Don't Drink The Kool-AId

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Is AI “brat”? We don’t know. But the term – just like brat, bet, cap, or basically all Gen-Z slang – has gone the way of most buzzwords: no one really knows what it is or what it means, but it gets the people going. 

So it should be no surprise that bitcoin mining, an industry so laden with hype, should embrace perhaps the only sector that is more poorly understood by the wider investment community than itself. Over the past year, public bitcoin miners specifically have increasingly leaned into the AI and high performance compute (HPC) sector, and investors have rewarded them handsomely for it. 

For example, the following chart shows the year-to-date stock price returns as of August 27, 2024 for miners who have announced an AI/HPC strategies and those who have not. 

Now, it’s important to note that all of these AI/HPC strategies are still in their stumbling infancy. As it stands in Q2, AI/HPC business lines still comprise a fraction of the revenue public Bitcoin miners produce. And there is still no single, proven method for standing up one of these data centers; the capital requirements are much greater than bitcoin mining, and the architecture itself – from cooling apparatuses, to networking gear, to redundancy infrastructure – are vastly more complex. 

If we take a look at the revenue and profit margins of these AI/HPC business lines from the bitcoin miners spearheading this transition, it becomes clear that they have a long way to go. 

But the miners who can make the transition have everything to gain. The transition will be expensive, but it could pay off in orders of magnitude given that generating AI/HPC compute is more lucrative than hashrate, as detailed by our friends at Second Gate Advisory. 

As with bitcoin mining strategies, we cannot judge the industry as a whole or treat every strategy the same – we need to evaluate the merits and decisions of each company individually. So for the remainder of today’s newsletter, we will tackle updates for those miners leading the charge on AI/HPC on a case-by-case basis. 

Core Scientific breaks ground on AI retrofits for Core Weave

We’ll start with Core Scientific, one of the dark horses in the AI/HPC compute race but which also shows some of the most promise. 

Core Scientific emerged from Chapter 11 bankruptcy in the dawn of 2024. Since then, it has emerged as one of the leading companies transitioning to AI/HPC operations. 

The company began its AI endeavors by leasing a Tier 3 datacenter in Austin, Texas, which it uses to provide 16 MW of capacity to Core Weave. Core Scientific inked this contract in February of this year, which comprised the whole of the company’s $5.50m in HPC revenue for Q2 2024. 

As Tom Mesiero, the founder of the compute infrastructure company Kungsleden, told Blockspace, the leasing model is an “entry level” move “to dip one's toes in this market” and “build the narrative.” As we will see with Core Scientific’s competitors, this entry level approach is the first step for virtually every miner breaking into the AI/HPC business.

But Core Scientific wants to move away from this lease model and graduate beyond the entry level strategy. 

In June, Core Weave contracted 270 MW worth of long term HPC hosting services from the company, and it followed up by securing another 112 MW in August. To put those figures into perspective, Core Weave’s combined contracted capacity (398 MW) is equivalent to 48% of Core Scientific’s current MW capacity of 830 MW.

To deliver this capacity, Core Scientific plans to retrofit some of its existing bitcoin mining data centers. Core Scientific reported that the first of these modifications, which will supply Core Weave with 200 MW, began in Q1 at its Pecos, Texas facility; the company anticipates they will complete the retrofitting in Q3 or Q4 of 2025, at which time an additional 70 MW should be operational at its Denton, Texas facility, as well.

Hut 8, one of the earliest bitcoin miners to tap HPC, is mum on expansion plans

Hut 8 was the first public bitcoin miner to enter the HPC playing field when it acquired datacenters from TeraGo in January 2022, and in Q2, it earned $3.40 million.

As a result of the acquisition, Hut 8 owns and operates 3 MW worth of cloud and colocation data centers in Canada in Mississauga and Vaughan, Ontario; Kelowna, British Columbia; and two sites in Vancouver, British Columbia.

Hut 8 both rents out computing power from computers it owns in the facility (cloud computing) or hosts computers for other clients (colocation). The company charges fees for its services in one of two ways, either by allocation, where the client pays a fixed amount per month for HPC services, or by consumption, where the client pays for additional allocations of compute power if their needs exceed what is provided under the allocation model. 

