Bitcoin Pivots to AI

Nosebleed territory June 11, 2024 [WEBSITE]( | [UNSUBSCRIBE]( A successful transition could send these companies' valuations into nosebleed territory. Bitcoin Pivots to AI CHRIS CAMPBELL Dear Reader, In the early days of the oil industry, oil companies focused on one thing: extracting and refining oil for fuel purposes. That’s obvious. But… then, over time, we realized how much stuff we could make out of petrochemicals. Plastics. Fertilizers. Solvents. Rubbers. And more. As the demand for these products grew, the forward-thinking oil companies saw an opportunity to diversify their business. Thus companies like Standard Oil (now ExxonMobil) and Shell began investing in research and development to create new petrochemical products. They leveraged their existing infrastructure, such as pipelines and refineries, to produce chemicals like ethylene and propylene - essential building blocks for plastics and such. This pivot allowed oil companies to tap into a new, high-growth market while reducing their reliance on the volatile prices of crude oil. The petrochemical industry offered higher profit margins and more stable demand compared to the boom-and-bust cycles of the oil market. Although this transition wasn’t without risks, the oil companies that successfully navigated the pivot to petrochemicals made out like bandits. Today, petrochemicals account for a substantial portion of revenue for many major oil companies, helping to diversify their business and offset the impact of fluctuating oil prices. Right now, the SAME EXACT dynamic is playing out with Bitcoin… but instead of microplastics we’re getting AI. Below, our Altucher’s Investment Network colleague Ari Goldschmidt joins us to talk about why Bitcoin miners are pivoting to artificial intelligence… And what it could mean for investors. Check it out below. Attention! Before You Read Any Further… Before you read any further in today’s issue, an urgent situation needs your immediate attention. I’ve just unlocked this upgrade to your Altucher’s Investment Network subscription, with 3 new benefits specifically designed to show you how to make a fortune in 2024 and beyond. [To see how to claim your upgrade offer, just click here now.]( Once you’re done with that, read on to see today’s issue… Bitcoin Miners Beat the AI/Crypto Power Drain ARI GOLDSCHMIDT Amazon has a problem. The world's largest cloud computing company, with 31% of the market, can’t seem to find enough energy. Its massive data centers, each of which houses tens of thousands of computers, can require as much power as a small city. With demand for its data centers showing no signs of slowing down, Amazon needs to get increasingly creative with accessing energy. So, in March, the company bought a data center powered by a nuclear power plant. The campus, located some 129 miles northwest of Philadelphia, sits in a rural part of Pennsylvania where you’re more likely to see dairy cows than computer hardware. Land in this agricultural community is generally cheaper than near big cities, which makes the $650 million Amazon paid for this 1,200-acre campus even more astonishing. Amazon’s interest in the land can be pinpointed entirely on one factor – the Susquehanna nuclear plant that sits adjacent to the property. Susquehanna is the eighth largest power plant in the US, pumping out a maximum of 2.5 gigawatts (GW) of power every year, enough to power roughly 2 million homes. Amazon’s new campus will consume a whopping 960 megawatts (MW), or roughly 40% of Susquehanna’s capacity. The deal is just one of many that Amazon has made in recent years to ensure its access to low-cost, reliable power. Amazon has 3 utility-scale renewable energy projects in Ireland that collectively generate 229 MW annually. Another project will add 75 MW of natural gas powered fuel cell capacity to power 3 data centers in Oregon. All told, the company has 230 renewable energy projects underway with the potential to generate 10 GW around the globe. At the rate that Amazon is growing, they’re going to need all the capacity they can get. Amazon, of course, isn’t the only cloud business vying for new energy. Microsoft has similarly committed to developing 10.5 GW of energy. Meta has signed up to bring 9.8 GW of renewable energy to market by next year in the US alone. These energy projects, which can take up to a decade to bring online, have been in the works for years to support the growing needs of big tech. And this might be just the tip of the iceberg. Demand for data centers used for generative AI has exploded over the past two years as Microsoft, Google, and Meta have kicked off an arms race to dominate the massive industry. While typical applications are energy-hungry, AI applications are downright ravenous. According to some estimates, Google’s new AI search capabilities require nearly 23-30x more energy than a typical Google search. It's no wonder that tech leaders like Sam Altman, Mark Zuckerberg, and Elon Musk