Bitcoin Mining, Luxor and the New Energy Future (Part 1)

This is the first essay in a four part series on how energy is produced, how we consume it, and the challenges we face when scaling energy systems. The series is fact-driven, but I’ll weigh in with more opinions as the series progresses.

Part 1 (Production and Consumption) is nearly opinion-free, but parts 2 and 3 will be opinionated based on the conclusions I draw from fact-based research. Part 4 will be a private internal memo directed towards Luxor as a call to action for our team.

If you find this compelling and want to join the fray, we’re hiring!

The articles series will be as follows:

1. Energy production and consumption
2. Electrification and its benefits
3. Challenges to electrification and how Bitcoin mining solves them
4. Luxor’s role in all of this

This piece will outline how, over the next 50 years, Bitcoin mining (and other interruptible / flexible loads) will fundamentally change electricity generation, transmission, consumption, and the markets that tie all of this together.

(Also, all references are inline hyperlinks because citations are for nerds).

Why Do I Care?

Why is it relevant for me to be writing about energy? I am the CEO of Luxor, one of the largest Bitcoin mining pools in the world, with an emphasis on hashrate as a new and exciting asset class.

This document is written from the perspective of a major producer, refiner, and trader of a wholly energy-backed commodity, known as hashrate, which requires the consumption of a phenomenal amount of electricity to produce. As a participant in this electricity-backed commodity industry, it is critical that I understand and leverage every opportunity in the macro-environment in which we are operating.

If you’re curious about my views on this topic in depth beyond this article, I have been on several podcasts discussing the idea of hashrate as a commodity: What Bitcoin Did, Stephan Livera, Bitcoin Bottom Line and Tales From the Crypt, among others.

Why Should You Care?

The target audience for this piece is anyone who consumes energy. The people who will find it most useful will most likely be mining or energy investors, Bitcoin miners, energy producers, or anyone interested in joining a company at the forefront of this market. Investors can use this article to evaluate and solidify their investment theses. Miners can use it as hopium during this trying time. Energy producers can use it as a new or different perspective on the trends as I see them.

Let’s jump into it.

How We Produce and Consume Energy Today (Part 1)

The world is at an energy crossroads - we are realizing that there will never be enough fossil fuel to ensure that humans will be able to flourish into the next century (see Hubbert’s Peak Oil Theory).

Still, we must consume more energy - a truly staggering amount more - if we want to maintain and improve our quality of life. Most energy debates center around the carbon impact of fossil fuels. I will deliberately sidestep this political landmine for the sake of our sanity. Instead, we’re going to focus on other, non-carbon related reasons that create incentives to minimize our reliance on fossil fuels for primary generation: namely, resource scarcity and other commodity-based risk factors.

Given the highly advanced, interconnected nature of modern society, human’s require more energy than ever to grow and thrive

It is a fact of life that, as humans consume more energy, the average quality of life increases and the population grows. More generically, as humans are able to capture more of the total energy available to them, so their level of technological achievement advances in kind (this is known as the Kardashev Scale). Humans must necessarily consume more energy if we want to advance as a species, and this poses a huge problem - we are going to run out.

Sustainability

The term sustainable has been corrupted in the current political arena to mean “green”, “low carbon,” “low emission,” or “eco-friendly.” At face value, these are valiant targets, but for the duration of this document, sustainable specifically means lasting 1000 generations (which is roughly the current history of modern humans).

Sustainable energy generation is the only way to ensure our children’s children will be able to prosper just as much as we have. Further, as richer, developed countries transition to sustainable sources, fossil fuels will be more readily available for emerging countries. Fossil fuels will be necessary transition fuel sources as developing countries make the move towards renewables. Because sustainable energy sources are constrained by variable energy inputs (for solar, the sun only shines so much and, for turbines, the wind only blows so hard). Additionally, sustainable energy is not constrained just to fuel inputs, but to raw materials as well. There is a limited amount of cadmium telluride (CdTe) and copper indium gallium diselenide (CIGS) for solar panels (among other materials).

Since these materials are scarce, one of the challenges is creating maximally efficient ways to harness this energy.

