WORLD CUP
By the year 2036, Bitcoin mining looks nothing like it did five years ago, much less ten. Long gone is the model of Bitcoin miners that dominated the landscape of the early to mid-2020’s. These large, often publicly traded, mining companies looked for large tranches of cheap power in mostly first-world countries they could monetize at scale. These corporations did not generate their own energy, nor did most design and manufacture their ASICs. They looked for a confluence of attractive power terms from an electric utility, available land near substation infrastructure, and timed the purchase of ASICs for as short a payback period as possible.
The compressing margins had already strained this business model by the middle of the decade. Then the explosion of artificial intelligence and high-performance compute (AI/HPC) data centers created a more profitable use of grid connected electricity. This effectively ended the availability of power for public Bitcoin miners in the markets they had adapted for. Many simply took their model and altered it slightly to accommodate the AI/HPC data center buildout. The process was similar, and the companies who successfully pivoted were rewarded by their shareholders. The opposite was true for those public mining companies who failed to build more traditional data centers
As the era of public Bitcoin mining companies ended, governments started to notice the advantages of Bitcoin mining for expanding and managing a national grid. Rapid growth in generation commonly outpaced transmission capacity necessary for broader grid connectivity, creating pockets of electricity that could not be delivered and utilized. Several nations possessed surplus energy at off-peak hours, but deficits during peaks in the morning and evenings. Many of the grids throughout the Global South lacked a buyer or high-capacity transmission infrastructure to export surplus energy on day ahead markets.
There was a growing realization that mining Bitcoin with the excess electricity was akin to exporting the power over the internet, rendering the expensive cross-border transmission infrastructure unnecessary for this specific sales activity. Countries began to use the design of mineral extraction deals as archetypes. In those arrangements, a joint venture or special purpose vehicle was formed between a foreign mining company and the government. The mining company would extract the mineral, but the country received a royalty in the form of a predetermined percentage of profits given it was the resource of the nation.
The sovereign level Bitcoin mining deals were similar. The surplus power was a national asset just like minerals in the ground, but the difference being the temporal aspect of the electricity. Every hour that excess was not monetized, that electricity was unproductive, thus minutely changing the economics of the power plant that generated the electricity. If hours turned into days, months or even years, the finances of the mostly state-owned electric utilities deteriorated. Countries increasingly followed the pioneering nations like Bhutan into similar sovereign level Bitcoin mining deals as they realized they couldn’t afford inaction.
In the late 2020’s, the U.S. and China played tug-of-war with the world economies via their digital currencies. The Americans exported the dollar through stablecoins, while the Chinese offered cheap debt if denominated in the Renminbi and offered swap lines with countries in the Digital Yuan, their central bank digital currency issued directly from the Bank of China. “Middle powers”, or countries with excelling economies and ability to influence their region but were a rung below great power status, sought to extricate themselves from the middle of the American-Sino economic struggle. For many, Bitcoin was such an escape hatch.
Take for instance the Strategic Bitcoin Reserve (SBR) legislative proposal in Brazil in 2026. Not only did it codify the country’s ability to put up to 5% of national reserves into Bitcoin, but it also abolished capital gains tax on Bitcoin and allowed payment of taxes in Bitcoin. Other middle powers followed suit with similar adoption measures. By leaning into alignment at the state or citizenry level with a neutral reserve asset not controlled by either America or China, they were able to avoid the trap of choosing one financial system and boxing themselves out of the other.
For those countries that assumed this strategy and possessed any measure of energy independence, Bitcoin mining became the most cost-effective method of accumulation. Some energy heretofore exported to neighbors was kept for the purpose of Bitcoin mining. Abundant energy potential without nearby offtake or grid connectivity that was previously deemed nonviable for development was now prioritized. Such projects now became a source of pride as they expanded the energy portfolio of the country while simultaneously creating a measure of economic independence.
Examples of this type of adoption were pockmarked all over the globe. Russia partially pioneered the strategy by turning isolated energy production in Siberia into sanction proof assets during the war with Ukraine. Turkey lessened exports to countries like Bulgaria and Iraq and further developed hydroelectric generation in the eastern part of the nation. Brazil and India similarly developed the plentiful hydroelectric potential in the Amazon and Himalayas respectively, far from population centers along the coast. Indonesia and Malaysia finally found a suitable use for the vast geothermal energy on Borneo Island. Ethiopia turned their private electricity sales to Bitcoin miners into more of a state pursuit with profit share between miners and their sovereign wealth fund.