In its 10-Q for Q2, Hut 8 did not disclose any activities related to expanding its HPC footprint. 

Hive dives deeper into HPC with 30 MW retrofit

Hive Digital broke into the HPC market after Ethereum’s merge to proof-of-stake nullified its ability to profitability mine shitcoins altcoins with its fleet of 38,000 Nvidia GPUs. In Q2 of 2024, Hive earned $2.60m from its HPC business line. 

Currently, Hive hosts a portion of its GPU fleet at Tier 3 data centers, but it has ambitions to convert parts of its bitcoin mining infrastructure to accommodate new HPC load.

In its latest 10-Q, the company said that it plans to convert 30 MW from its existing bitcoin mining sites  into Tier 3 data centers, though it did not disclose which sites it would retrofit. The company said that power distribution and internet redundancy infrastructure is already in place, so it believes it can pull off the update in six to nine months (if you remember, Core Scientific projects that its retrofitting will take a year and a half, although this is for a larger undertaking of 200 MW). Hive estimates that the retrofit will cost between $5 and $7 million per MW.

Bit Digital emerges as quiet giant in its HPC endeavor

Bit Digital often takes a back seat to other public bitcoin miners when it comes to analyst coverage, but the miner booked the largest HPC-related revenue of its peers for Q2 at $12.5m.

The company entered the HPC game in October of last year. As with Hive and Core Scientific, Bit Digital has bootstrapped its HPC business line by leasing out data center space for its GPU fleet. Notably, Bit Digital has brokered sale-lease agreements to finance its HPC operation, wherein Bit Digital has purchased GPUs, sold them to a third party, and then leased them from that third party. The company then takes these leased GPUs and sells their compute services to its HPC customers.

Bit Digital first tried on this approach in Q1, when it inked a three year HPC services deal for 2,048 GPUs. In Q2, it finalized an agreement to replicate this sale-leaseback model with another 2,048 GPUs, but the company and its client put this deal on pause so that Bit Digital could wait for the next generation of Nvidia GPUs. It’s worth noting that it’s unclear how much of Bit Digital’s HPC-related revenue came from computing services versus equipment sales; if equipment sales comprised the bulk of this revenue, this would explain why Bit Digital’s profit margins are so much fatter than the rest.

In August, in perhaps the biggest HPC deal for Bit Digital to date, the company signed a five year agreement with cloud gaming provider Boosteroid for HPC services for anywhere from 100 to 50,000 GPUs. It’s not clear where these GPUs will be hosted.

Honorable AI mentions and where bitcoin miners go from here

Iris Energy’s earning call is taking place later today, so we plan to update this article on the Blockspace website to include its AI/HPC updates. 

Touching on other companies in this arena, Terawulf has made some noise that it will be entering the AI/HPC game, but it has yet to book any revenue from these services. In its latest 10-Q, Terawulf said that it has carved out 2 MW from its Lake Mariner facility for HPC services, and it is also designing a 20 MW pilot for HPC colocation at Lake Mariner. 

Bitdeer has also announced its incipient HPC/AI strategy, which involves a pilot program launched in Singapore in July, but it did not report any revenue from this business line for Q2.

The bottom line for any bitcoin miner making this transition, though, is that it will be incredibly capital intensive. The bitcoin miners in our update have already started spending on expansions, but these early spends are like spitting in the ocean compared to the liquidity they will need to fully execute their visions. As such, expect plenty of dilution through share offerings – and perhaps some debt sprinkled in – over the coming years as bitcoin miners chase the AI/HPC rabbit. 

As for which operational strategies will win out, that’s literally a billion dollar question. Masiero said that margins for the leasing model are too thin, and that retrofitting has not “been done well or at scale,” specifically with newer GPUs like Nvidia’s H100s. The real opportunity, he thinks, lies in miners building data centers from scratch for “high density compute hosting.” 

“Lots of tradeoffs, but there are ways to build one of these sites at 1/10th the cost of a traditional data center build out,” he claimed.

So if bitcoin miners can crack that cost, perhaps AI won’t be such a buzzword after all.