This is an opinion editorial by Bob Burnett, founder and CEO of Barefoot Mining.
It would be fair to say that I entered the world of bitcoin mining through the backdoor. Prior to 2017, I had limited exposure to Bitcoin. That changed when I was approached by an acquaintance who needed access to a large volume of Ethereum mining equipment. Since I had spent the majority of my 30 year career in the personal computing industry, he hoped that I would be able to exploit my network to access the scarce GPUs needed and to design an enterprise class server for the hosts. . My team and I were able to do this, which was the catalyst for the creation of Barefoot Mining, the company I run now. (Note to all Bitcoiners: We quickly focused on Bitcoin only and became Bitfury’s US distributor.)
In 2017, “crypto” was all the rage. Therefore, finding investors to invest in mining ventures was not very difficult, and competition for energy sources to support mining sites at the time was relatively low. Thus, access to mining equipment was the key factor to enter the market. For Barefoot Mining, we had solved this difficult part of the equation and because capital and energy were fairly easy to come by, we were able to ramp up to run the hosting and mining hubs as well.
At the start of 2018, the industry entered a “crypto winter” and the dynamics quickly changed. Investor interest cooled as energy sites remained numerous and access to mining equipment became easier. The mining industry remained in this state until the end of 2020, when the price of bitcoin rose and market momentum quickly pivoted. Based on this catalyst, new capital flowed into the market and mining equipment supply lines tightened almost instantly. For the first time, miners began to see a shortage in the energy markets.
Observing and experiencing these changes revealed to me a pattern that I now call the “miner’s trilemma”. The first axiom of the Miner’s Trilemma states: “In bitcoin mining, three variables – capital, energy, and mining equipment – will always be in play, and at least one of them will always be difficult to obtain. A visual representation of the market and the miner’s trilemma during the last bull run is shown in the chart below:
This contrasts with current market conditions (chart below) in which the availability of capital has dried up, while mining equipment and prices have loosened as well. Access to energy sites remains about the same, a bit difficult. This illustrates the second axiom which states that “when one of the three variables changes from a difficult state to an easy state, at least one of the variables in an easy state changes to a difficult state”.
The importance of the miner’s trilemma is that it gives an excellent set of rules for determining the probability of success of a mining venture. Most mining companies, including mine, started out with an advantage in one of the three key variables, but long-term success and growth allowed pivoting and resolving with the difficult variables. So if you are considering starting a mining business, investing in a private mining company, or buying shares in a public mining company, provide yourself with a consideration of that entity’s ability to solve the miner’s trilemma, whatever whatever the evolution of the difficulty. If they present a solution for each of them, then there is a business basis that competent and experienced management can build upon. In the absence of any of these three elements, the business will ultimately face a massive survival test.
This is a guest post by Bob Burnett. The opinions expressed are entirely their own and do not necessarily relate to those of BTC Inc. or Bitcoin Magazine.