Not long after writing one of my college thesis on Alternative Models to the Fiat Currency System, I began a serious search into developing an alternative currency in and around Santa Cruz. This endeavor taught me a lot about the mechanics of money and most especially local currencies… topics which I still try to stay informed on as the global economy continues to evolve. Hence, Bitcoin has fascinated me from the moment I heard about it and I’ve gobbled up every article I could find to understand how the heck this currency works, who the players are, how Bitcoins are created, shared, stored, used… and how it may evolve over the coming months and years to come.
One such article struck me recently while doing my usual industry research:
Massive Bitcoin Mines Spring up in Warehouses
The last research I read stated that a total of 107 bitcoin startups have raised a total of $292 million. That includes $176 million raised so far in 2014, which is nearly a six fold increase over 2013 year-to-date, and 53% higher than all of 2013. Xapo, BitPay, Coinbase and Circle have accounted for nearly 26% of the total market capitalization.
These companies are nothing to ignore short term and it is definitely true that Bitcoin has been “trending” as a topic amongst data center sales, channel partners and owner/operators. However, I feel very strongly that anyone talking about tapping some sort of gold mine to be found with those actually mining Bitcoins lack an understanding of HOW they are actually mined today and will be mined in the future as well as HOW MANY are actually mined today and will be mined in the future. For those interested in diving into the details of HOW and HOW MANY, please check out https://www.cryptocoinsociety.com/how-to-mine-bitcoin or the Bitcoin Wiki HERE.
Nutshell, unless there is a DRASTIC uptick in Bitcoin usage around the world over the coming months and years to come, which there simply has not been as you can see from the chart below, those currently investing tens of millions of dollars buying, deploying and managing assets to mine Bitcoin will not be able to sustain themselves.
The economics involved are such that there is only a short window to capitalize on mining, and hence to put this in terms hopefully those of you in the industry can understand, THEY WILL BE UNABLE TO PAY THEIR BILLS AFTER 12-18 MONTHS. Hence, I am trying to warn all those who care to listen to simply be cautious when negotiating with Bitcoin mining companies and DO NOT expect them to be long term tenants.
If you walk into an agreement with one of them, simply realize they’ll be good for 1, maybe 2 or 3 more years worth of income. Signing a 5 or 10 year term however with one of these companies will likely only end in scrapping for a piece of their liquidated hardware assets… though you’ll likely be in line with the different equipment finance companies that made the same mistake you did. If you’re reading this and think I’m wrong here, I am totally open to debating this and would love to hear your logic. What am I not taking into consideration here?
Update: … and thanks to Ken Fromm from www.iron.io, a little Bitcoin humor for ya: