Bitcoin Miner Rhodium’s S-1 Cites Halving as Bitcoin’s Biggest Systemic Risk

As more bitcoin mining moves to the U.S., Texas-based Rhodium Enterprises is asking cryptocurrency supporters to bet $1.7 billion on a liquid-cooled, solar- and wind-powered operation that will mine more BTC while creating less pollution.

In an S-1 filing with the Securities and Exchange Commission (SEC) last week, the cryptocurrency firm revealed its plans for an initial public offering (IPO) that would raise money for it to build a second mining farm that would triple its output. It also revealed a window into its thinking about the economics and future of bitcoin as it moves into the year after crypto went mainstream.

The core of Rhodium’s IPO plans center around its use of a technology new to bitcoin mining: liquid-cooled mining computers. Mining is the process by which new bitcoins are created, with miners competing for the right to add a block of validated transactions to the blockchain in exchange for a 6.25 BTC reward and transaction fees.

Rhodium has 33,600 ASIC computers designed specifically to mine bitcoin already pumping out a hash rate of 2.7 EH/s, or exahashes per second. That means it is producing about 1.75% of bitcoin’s hash rate of 154.6 EH/s — the amount of processing power dedicated to mining bitcoin. To put it in perspective, that requires about 137.4 terawatts of power per year — more than Ukraine but less than Egypt.

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It is that power drain and the resulting pollution that casts the biggest shadow on bitcoin’s future as politicians; environmental groups; environmental, social and governance (ESG) investors; and recently more and more average people turn out against crypto mining used by blockchains, including bitcoin and Ethereum.

Read also: Wikimedia Criticized for Taking Crypto Donations Over Environment Concerns

A Better Mousetrap

“The cornerstone of our infrastructure platform is our proprietary liquid-cooling technology,” Rhodium told the SEC. “… Our liquid-cooling technology has many advantages over traditional air-cooled systems,” giving the firm a competitive advantage as it can “predictably and consistently mine more bitcoin with fewer miners.”

The liquid-submerged computers require far less cooling — a huge expense in running any server farm, and particularly one with crypto’s high-intensity and high-powered computers — and can run more efficiently. That means they can either run more efficiently and use less power or be more productive. Rhodium said it believes its mining computers have a 30% to 50% longer life than standard air-cooled machines.

While Rhodium does have a lead in liquid-cooled mining rigs, other manufacturers are turning to the technology. Bitmain, one of the largest producers of crypto mining computers announced on Twitter that it will use liquid cooling to produce a hash rate a third higher than its previous top-of-the-line model.

“Enter a new era of liquid cooling,” Antmain tweeted.

Publicly listed bitcoin mining maker Canaan launched its own liquid-cooled line Tuesday (Jan. 18).

Texas Cool

In its S-1 filing’s risks section, Rhodium revealed its answers to bitcoin’s pollution problem — and the potential holes in it.

In choosing Texas, Rhodium joined a stampede of miners looking for a new home after China banned mining. Aside from a welcoming regulatory environment, Texas has plenty of green energy production from wind and solar. Liquid cooling, it said, will let it operate more efficiently in the hotter and more humid parts of the state where the wind power is located.

Saying it is “dedicated to helping support the environmentally friendly mining of bitcoin,” which it considers critical to bitcoin’s future, Rhodium noted that Texas is the U.S. leader in wind power, supplying 30% in 2020, and has huge potential in solar power (meaning a whole lot of sunshine). Other parts of the country saw that, including upstate New York, where underutilized hydroelectric power attracted mining companies until a state crackdown.

However, it noted that Texas’s power grid is subject to a growing frequency of power shortages, meaning Rhodium’s production will have to stop for those situations.

This leads to a broader industry problem: The strain it puts on the U.S. grid — which is highly regulated — something that helped get it booted out of China.

Environmentalists have criticized crypto’s green power argument, saying it just means other users have to use dirtier suppliers.

Bitcoin’s Changing Economics

While the highly volatile — and currently tumbling — price of bitcoin is a potential problem, Rhodium noted a longer-term problem: halving.

About every four years, the number of bitcoins in a block reward is cut in half, as it has an absolute maximum of 21 million BTC. Beginning at 50 when the blockchain launched in 2009, the block reward is now 6.25 BTC. That’s viable when bitcoin’s price keeps rising, but mining computers are expensive — the top models can crack five figures — and must be replaced regularly.

Otherwise, miners rely on transaction fees, which have already grown from the pennies intended to an average of $2 to $6, well above what is usable for small transactions. As the bitcoin reward decreases — it will end around 2040 — transaction fees will have to go up, which undercuts the usefulness of the blockchain as a currency replacement.

“The reward for adding new blocks to the bitcoin blockchain is subject to halving, and the value of bitcoin may not adjust to compensate us for the reduction in the rewards we receive from our mining efforts,” Rhodium said in its filing.

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While that could mean that bitcoin mining returns to something that can be done on high-end desktops, it would also mean a decline in the number of miners — and the number is what protects the security of the blockchain.

Read also: Crypto’s Double-Spending Achilles Heel

Perception Becomes Reality

Aside from the environmental and regulatory threats, “public perception of bitcoin or cryptocurrencies could be damaged if banks or financial institutions were to close the accounts of businesses engaging in bitcoin- and/or other cryptocurrency-related activities,” Rhoidium said in the filing. “This could occur as a result of compliance risk, cost, government regulation or public pressure.”

Then there’s theft and hacks.

Finally, there’s the Chinese problem: A full ban on cryptocurrencies.

“It may be illegal now, or in the future, to acquire, own, hold, sell or use bitcoin, or other cryptocurrencies, participate in blockchains or utilize similar cryptocurrency assets in one or more countries, the ruling of which would adversely affect us,” the company warned.

And while the threat seems to be fading, a crypto ban in India was a real threat and remains a serious one.

Add that to China, and half the world’s population would be unable to buy bitcoin.