Crypto and Bitcoin Miners Rebrand and Diversify to Survive — CoinDesk

Bitcoin miners are trying to survive a freezing crypto winter by expanding the scope of their business, both in name and in practice.

On January 4, one of the largest publicly traded bitcoin mining companies announced that it was replacing “Blockchain” in its name with “Platforms.” The conversion to Riot Platforms (RIOT) was to “underpin” an “increasingly diversified business”.

It is not the only company to change its name. In the past year, miners have been working to diversify their revenue streams into other products and services using energy-intensive data centers. Some did so in response to brutal market conditions, while others took steps to prepare for a downturn when business was still going strong.

The strategy is the opposite of what we’ve seen in previous bull markets, where publicly traded firms would add the word “crypto” or “blockchain” to their names and see their shares rise more than 100% in a day – even though the company had no viable crypto -related business plan.

Now, “There is a general desire by companies to distance themselves from the crypto bubble over the last couple of years,” said DA Davidson analyst Chris Brendler. “It makes it easier when you’re dealing with more traditional financial institutions.”

Exactly how much of this wave of corporate rebranding and promises of new business lines is just talk of pumping up stock valuations in a depressed market, and whether it will last, has yet to be determined. It depends on how profitable it will be to diversify.

“As we saw in the last bear market, many miners are spinning their public narratives as a diversified business so they don’t just face the difficult mining valuations,” said Ethan Vera, CEO of mining services firm Luxor Technologies.

Just like traditional commodities, bitcoin mining is an extremely competitive and capital-intensive business, with miners competing for an asset that is limited in quantity.

There are only about 2 million more bitcoins that can be mined until the Bitcoin network reaches a cap of 21 million. Assuming the current bitcoin price of $25,000 per token, the total value of bitcoin to be mined is around $50 billion. That amount is “super limited,” said Lucas Pipes, an analyst at investment bank B. Riley Financial.

With many miners constantly adding computing power to mine the limited amount of bitcoin, it may not be possible to base an entire business model on mining alone. So companies are looking to use some of their computing power for other industries and services. This includes the sale of “high-performance computing” to firms in industries such as artificial intelligence and cyber security.

Others want to capitalize on the energy markets, either by owning their own assets or selling energy back to the grid.

“If you want to have a $50 billion market cap—and what good CEO doesn’t want one [high] market value … you have to do something else, too,” Pipes said.

However, many strategies miners implement to diversify can do more harm than good. High-performance computing services are taking away from their core business, according to DA Davison’s Brendler.

Pipes believes that miners are probably better off just focusing on mining bitcoin, rather than entering a new sector and taking on clients that need high-powered computing and competing with established tech firms such as Amazon and Microsoft. And what about miners trying to sell energy to the grid? It’s just another ‘sign of [difficult] times,” Brendler said.

One of the ways miners diversify their income is by taking advantage of their high energy consumption and close ties to the power grid.

Riot, for example, bought an electrical engineering firm last year to service its Texas mega-mine called Whinstone. It now offers similar services to other companies. Although gross margins from this new business (around 10%) were far short of mining (about 59% before power credits) for the first nine months of 2022, there could be a growth area before including power credits, according to the company’s third-quarter earnings report quarter.

Meanwhile, Riot also received $21.3 million in power credits in the nine months ended Sept. 30 by shutting down operations to redirect energy back to the Texas grid, according to its third-quarter report.

The strategy is not an attempt to pivot away from mining, but to gain more control over costs and turn them into a revenue stream, said Riot CEO Jason Les. “We have a vertically integrated strategy for our bitcoin mining focus, and with that strategy we are focused on taking more control of our inputs and turning expenses into revenue.”

Competitors Greenidge Generation (GREE) and Stronghold Digital Mining (SDIG) also own fossil fuel-based power generators and sell power back to the grid.

However, both firms saw their gross margins for their power segments shrink dramatically through 2022, well into negative territory. Greenidge ended the third quarter with a gross margin of -4%, while Stronghold ended with -72% when including maintenance costs, according to data from The MinerMag Research Head of Research Wolfie Zhao.

Greenidge’s support services segment, which offers “customer service, sales support and technical support,” has proven to be the most profitable, with a gross margin of over 50% versus a mining margin of around 42%, according to the firm’s quarterly report.

Miners entering the high-performance computing market are essentially hitching a ride on a “mega-trend that should last for many years,” B. Riley’s Pipe said.

Bitcoin miners are uniquely positioned to compete in high-performance computing, as most of them already own data centers and have access to low-cost power, Luxor’s Vera said.

However, the market for high-performance computing is highly competitive and miners lack the infrastructure and capabilities of already established data center operators. The computer industry is “a customer-facing business,” Vera said, and many bitcoin miners don’t exactly have sales departments.

In early 2022, Canadian mining company Hut 8 Mining (HUT) bought five data centers from TeraGo for about $22 million, which had grown to 14% of revenue by the end of the third quarter. That’s more than its mining hosting business delivered quarterly last year.

Diversifying into the wider world of “computing” is essentially catching a “rising tide” said B. Riley’s Pipe. The industry can ebb and flow and it can be riskier depending on the clientele, but overall it is a growing sector.

Zhao estimates that the gross margin for Hut 8’s high-performance computing segment has remained around 50% through 2022, while the mining margin fell to 34% in the third quarter. By comparison, operating margins for big data companies such as Amazon Web Services and Microsoft are reportedly in the 25-40% range.

Like Riot, Applied Digital Corporation (APLD) dropped the “blockchain” from its name. This was “to distinguish that next-generation data centers support many other high-performance computing applications as well,” the press release said at the time.

The firm has yet to capture revenue from high-performance computing applications, but is targeting 10% of its gross revenue by the end of 2023 from that segment, CEO Wes Cummins told CoinDesk. The gross margin for high-performance computing is higher than mining, Cummins said.

For now, APLD hosts 128 graphics processing units (GPUs) “retrofitted part of an existing building in Jamestown [North Dakota] for Web3 Applications,” and plans to host an additional 300 GPUs for machine learning in the first quarter of 2023. The 300 GPUs will be in a 5 megawatt (MW) facility dedicated to GPUs that broke ground in December 2022.

Canadian miner Hive Blockchain (HIVE) has been preparing to launch cloud services for high-performance computing since the Ethereum Merge effectively dismantled its Ether mining business. The Merge upgraded the blockchain’s proof-of-work backbone in favor of a less intensive proof-of-stake algorithm.

The cloud offering is 25 times more profitable than mining, measured in dollars per electricity consumption, given current market conditions, has annual revenue of $1 million on a run-rate basis, the company said on Tuesday. Hive has a fleet of 38,000 GPUs and currently uses 450 of them for its cloud proof of concept, which uses about 80 kilowatts (KW) to earn $3,500 per day.

Hive has also deployed some of these GPUs to mine other coins, which it later converts to bitcoin. In January, only 6% of Hive’s computing power came from alt-coin mining, as the GPU fleet was limited to selling energy back to the grid, which totaled $180,000 for the month. In the pre-merger quarter ending June 30, 2022, 11% of Hive’s revenue came from Ethereum and Ethereum Classic mining.

Hive has also sold energy back to the grid in times of high demand since. In December 2022, it earned $3.15 million selling power back to the grid.

For Brendler, miners could find a niche in the high-performance computing space, but given competition with big players, it will never become a big trend.

“It could have been a bigger trend if the market had been stronger. But now that we’re in survival mode,” it’s unlikely we’ll see any more expansion plans, Brendler said.