The End of Fossil Fuels

Fossil fuels have served humanity incredibly well. The quality of life we enjoy today is solely attributable to fossil fuels; they are cheap, easy to convert, and incredibly dense. Unfortunately, they are not sustainable. There may be arguments that fossil fuels will last more than the predicted 50-100 years, but even if they last 10 times longer, they will eventually run out.

With that in mind, we must look to energy sources outside of the earth’s crust, or find one with a lifespan several orders of magnitude longer than current fossil fuels.

The only sources of energy which will last us more than 1000 generations are the sun (solar and wind power), hydraulic force (hydro dams), and atoms (nuclear).

Nascent Nuclear

It is true that nuclear disasters like Chernobyl and Fukushima have hindered the growth of nuclear technology in our global generation mix. In some countries, fear has led to complete decommissioning of functioning nuclear generator fleets. A growing number of experts are waking up to the realization that nuclear in both its current large-reactor form and in new micro configurations are going to be absolutely vital during the coming energy transition. I believe nuclear generation is going to undergo a Renaissance in the coming decade and that Bitcoin mining is going to be the digital throttle that throws nuclear development into overdrive.

Nuclear power will be an incredibly large part of the energy equation over the next few generations. Current uranium sources will last ~5x longer than the remaining reserves of fossil fuels and there are technologies which would make it possible to create effectively infinite fissile material from sea water. These technologies are in their infancy and are nowhere close to being economically viable yet. Either the cost to extract the uranium must come down or the value of uranium must come up. Currently, it costs around $500 / lb to extract uranium from seawater; compare that with a $45 / lb average price of uranium in 2021, and the gap is quite large. Note that this is the cost to get unrefined Uranium, which needs to be refined to U-235 to yield roughly .7% useable nuclear material.

Harnessing the Sun and the Weather It Creates

We generally harness energy from the sun in 3 ways, all of which have major shortcomings versus traditional fossil fuel sources.

By far, the largest downfall of renewable energy sources is intermittency; no renewable energy source readily dispatchable 100% like fossil fuels. Another major downfall of renewable energy is that the sources are generally stranded; hydrodams, windfarms and solar farms aren’t necessarily optimally placed near population centers (cities) and transmission over distance is expensive (not to mention that a unit of energy loses power over time when it is transmitted). Also, hot places with sufficient irradiance levels and strong, sustained winds are generally not desirable places to live.

The sun is largely responsible for these methods of energy capture:

Solar - capturing the sun’s power directly through photovoltaic cells

• Pros
• Abundant in many areas. The sun generally shines in low-latitude locations.
• Low maintenance. Once erected, very little is required to keep it operating.
• Long life span. New-gen solar arrays can last over 20 years
• Cons
• Expensive. Generally some of the highest upfront capex
• Intermittent. The sun stops shining at night 😉
• Low density
• Lowest average capacity factor of all renewables
• Poor recyclability with current technology

Wind - energy from the sun causes the wind to blow, which can be used to turn turbines

• Pros
• Low cost / watt hour
• More predictable than solar. Windy places are generally consistently windy throughout the day / year.
• Cons
• Wind is not ubiquitous
• Basic, routine maintenance is dangerous and expensive

Hydropower - the sun causes water to evaporate, which creates rain to fill reservoirs which power hydrodams

• Pros
• Lowest cost / watt hour
• Historically, very reliable seasonal output, though that could be changing for certain areas
• Low maintenance
• Cons
• Least ubiquitous / most remote.
• In freezing climates, may be inoperable in the winter
• Significantly impacts local ecosystem by flooding entire valleys
• Most expensive capex per MW

All of these are primary energy sources which, when converted into electricity, can be injected into the grid and used by consumers.

Primary vs Secondary Energy Sources

Primary energy sources are unconverted or original fuels; oil, natural gas, coal, wood, uranium, blowing wind, flowing water, biomass, and sunlight are all examples of primary energy sources. There are some energy consumers which can use these directly for their given task; furnaces and water heaters use natural gas, fireplaces use wood and steam-powered engines use coal but generally primary energy sources are refined into secondary energy sources.

Secondary energy sources have been converted or stored. These include: gasoline, liquid fuel oil, biofuels, hydrogen, heat and, most importantly electricity.

Electricity becomes the great unifier in the new energy future - which will be the focal point of Part 2