AI Emerges, Yet Bitcoin Miners Persist: Blockspace's Perspective

Those closely monitoring public bitcoin miner markets are well aware of the growing interest in artificial intelligence (AI) and business shifts towards high performance compute (HPC) among bitcoin miners. This trend, which began subtly last year, has now become a strategic focus for numerous prominent public bitcoin miners.

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Core Scientific, Bit Digital, Hut 8, Hive and IREN currently have AI/HPC business lines generating revenue, while Crusoe Energy and Lancium, Cipher, Terawulf, Riot and Bitfarms are either in the development phase or exploring this area. The Stargate Project, announced in January, will see SoftBank, OpenAI and others collectively pledge up to $500 billion to drive AI advancements in the United States. Given these developments, what does the future hold for dedicated bitcoin miners?

Kevin Dede, a managing director of equity research at investment bank H.C. Wainwright, believes there is ample space for both. In a recent episode of the Mining Pod’s Bitcoin Stock Show, Dede stated that although he wouldn't discount miners who are seriously pursuing AI/HPC, he also wouldn't dismiss the prospects of dedicated bitcoin miners.

Does the launch of Project Stargate alter the discussion on AI pivots for bitcoin miners?

According to Dede, the conversation shifted when Core Scientific announced the CoreWeave deal six to eight months ago. Another factor to consider is that bitcoin miners can compete at various scales. Although Project Stargate is centered around hyperscale facilities, there are opportunities for smaller-scale implementations as well.

BitDigital and Applied Digital have demonstrated that success doesn't require hyperscale. There is a significant demand for compute access, and not all customers are hyperscalers.

Riot recently decided to halt its 600-megawatt Corsicana Phase 2 to evaluate it for AI/HPC. Why do you think they made that decision?

Riot has experienced activist investors purchasing stock, which is positive for the stock price. The company has consistently maintained its commitment to bitcoin mining. At their analyst meeting last June, CEO Jason Les stated that they would not venture into HPC.

Riot’s Corsicana facility is outstanding. The question is: is 600MW of HPC worth more than 600MW of bitcoin mining? The demand for HPC is increasing, and the applications are evolving; we're just beginning to explore the possibilities. The real market is the enterprise market, where companies utilize AI to optimize production.

Considering Bit Digital and Core Scientific, which company’s strategy do you think has the most potential?

BitDigital purchased GPUs and leased space in northern Iceland to cater to one customer, who is presumably based in Europe. With mainland Europe being the primary customer for inference compute, Iceland's proximity to Europe is crucial.

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The Enovum deal was secured, and they obtained their first site, which is approximately four megawatts. They've also recently launched another site, aiming for five megawatts initially with plans to scale up to 35 megawatts in HPC capacity this year. Sam Tapar, their CEO, often emphasizes that this acquisition has opened the door to a potential 288 megawatts of HPC capacity.

When assessing the risk, several factors need to be considered. Bit Digital acquired a company with a proven track record of constructing and operating these sites. However, this adds another layer of risk beyond the basic execution risk. There is a risk that they may encounter obstacles during the construction and operation of their subsequent facilities as the year progresses.

As for Core Scientific, they have an impressive team. I questioned their CEO, Adam Sullivan, about how their plans are progressing. He mentioned that many employees in the existing data center world are witnessing limited growth trajectories. If an employee at one of these companies receives an offer from Core Scientific with stock options, they may consider it an attractive prospect.

On the other hand, these new B200 chips they are using are significantly more powerful but also more complex. This might result in delays for CoreWeave’s implementation at Core Scientific’s sites. I believe much of this will be addressed in Core Scientific’s next earnings call in March. They will likely discuss whether they are still on schedule to energize the first large CoreWeave facility in the second quarter and how they have tackled these networking challenges.

Do you think the greater upside of AI/HPC relegates bitcoin mining to the periphery, or can it coexist alongside HPC and AI?

Dede doesn't believe bitcoin mining is disappearing. The concept of a hybrid AI-bitcoin mining data center is intriguing. HPC power usage isn't as consistent as people might assume. It depends on various factors, such as whether they are running a new model or supporting inference. Power loads will fluctuate accordingly.

It's plausible to imagine a host having flexibility in their power purchase agreements (PPAs) to run bitcoin miners when the power isn't needed for HPC. It's simply a matter of adjusting the load.

Upon reflection, it seems there's room for both. We've discussed Corsicana, but there are numerous other sites like those in West Texas. Mike Novogratz wants to transform Helios into an HPC center, but it's in a remote location. Accessing it requires a private plane, and it's a lengthy drive from Lubbock. Moreover, it operates on wind power, which is affordable, but how can inference be run from that site?

When examining business models, the optionality is fascinating. From a hybrid perspective, there is transparency. HPC revenue can be forecasted, and a certain amount of debt can be assumed based on those margins. However, if bitcoin mining continues to operate alongside HPC, there is an opportunity to benefit from a rising bitcoin price and improving market dynamics.

This optionality is an opportunity that some newer HPC-focused companies offer investors. They have a steady HPC stream, and then there's the potential upside of Bitcoin reaching $200,000 this year. That's the compelling proposition. Consequently, many of these companies with experience in both will likely continue to pursue both.

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