have all sounded the alarm on energy security. And while you might think this would be good news for local power companies, renewable energy technologies, or oil companies, the biggest winners might actually be crypto miners… The Problem of Stranded Energy It’s no secret that US power infrastructure is a mess. A report published by the US Department of Energy in 2015 found that 70% of transmission lines are over 25 years old. The power transformers responsible for stepping down voltage have an average life of 25-40 years, and are, on average, already over 40 years old. One of the biggest problems for data center operators (and renewable energy adoption) is the grouping of the US transmission system into 7 largely isolated transmission regions. There is simply not enough transmission capacity to move large quantities of power between regions. The result is that power ends up “stranded” – one geography could have an abundance of clean, cheap, energy while another area might be struggling to meet their needs. This is an especially challenging problem for renewable energy adoption. Since both solar and wind power are unpredictable (they need wind/sun to work optimally), regions with a large amount of renewable energy can end up with more energy than they know what to do with on sunny/windy days. One of the industries that has been quick to take advantage of this opportunity is cryptocurrency mining. You see, cryptocurrency mining is an energy-intensive process by nature. Miners compete to solve complex computational puzzles, and the more computing power they have, the better their chances of earning rewards in the form of new crypto tokens. But all that number-crunching requires an insane amount of electricity. To cut costs as much as possible, large crypto mining firms have set up data centers in areas where stranded power results in some of the cheapest rates in the world. For example, miners in west Texas can pay less than 3 cents per kilowatt hour, far less than power prices in energy-rich countries like UAE, Saudi Arabia, and Qatar. Before setting up shop, cryptocurrency miners will typically arrange Power Purchase Agreements (PPAs) with an energy provider to lock in long-term agreements (usually 10-25 years) to receive power at a fixed price. These PPAs allow energy providers to earn revenue from power that would otherwise go unused while cryptocurrency miners can reduce risk by locking-in long term costs. The deal is win-win all around. To keep politicians and local communities happy, cryptocurrency mining companies typically also have demand-response agreements in place. Basically, these agreements require miners to power down their energy-guzzling rigs when the power grid is straining under peak demand. In exchange, miners get reimbursed for the profits they lose by turning off their machines. This can result in some big money. Last August, when a scorching heat wave hit Texas, cryptocurrency mining firm Riot Platforms earned a staggering $31.7 million by slashing their power usage for a few days. For the power companies, this flexibility is a godsend. Instead of having to deal with blackouts or fire up expensive, inefficient "peaker" plants during times of high usage, they can simply call upon their mining partners to temporarily cut their consumption. This arrangement has worked beautifully over the past few years. As crypto prices have skyrocketed, miners have been able to return handsome profits to their investors. However, a change this spring has required miners to consider pivots to their strategy… The Pivot to AI, How Miners Can Make A Killing Last month, the Bitcoin network underwent a big change. Every four years, Bitcoin experiences a programmatic change called the “halving.” As you know, there’s a fixed number of 21 million Bitcoin that will ever be produced. Right now, about 19.7 million of those Bitcoin have already been produced. Prior to the halving, about 947 Bitcoins were produced each day. However, beginning in late April, that number was halved to just 473 Bitcoin per day. As a result, Bitcoin miners, who are responsible for helping to process transactions, now earn just half of what they were making earlier this year. In time, the price of Bitcoin could double and Bitcoin miners will be back to earning the same as they were prior to the halving. In the meantime, Bitcoin miners have begun looking for other opportunities. One area where many Bitcoin miners have set their targets – AI. For one thing, the core needs of AI computing are very similar to mining cryptocurrency... Both require data centers with access to cheap and abundant power. By expanding beyond Bitcoin, miners are also able to reduce the risks from the up-and-down fluctuations of cryptocurrency prices. Although the AI businesses are still a small part of cryptocurrency miners' operations, they represent a fast-growing segment. Iris Energy (IREN) is expecting that profits from AI cloud computing services will triple this year, from