This Cryptocurrency startup Is Getting Paid not to “mine” Bitcoin

huge mining ring

Layer1 is a cryptocurrency startup company backed by billionaires like Peter Thiel. In recent months, the west Texas-based company has been working intensively on the construction of steel structures (containers) filled up with state-of-the-art processors that are “immersed” in cooling tanks filled with mineral oil.

Why in west Texas, one’s going to wonder?

Because, thanks to the excess supply of natural gas and a “forest” of wind turbines, there the price of energy – which is extremely necessary for the energy-intensive cryptocurrency extraction process – is one of the cheapest in the world.

“Bitcoin mining is related to converting electricity into money,” says Alex Liegl, managing director and co-founder of Layer1. By next fall, his company will have “set up” dozens of such boxes that will work relentlessly around the clock to convert 100 megawatts of energy into a Bitcoin mining stream. Liegl notes that the average cost of production is about $1,000 per currency – a price that yields a 90% profit margin based on bitcoin’s current price, which is $9,100.

In these circumstances, it is strange that Liegl is excited about the prospect of stopping mining next summer.

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Already this year, west Texas has experienced several days where the thermometer exceeded 100 degrees Fahrenheit. However, in reality, heat and humidity do not make their appearance in the area before August, at a time when the Texas electricity grid is essentially being tested under the weight of the relentless operation of air conditioners throughout the state.

During such a week in 2019, wholesale electricity prices in the area managed by the Texas Electricity Reliability Council (ERCOT) soared from about $120 per megawatt-hour to $9,000 per megawatt-hour.

It was one of only three times in history that the price of electricity production in Texas reached this level. And although this outrageous price lasted only about an hour, it was enough to yield significant profits.

According to SSR analyst Hugh Wynne, Texas power companies made about 15% of their annual revenues during the maximum 1% of those hours (while in more temperate areas like California producers account for just 3% of their revenue from 1% of their respective peak).

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Therefore it turns out that a cluster of Bitcoin mining units is a very good way to compensate for these peaks. Layer1 has concluded with the system managing authority the so-called “demand response” contract, in which it “downloads” the switches directly to its units, thereby allowing the 100-megawatt energy it uses on the network to be directly channeled. “We act as a reinsurer of the electricity network”, says 27-year-old Liegl.

“When we get a shortage in the demand for supply, we will be suspending our operations”.

The best part of the contract, however, is that the company is paid whether an emergency arises in the system or not. More specifically, for its compliance to not mine Bitcoin when it is necessary, Layer1 gets a yearly check equivalent to Nineteen dollars per megawatt-hour of expected energy demand – or about seventeen million dollars.

I’m going to have to go S=since under the long-term contract concluded by Layer1 the purchase cost per megawatt-hour is around $25, the premium essentially ensures a 75% reduction in the total energy price, i.e. it pays less than 1 cent per kilowatt-hour (which corresponds to only 10% of the price paid by domestic consumers).

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Although it seems that the electricity grid operator is paying Layer1 dearly for a treaty that may not arise, especially at a time when the corn pandemic has curbed electricity demand, the lecturer in the department of energy economics, the University of Houston, Ed Hirs, notes that it is a perfectly reasonable agreement. “It’s a much cheaper option than building a new power station or a battery pack for energy storage,” he notes.

While this practice may be a new idea for the cryptocurrency mining industry, this is not the first time such an agreement has been concluded. Two decades ago, industrialist Charles Hurwitz struck a similar deal for the energy-intensive aluminum foundries he bought in the Pacific Northwest but made more money from reselling electricity than from aluminum production.

More recently, companies have been choosing to install radiofrequency devices to control water heating and lighting systems. It is even noted that the network management industry is so “hot” that in 2017 the Italian giant Enel bought the Bosnian Enernoc for EUR 250 million. and Itron converge for EUR 100 million. Dollars. However, the new category that is now emerging is that of companies such as Layer1, which Delurey describes as a consumer-producer.

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As for Layer1, Liegl says that Layer 1’s next step is to jump in other economic cryptocurrency products such as Bitcoin derivatives and similar.

But he also has a tip for anyone still trying to mine cryptocurrencies from their bedroom computer or even through a cloud: “I can’t think of anything more absurd at the moment. It’s like digging a hole in my yard to mine oil,” he says.

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