Why Bitfinex and Tether want to get into bitcoin mining

Last month, Bitfinex and Tether CTO Paolo Ardoino posted a curious tweet: the two sister companies, he said, "have been investing in bitcoin mining recently."

He added that the goal was not to seek out the cheapest electricity — a fundamental aspect of many mining firms' strategies — but rather to ensure that there is "enough geographical and political diversity" in Bitcoin mining. 

Then, earlier this month, Tether hosted an event with Lugano, Switzerland, where Ardoino got more specific. He said that Tether wants to mine bitcoin in Lugano and that the company has invested in a little-known bitcoin mining hardware manufacturer called Enigma. 

But how does bitcoin mining fit strategically with Tether and Bitfinex's respective stablecoin and exchange businesses? 

The Block sat down with Ardoino to learn more about the rationale behind the new business plan and how it fits into the bigger picture for Tether and Bitfinex.

Geopolitical diversity 

In the interview, Ardoino reiterated that Bitfinex and Tether's main aim with the new venture is to ensure that the Bitcoin network's hash rate, or computing power, has geopolitical diversity. "Our mission is to decentralize the spread of bitcoin mining geographically and politically," he said. 

Currently, the US is the leading market for bitcoin mining, with nearly a 43% share of the total hash rate, according to data from the Cambridge Centre for Alternative Finance. 

Ardoino said that whereas most companies prefer to locate mining operations in places where relatively cheap electricity is available — like the US state of Texas — that is not the approach that Bitfinex and Tether will take. Instead, he said, the companies are primarily interested in a diversity of Bitcoin's hash rate and thus want to set up mining operations in Latin America and Europe primarily — starting with Lugano. 

Ardoino called the geographic concentration of the mining industry "bad for bitcoin" and the crypto ecosystem — and, in turn, bad for Bitfinex and Tether, the world's most popular stablecoin. 

He added that given geopolitical issues such as the current Russia-Ukraine crisis, one cannot risk having bitcoin's hash rate so concentrated. "Let's say a country eventually says, OK, bitcoin mining is banned, or you cannot mine here, or we'll seize hardware," he said. "You never know, right?"

Something like that has already happened, though. Last summer, China, which had been home to the vast majority of the Bitcoin network's hash rate, took measures to effectively ban the industry. The network's computing power took a hit at first but recovered within a few months.

Still, in Ardoino's view there's no guarantee that the network would recover if something like that happened again. "The world keeps changing. Politics keep changing. There are wars now that weren't two years ago," he said.

Why now?

But while it is true that much of the hash rate is now located in North America, such geographic concentration of the mining industry is not new. Before China's government cracked down on mining, most of the industry was located there — and that had been the case for nearly a decade. So why did Bitfinex and Tether wait until now to get into mining?  

According to Ardoino, the two companies wanted to get into bitcoin mining a few years ago, but it wasn't the right market environment. "The openness of countries for bitcoin has been much better in 2021 and 2022 than it was in 2018," he said.

More recently, some governments — most prominently El Salvador's, which has made bitcoin legal tender — have embraced cryptocurrency as an asset class and currency. 

Earlier this month, Lugano, the Swiss city with a population of just over 63,000, also made bitcoin legal tender. It allows citizens to pay annual taxes and city services in bitcoin, tether (USDT), selected unnamed stablecoins, and Lugano's own LVGA Points token. LVGA Points are tied to the value of Swiss francs, with 100 LVGA Points being equal to 1 Swiss franc.

Ardoino said another reason Bitfinex and Tether chose not to start mining earlier was the lack of good bitcoin mining hardware. He said Enigma, in which Bitfinex and Tether have invested more than $50 million, makes the most efficient bitcoin miners.

According to Enigma founder and CEO Jakov Dolic (former CEO and co-founder of Genesis Mining), the company's miners are both efficient and relatively inexpensive compared with other models on the market. He said Enigma's miners have a power efficiency of 35 joules per terahash (J/TH) with a hash rate of 285 terahash per second (TH/s) and power consumption of 10 kilowatts (kW). 

In comparison, Bitmain's S19 Pro, which also has a 7-nanometer chip like Enigma's, has a hash rate of 110 TH/s and consumes 3.25 kW of electricity, resulting in a power efficiency of 30 J/TH. Put simply, while Enigma's miner isn't the best in terms of power efficiency, it is still among the best in the market, given its higher hash rate.

As for cost, Dolic said Enigma's miners are 70% cheaper compared with average bitcoin miners in the market. "Our complete containerized mining solution is less than $25 per terahash per second (TH/s), compared to an average cost of around $100 per TH/s," said Dolic.

Enigma is based in Zug, Switzerland, and was officially established as a company in 2020. But it had been researching and developing miners since 2016, said Dolic.

Digital Currency Group's mining subsidiary Foundry Digital is also a shareholder in the firm, having invested $10 million before Bitfinex and Tether, said Dolic. Kevin Zhang, SVP of mining strategies at Foundry, confirmed that the firm is an investor and shareholder in Enigma, but he declined to comment on the investment amount.

Enigma plans to ship bitcoin miners to Bitfinex and Tether in the next two to three months. It is not clear what the capacity of Bitfinex and Tether’s mining operations will be or how much hash rate it plans to possess. Ardoino declined to comment on that detail.

Bitfinex and Tether have also invested in another bitcoin mining company, but Ardoino declined to name it. The total investment in this company and Enigma is more than $100 million, he said.

Ardoino also made clear that Tether's reserves will not be used for investing in bitcoin mining operations, which he said would be "reckless." For proof, he said people will be able to reference Tether's attestation reports, which the company has been issuing every quarter since June last year. These reports are supposed to be a record of all the funds backing the stablecoin.

Tether's attestation reports have been the subject of controversy, however, as they omit certain information. Specifically, they do not provide all the details about the stablecoin’s reserve compositions, like what companies or regions their commercial paper and corporate bond holdings come from.

According to Ardoino, Bitfinex and Tether aim to allocate between 20% and 30% of their profits to bitcoin mining operations.

"That is not little money. But it is something that we are happy with, and we are happy to sacrifice it for the benefit of the industry," Ardoino said.