about $4.2m to a conservative $13.8m on an annualized basis. For now, this number represents just about 10% of IREN’s profit but will fall to 5% once the company doubles its Bitcoin mining capacity later this year. Still, I would not be surprised to see IREN look to invest more aggressively in adding AI capacity within its data centers in the coming quarters. Of course, IREN isn’t the only cryptocurrency miner with AI ambitions. Mining firm Core Scientific (CORZ) announced a $100m contract to lease 1.5% of its total planned data center capacity to AI cloud provider CoreWeave. Core’s management is looking to transition as much as 50% of their data center capacity to AI to take advantage of the 3-5 year wait time for new U.S. data center capacity from traditional providers. The company is currently in talks to lease its capacity to several large tech companies. Other crypto miners that have begun experimenting with a pivot into AI data centers include TeraWulf (WULF) and Hut 8 Corp. (HUT). Neither company is as far along as Core or IREN. One important catalyst driving the change? Money (what else). Because of the risks associated with crypto mining, company valuations for miners are usually between 5-10x EV/EBITDA. By pivoting into data center companies, these miners stand to not only make more money but also pivot their multiple into the range of 20-25x. So, what's not to like? Risks While the pivot from crypto mining to AI data centers is compelling, it comes with a healthy dose of risk. For one thing, there’s no certainty that these companies will succeed in their pivot. Of course, if AI data center growth slows, it could make miners transition that much harder. On top of this, there are also risks associated with the price of Bitcoin. Until these miners complete their transition to AI data center businesses, they’ll still be exposed to the wild price fluctuations of cryptocurrency. If cryptocurrency prices drop off, the mining companies with the worst balance sheets might not survive long enough to make the transition. We’ve seen miners go bankrupt during past crypto bear markets (including Core Scientific) and it would not be surprising to see this happen again. For all of these reasons, I’m reluctant to officially recommend any of these miners. While the opportunity is exciting – and I think it's likely many of them will succeed in their transition to AI in time – there are a lot of risks these companies really can’t control. Sometimes a company can have a great product and still be a lousy investment. In this case, data centers plugged into cheap power are a great product. I wouldn’t go so far as to say it is a lousy investment, but it's definitely risky. Conclusion At the end of the day, the opportunity for crypto miners to pivot into the AI data center game is about as tantalizing as it gets. We're talking about companies that already have expertise in managing massive computing operations and access to some of the cheapest power on the planet. Adding AI workloads leverages their existing assets in a major way. But let's be real – the risks of this transition are high. A prolonged crypto winter could knock some of the weaker players out of the game before they get a chance to make this pivot. And even if demand for AI computing remains red hot, there's no guarantee these companies can successfully execute on diversifying their business models. That said, the potential rewards are simply too juicy to ignore. A successful transition could not only significantly boost profits, but completely re-rate these companies' valuations into nosebleed territory. We're talking about multiples as much as five times what they currently trade at. For investors, it's a high-risk, high-reward scenario. Those with the stomach for volatility and the ability to hedge out the crypto exposure may want to start doing some due diligence. The leaders making meaningful headway into AI could be in store for some mega gains down the road. As for the rest of us, it's probably best to watch cautiously from the sidelines for now. Let's see if these miners can successfully pull off their ambitious pivot plans. Based on how the circumstances evolve, I may potentially consider officially recommending an investment in one or more miners. Best, Ari Goldschmidt Senior Analyst, Altucher Confidential Rate this email Like Dislike Thanks for rating this content! Looks like something went wrong. Please try to rate again. [“90 will be the new 40” because of THIS]( “Sometime in the next 10 years, we think you're going to be able to... reboot yourself, so that... 90 will be the new 40.” – Newsweek According to this new presentation… This will be the greatest medical breakthrough in human HISTORY. [Click here to discover what it is.]( You Might be Interested in... [Jim Rickards 2024 Election Prediction: Biden OUT By May]( [Ethereum Kills Ethereum Killers]( [Only around 4 in 100 Ai stocks can make it. 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