Texas’s Crypto Mining Boom Is Starting to Look More Like a Bust

In an effort to become a haven for crypto mining, Texas has aggressively lured miners with cheap power and favorable regulations.

The companies represent the largest participants in Texas’ crypto-mining industry out of a dozen crypto-mining firms with plans to build facilities. (Bloomberg)

The digital gold rush in Texas is losing its luster as Bitcoin miners grapple with financial woes, leaving behind what some fear will be a wasteland of unfinished sites and abandoned equipment.

In an effort to become a haven for crypto mining, Texas has aggressively lured miners with cheap power and favorable regulations, prompting many to take out billions in loans to buy pricey machines and build out infrastructure.

However, soaring energy costs, a sharp decline in Bitcoin prices and more competition have compressed profit margins and made it difficult for miners to repay debt. Some are on the verge of bankruptcy.

“There are just tons of assets everywhere, it's like a mess.” said Mason Jappa, chief executive at Austin, Texas-based crypto-mining service firm Blockware Solutions. “I got messages about transformers, switch gears, and mobile data centers and containers for mining, they are just sitting there.”

There are a lot of losers if the Bitcoin mining industry goes bust. For one, local authorities provided incentives such as tax abatements that reached into the tens of millions of dollars. The power generation planned that the region sorely needs to avoid another energy crisis may not materialize. Some developers made hefty investments to build out Bitcoin mining facilities. The average cost to have one-megawatt capacity of mining infrastructure is currently around $300,000 in the state, the high end of the range, according to Jappa.

Iris Energy said it would assess how much and when they will build out facilities beyond the initial 20-megawatt construction on their Childress site after closing out two facilities and defaulting on $108 million in loans. The firm planned to have 600-megawatt of capacity at the site. Compute North, which has another 600-megawatt site under construction at Hood County, filed for bankruptcy in September.

Argo Blockchain initially planned to complete its 800-megawatt mining farm at Dickens County earlier this year but the miner has experienced a liquidity crunch. It warned in October that if new financing isn't secured, it would need to “curtail or cease operations.” Core Scientific warned of potential bankruptcy after announcing its plan to build facilities with 200-megawatt of capacity near Dallas.

The companies represent the largest participants in Texas' crypto-mining industry out of a dozen crypto-mining firms with plans to build facilities. They are projected to produce as much as 7-gigawatt of power demand from Texas' grid, with 3 gigawatt coming in 2023, based on announcements and US Securities and Exchange Commission filings.

It will take several years for Lancium, which has two sites with over 1-gigawatt of capacity in Taylor and Pecos Counties, to fill the facilities, a spokesperson said. In addition to miners, the firm expects to host different applications such as high-performance computing.

Riot Blockchain, Argo, Compute North and Core Scientific, Genesis Digital Assets and Bitdeer did not respond to requests for comment.

“A lot of the supply chain issues that were strong during the Covid times are not necessarily a bottleneck factor anymore.” said Matthew Kimmell, digital asset analyst at CoinShares. “What may be a limitation is just their cash on hand.”

Energy costs for miners have been high throughout the year due to Russia's invasion of Ukraine and heat waves across Texas in the summer. The Federal Reserve's tightening of monetary policy and implosions of major crypto firms sent Bitcoin prices down more than 60% this year.

After China banned crypto miners last year, Texas sought to fill the gap as a way to add fuel to the state's fast-growing economy. But because mining hinges on power consumption, the wave of new demand threatens to stress a grid still trying to recover from failures during an extreme winter storm in February 2021 that left millions in the dark for days and more than 200 people dead.

Governor Greg Abbott has touted mining as a way to aid the grid because machines can be quickly ramped down during periods of stress and ramped up to soak up excess wind and solar generation that would otherwise be wasted. The ability to reliably swing output from such large amounts of demand would be a boon, however the rules that would require miners to act a certain way under certain market conditions are still being debated. Critics are concerned that existing practices will enable crypto miners to dodge costs tied to upgrade the grid to accommodate all their demand to consumers.

Abbott's office did not respond to requests for comment.

Texas has about 1.5 gigawatts of crypto mining capacity, mainly Bitcoin, operating with about 37 gigawatts vying to connect to the state grid as of Oct. 20, according to the most recent data available from the Electric Reliability Council of Texas. That queue has more than doubled in six months.

While the queue indicates growing power demand from miners earlier this year, the amount may be inflated. Power brokers and mining companies could have filed multiple applications for the same mining site as those applications do not require deposits.

Some applications may not even come through because those with little experience in Bitcoin mining are likely to abandon their plans, said Ethan Vera, chief operations officer at crypto-mining services firm Luxor Technologies.