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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.”
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.”
Check out: Personal Finance Insider’s picks for best cryptocurrency exchanges
US banking regulators are looking to clarify crypto rules in 2022 – The Verge
One of them is already working to make banks’ responsibilities clearer
The Federal Reserve, Federal Deposit Insurance Corporation (or FDIC), and Office of the Comptroller of the Currency (OCC) have issued a joint statement announcing a plan to clarify the rules and regulations around how banks can use cryptocurrencies over the next year (via Bloomberg).
The agencies say they’re focusing on setting expectations for what banks can do when it comes to holding crypto, allowing customers to obtain crypto, issuing their own stablecoins (or cryptocurrencies whose value is tied to a fiat currency like the US dollar), and taking crypto as collateral for loans and keeping it on their balance sheets. According to the letter, the goal is to make sure consumers are protected and that banks act responsibly. The regulators also say it’s an attempt to make sure the financial industry isn’t used to launder ill-gotten currency, something the Treasury Department has been focusing on recently.
The OCC has already made moves in this direction — on Tuesday, the acting comptroller released a letter clarifying decisions that the office had made throughout 2020 and early 2021. Now, the letter says, banks will have to ask permission from regional regulators before getting into certain crypto fields.
Previously, the Comptroller said banks were allowed to hold cryptocurrencies for customers as well as assets being used to back stablecoins. Banks were also told they could use stablecoins and act as nodes on blockchain networks. While financial institutions will still be able to carry out these activities, they’ll have to be able to prove to regulators that they can do so safely and responsibly.
These announcements come as some crypto companies have skirmished with regulators over what legal classifications their products fall under. Recently, Coinbase canceled its Lend program after a public feud with the Securities and Exchange Commission over whether what it was selling counted as securities (and would therefore fall under heavier legal scrutiny). The Treasury has also proposed that large cryptocurrency transfers be reported to the Internal Revenue Service, and has asked Congress to start regulating stablecoins.
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