These state involved Bitcoin mining operations served as a sandbox to advance grid management practices using curtailable electric load or reserve capacity. While pundits for years argued whether battery energy storage systems (BESS) or Bitcoin mining was the better dispatchable demand, it turned out the answer was a combination of the two because of differing and complimentary characteristics. Bitcoin mining can handle large scale load shedding or absorption for long stretches of time, while batteries can respond in milliseconds with precision but lack long-term management ability due to finite storage capacity and limited cycles over their lifespan.
The combination of economic resiliency and grid improvement that these nations enjoyed from Bitcoin mining created envy in their regional neighbors. In about half a decade, sovereign level Bitcoin mining projects went from viewed as risky to essential. Even countries with expensive electricity tariffs found it more economical to institute Bitcoin mining than to deal with the variability of renewables with BESS alone. ASICs, even ones several generations old, sold at a premium for a time as the sudden FOMO-driven demand took hold. Before long, it was more unique to find a ministry of energy without Bitcoin mining integration than one with such a program.
Now that it is 2036, we will experience the next halving event this year in which the block reward will drop to 0.39 Bitcoin per block. Luckily, Bitcoin becoming extremely valuable as a global macro asset, exceeding the market cap of gold, caused nations to use the digital asset as a neutral reserve asset in trade between different economic and currency blocks. This drove more large transfers to the base chain for immutability, subsequently increasing revenue from fee collection which surpassed the value of block rewards. Still, the margins of mining have continued to compress because of global adoption at the state level and created an area of geopolitical competition.
Early Bitcoin enthusiasts lament the state capture of the mining industry, but unfortunately it was inevitable from a game theoretical perspective. As Bitcoin gained adoption in the underpinning of the global financial system, the production of the asset became an issue of geopolitical importance. No private industry had the ability to compete with national governments in the aspects of scale, coordination and control of energy. In a sense, the only way to avoid the government concentration of Bitcoin mining would have been for the Bitcoin network to stall in its adoption somewhere short of becoming the most prominent neutral reserve asset on the planet. If that had been the case, Bitcoin mining would have remained a private sector industry, but the network would have never gained significance beyond a niche alternative asset.
That’s not to say that the mining industry is operated completely by governments. Public private partnerships are the backbone of the space, much like the energy industry of ten years ago. While petrochemical companies are private sector entities, they are heavily reliant on licensed government-owned oil and gas deposits. Similarly, independent power providers build electric generation facilities to sell energy for a profit, but they must jump through regulatory hoops and market to an electric utility that is at a minimum under government oversight, if not owned outright. Bitcoin mining began to operate under a similar paradigm in that private companies built and operated the data centers but with government sanctioned contracts outside of very rare circumstances.
The companies making the most profit in the space are those that design and manufacture ASICs. These companies are highly specialized and export controlled in the ways that chip companies were in the 2020s during the initial AI boom. These corporations are domiciled in either the U.S., China, or countries closely aligned with one of the two. Other countries could not compete with the chip design advances and other technological byproducts of the defense tech race between the two great powers.
Given that mining efficiency is a source of national advantage, the research and development of machines that provide that edge has been partially funded by government grants and spurred by classified technological information. In exchange for that aid, the government disqualifies or approves foreign sales through legislation that looks similar to International Traffic in Arms Regulations (ITAR) or the CHIPS Act. Access to cutting edge ASICs by countries not sophisticated enough to design and manufacture their own are sweeteners for trade deals much like access to NVIDIA chips were during the AI boom.
While the cypherpunks of the early part of the century would bristle at the nation state involvement of Bitcoin mining, in an odd way the decentralization of the network is as strong as ever. The proliferation of hash rate has guaranteed that no single actor could ever attack the network. Additionally, any emerging threats to the network created by a single nation would quickly supersede disagreements and temporarily unite the rest of the world against that country as a rogue actor threatening the global financial system. While many countries kept their fiat currencies as the backbone of their economies, every country on earth recognizes the value of Bitcoin therefore allowing individuals to live on a Bitcoin standard in every corner of the world. If Satoshi had to choose between decentralization of money or the proof of work algorithm, he likely would have chosen the former. Let’s hope that’s the case at least, because that’s what happened.
This piece is featured in the latest Print edition of Bitcoin Magazine, The 2036 Issue. We’re sharing it here as an early look at the ideas explored throughout the full issue.
