Texas is becoming a new hot spot for bitcoin miners, but not because it has cheap electricity

Home on the range?

Numerous bitcoin miners, both from the U.S. and abroad, are flocking to the State of Texas to build new mining farms.

The Lone Star State's dusty horizon is dotted with massive plumes of fire shooting up out of the ground, keeping the sky alight with a brilliant glow both day and night. This practice is known as "flaring," and is used to burn off excess natural gas. The state's abundance of energy has long captured the interest of bitcoin miners. Recently this includes mining rig manufacturer giant Bitmain, Digital Currency Group (DCG)-backed Layer1, and Germany-based mining firm Northern Bitcoin AG.

As these energy nomads who frequently change locations in pursuit of the cheapest electricity and the strongest regulatory stability find their way to Texas, it's worth noting the advantages and drawbacks that accompany this migration. 

Electricity prices

One advantage of mining in Texas is its abundant natural resources. In fact, some parts of the state are so rich in natural gas that setting it on fire is more cost-effective than storing it. 

However, excessive natural gas does not guarantee favorable electricity prices. El Paso, where Layer1 is building its mining farm, has an average industrial electricity rate of $.05/kWh, which is not a particularly attractive price, especially for some Chinese miners who have been spoiled by prices as low as $.02/kWh thanks to the abundant hydropower in Sichuan Province.  

Although Layer1 CEO Alexander Liegl told The Block that his firm can bring the price down to as low as $0.012/kWh, others have disagreed. A Chinese fund manager who recently did field research in Texas told The Block that the electricity rate varies from 2-5 cents, not counting the additional electricity costs from running the facilities. 

Here is some quick math, courtesy of bitcoin mining machine manufacturer Canaan. 

Using Canaan’s A921 mining machine, a $.03/kWh under a 70 EH/s hash rate will have a payback period of roughly 278 days with the current bitcoin price being around $7,000, and that is already too high, according to Iterative Capital research lead Leo Zhang. Zhang has done extensive research on mining in China and the U.S. 

“If you are a Chinese miner and [the payback period] is longer than 8 months, you lose your patience,” Zhang told The Block. 

However, as hash rate increases, the payback period will only stretch longer, meaning that if bitcoin's price does not shoot higher and electricity prices don't drop, miners will be running at a loss for a longer period. 

“Before they can turn a profit, miners have to keep raising rounds of funding to sustain themselves,” said Zhang. 

Infrastructure costs

The electricity rate is not the only thing miners need to worry about. The cost to build the mining infrastructure, or the capital expenditure (CapEx), is making some foreign miners think twice before moving to Texas. 

“Texas is a good place - [it has] abundant power resources. We are only concerned with the initial construction cost - it’s too high compared to China,” said the Chinese fund manager who requested to remain anonymous. According to him, the CapEx in the U.S. could be three to five times higher than in China. 

“A lot of places [in Texas] are advertising [an electricity rate] of 2.3 cents or 3 cents, but a lot of them don’t have much of the right infrastructure,” said Zhang. “Once you consider hiring staff, putting up warehouses and networking infrastructure, the cost is much higher.” 

Besides, cooling also incurs additional costs. Just like regular computers, mining machines need to dissipate heat when running continuously at a high capacity. Miners who want to operate in Texas need to combat the region’s year-round high temperatures with cooling mechanisms. 

Layer1 CEO Alexander Liegl said the firm has designed mining units that pack cooling and mining chips together, which can increase the lifespan of mining infrastructure and reduce one-time CapEx. However, for some of the older miners in the space, adopting this new technology may be less viable. 

“Overall, this is the right direction for industry to go,” said Zhang. “People have been talking about cooling mining units for quite some time, but nobody has done it because the mining cycle is volatile and miners have to make decisions within several months. Therefore they stick with old infrastructure for years and years.” 

Still, why Texas? 

If neither the electricity rate nor the infrastructure cost is especially favorable, why are miners still choosing Texas? 

Regulatory stability is key, several industry participants told The Block, including the Chinese fund manager and a trader who runs a mining farm in China and is considering Texas for his second farm. 

The China National Development and Reform Commission previously listed bitcoin mining as an outdated industry that needs to be eliminated, only to remove it from the list in early November. However, the Chinese government’s mercurial attitude has trained miners to always be vigilant for potential crackdowns. 

Northern Bitcoin, a Germany-based mining firm, also cited the same reasons for their interest in Texas to move.

"We took the decision to go to Texas, as there we find sufficient large quantities of electrical energy predominantly from renewable sources. At the same time we get good prices under stable legal framework conditions," Northern Bitcoin head of corporate communications Hans Joachim Dürr wrote in an email to The Block. 

For companies like Bitmain that operate on a global scale, being in the U.S. may also help with fundraising and global sales, Zhang and Liegl speculated. The bitcoin manufacturer has reportedly filed an U.S. IPO application with the Securities and Exchange Commission (SEC). Strengthening its U.S. presence at this time may win the firm a favorable decision from the U.S. regulator and pave the way for its potential IPO roadshow. The U.S. presence may also help with the company’s mining machines sales, according to Zhang. 

Finally, mining in the U.S. may require less social capital, according to two industry participants. 

“In China, mining is a dirty business,” said Zhang, referring to the fact that bitcoin miners in China usually need to have a deep understanding of the local political and social culture, and possess a substantial social network to set up their mining business.