The VP of an investment firm that’s poured $300 million into North American crypto mining explains why now is the perfect time for smaller players – and breaks down the 3 metrics any hobbyist needs to understand.
- Kevin Zhang is vice president at Foundry, a crypto mining financier run by the group that owns Grayscale and CoinDesk.
- He told Insider China’s crypto ban has created North American mining opportunities.
- Zhang also laid out the three metrics that shape the economics of crypto mining.
There’s another way to play the bitcoin market that isn’t buying the cryptocurrency or investing in a futures ETF: mining.
Bitcoin mining involves sophisticated computers solving mathematical problems. The first computer to find a solution is awarded a block of bitcoins.
Bitcoin’s price has been volatile this year, but it has broadly trended upwards. It rose from just under $30,000 at the start of 2021 to an all-time high of almost $70,000 on October 21.
The well-known crypto consortium Digital Currency Group, which also owns the investment firm Grayscale and news website CoinDesk, has expanded into bitcoin mining in recent years. Its subsidiary Foundry USA has deployed $300 million into the North American crypto mining space, developing a top five global bitcoin mining pool in terms of computing power.
“We call ourselves the company that focuses on empowering decentralized infrastructure,” Foundry’s vice president Kevin Zhang told Insider in a recent interview. “All boats rise with the tide – it’s an ecosystem play, so we want to bring financing to other business lines in North America.”
Insider spoke to Zhang about why Beijing’s crypto crackdown has created more opportunities for American bitcoin miners, and we asked him which metrics hobbyists need to understand.
In late September, the People’s Bank of China banned most crypto activity, including mining, announcing in a statement that virtual currencies “are not legal and should not and cannot be used as currency in the market.”
Zhang said that this move, coupled with bitcoin recently hitting an all-time high, has created opportunities for North American miners.
“The bitcoin price is so high right now, and the network competition is so low, because 50% of the network was shut off in China,” he told Insider. “Anyone can be mining and be in profit right now, but the question is whether you are going to be profitable enough for the next half year to pay off your equipment.”
Zhang also said bitcoin mining operates on a ‘U-shaped curve’ – where the most profitable firms are either ‘the little guys’ or the large companies that Foundry tends to support. Individuals with access to cheap electricity can particularly benefit from this dynamic.
“When you have just a few miners, and when you have a lot of miners, you’re more profitable than someone stuck in the middle ground,” he said. “It’s a no-man’s land for those with 100 to 200 miners.”
“If you’re a small individual miner in a dorm room and you have very cheap, or subsidized, power with your board and tuition, your costs are so low,” Zhang added. “That’s where it makes sense to buy one to five mining machines.”
Metrics to watch
Zhang said once an individual has bought a miner, such as an ASIC machine, there are three key metrics they need to understand.
First is bitcoin’s price. This determines the value of a block reward.
“You need to understand the market, and market economics,” Zhang told Insider. “The price of bitcoin plays a role.”
Secondly, the hash rate measures the speed at which a cryptocurrency mining device operates. This can be used to determine when mining is, or isn’t, profitable.
“Network hash rate shows you what level of competition is out there,” Zhang said. “You’re all fighting for the same amount of bitcoin, the same amount is mined every day, so you need to work out your proportional share of what you’ll be rewarded for your computational power.”
Thirdly, hobbyist miners need to keep an accurate log of their input costs – particularly electricity.
“What is your cost of electricity, and where are you on the cost stack?” Zhang asked. “Right now, you’ll probably be paying a lot for electricity – but that’s outweighed by the high price and the low level of competition.”
“The money economics are just so good right now,” he added. “That’s why I’d encourage retail types to do their own research, and to make sure that they understand the market dynamics of bitcoin price, hash rate, and input costs.”