks all together.

Cheaper is not always better because often you can end up paying a lot more on the back end when you try to skimp on the front end. Being very skeptical of sales people, even me, and asking a lot of questions and looking for inconsistencies in answers is good. It is really important to be confident someone is being honest with you because you are taking on a massive risk by buying miners.

If the operator is not running the machines in good conditions, they have the potential to break which could create a big financial hole for you. Expect machine failures and expect repair costs.  Finding experienced and trustworthy operators to handle your equipment is not easy, and the thought that buying miners to put into hosting being a passive activity to generate money is not generally the case.

There are a lot of complaints about Bitmain quality, but these machines (minus the S17 series) tend to be pretty resilient if operated in the correct conditions. Running machines in hot and horrible environments like Texas only become attractive if the costs are low enough to justify the headache of broken equipment. One of the benefits of buying new equipment is having the ability to warranty it when it breaks, versus having to fix it out of pocket.

The biggest potential problem with this whole thesis is that Bitcoin stays relatively flat, difficulty continues to go up through the roof, and mining economics as we have historically thought about changes dramatically. This would be problematic for the whole industry in the short term, and I may be out of a job if this happens. It’s a serious concern that everyone should deeply consider and run the numbers before jumping into the market because a sales guy is super bullish. Mitigation for this is making a bet that you can afford to lose. Mining is one of the quickest ways to lose money (I can attest from personal experience), but this can be mitigated by successfully timing the market, which in mining is not rocket science if the cycles play out similarly to how they have in the past.

On paper, it seems like all our bags are about to get pumped super hard, but we live in a world where nothing makes sense, and therefore it is always important to check your emotions and try to think rationally about the potential downsides. It’s important to be prepared for the possibility that you are stuck mining with the machines for a while and won’t be able to sell for a premium. I’m gambling that this is not the case by continuing to work in this industry and dedicate most of my waking hours to this which to me is a big bet. It does not do me any good to screw customers over and make a quick buck and I try to give my customers the best information I have because I want to create a lasting relationship and continue to sell then equipment in the future.

The newest and most efficient machines coming to market are a big unknown. We generally do not know the quality of machines until they have been operated for at least 12 months. Getting through 4 seasons and extended time hashing gives us a good understanding of what the quality of the machines is. There is a possibility that you could get a lemmon, meaning the model you buy has high failure rates.. Having the option to sell the machine hosted in place for a premium, mitigates some of this risk. So far, the 21 series has done pretty well at running stably in the summer and we are getting towards the end of the summer. Underclocking the machines in the hot months or having the option to curtail could assist in general stability and longevity (less watts equals less heat and strain). We are getting to a time in the year where the hot months are soon behind us, and deploying machines into hotter environments is less risky, especially if your target sales timeline is summer next year.

Deploying in cold snowy environments carries its own risk, especially if there is intermittent downtime which creates more wear and tear on your machines. Understanding the parameters in regards to curtailment, or just general downtime is good to know. Understanding the operating conditions, whether it is a grid data center environment, container deployment, or off grid deployment is important for understanding potential wear and tear on miners. Heat is kind of unavoidable in the summer, even if you deploy in environments less terrible than Texas.

There is also the very real possibility that the regulatory landscape for miners changes in the US. Many US pools will likely be forced to KYC customers, and there may be other disruptions that could happen. While narratives on Twitter present a picture that Bitcoin miners are saving energy grids and are the most wonderful people in the world, the reality is that many individuals have been bad actors causing damage to communities around them, power companies which they ran up huge bills and never paid, using large amounts of water, etc. There are people who really don’t like us, and potential motivation to come after us as a result. Not only that, as mining continues to scale up, there will likely be the possibility that larger firms pressure politicians to pass regulations that benefit them and hurt smaller competitors. It happens in every industry and we have seen a general consolidation of everything for decades, so it’s a massive risk for miners. I think a lot of this could be mitigated by shortening your time horizon. It will take time for these to play out, but I think it’s still something to pay attention to.

One massive risk that’s really important to understand is that the power markets are on the verge of complete chaos. Power producers are locked in at rates that they likely will not be able to maintain if and when their costs shoot through the roof. The Middle East is super chaotic right now which makes me think this is a real possibility in the short term to look out for.

The Bull Case for New top dollar hardware

New equipment is expensive, and it is this case because it’s the only stuff on the market most people can run profitably. With the proximity to what has historically been mining bull runs, the highest hashing equipment will carry the highest premium and have the wildest price swings upwards. In the bull, individuals’ mentalities completely change. People care about capacity and maximizing hashrate, much more than they care about price or efficiency. Caring about efficiency is a bear market activity, but whatever has the biggest number hashrate will be the machines with the most demand.

Buying machines with a year warranty mitigate the risks of the machines breaking and having to eat repair costs yourself. J Pros for example, selling near or below $500 are not worth spending the money to repair because of how cheap they are. Buying a replacement machine makes a lot more sense than spending a third of the value to repair a hash board or replace a power supply. You can mine new equipment profitably, and likely sell.

Recap/Final Thoughts

• Mining is changing and maturing
• People will fomo into the market
• There is going to be capacity constraints meaning people pay more for machines already plugged in
• Next halving is going to be brutal
• You can make a lot of money fast timing the market like this
• There is a lot of risk, and a lot of people won’t and shouldn’t attempt this

This market is risky and it’s easy to get scammed, so I would encourage people to do a lot of research on who they are working with and stick with people who have good reputations. At the end of the day, it is much easier and safer to just buy Bitcoin. Double check you know who are you talking with, as there will be people impersonating individuals on telegram, twitter, etc. Scams are getting more sophisticated.  

Thank you for reading, Kaboomracks Alex