There’s (digital) gold in them thar hills: Crypto giant DCG is betting $100 million on mining Bitcoin in North America

August 27, 2020, 1:00 PM UTC

In the early days of Bitcoin, people could mine the cryptocurrency in their homes using cell phones or laptops. Today, mining crypto is a lot like mining gold: It requires expensive equipment, lots of capital, and the right location. Barry Silbert, a prominent crypto entrepreneur, believes he has the chops to succeed in this challenging new industry and, in doing so, repatriate some Bitcoin production to the U.S. from China.

On Thursday, Silbert’s company, Digital Currency Group, revealed the existence of a subsidiary called Foundry that will invest $100 million into mining Bitcoin and other cryptocurrencies in North America over the coming months.

Foundry, which has been operating below the radar since 2019, runs its own mining operations and also provides equipment and financing to crypto startups.

The equipment in question, an example of which can be seen in the image below, consists of large banks of servers stuffed with specialized chips designed specifically to mine various cryptocurrencies.

An array of crypto-mining servers.
Photo: Courtesy of DCG

The specialty chips in question are optimized to perform trial-and-error calculations to solve the random math problems that Bitcoin and many other cryptocurrencies use to allocate rewards to those who maintain their networks. In the case of Bitcoin, its software creates a new math problem every 10 minutes or so, and the current payout for solving one is 6.25 Bitcoin—worth around $70,000 at current prices.

Despite such lucrative payouts, there are few significant crypto mining operations in North America. Instead, the industry has been dominated by Chinese conglomerates that pool resources while tapping into cheap sources of electricity.

Silbert, however, believes the opportunity is ripe for North American crypto firms to reclaim a significant share of the world’s mining power. To lead the effort, he selected Mike Colyer, a veteran of GE and other traditional industrial firms, to be CEO of Foundry.

While cheap power has long been the primary consideration for crypto miners, Colyer says that other factors are becoming increasingly important. In the case of Foundry, he believes that access to a new generation of energy-efficient mining equipment, as well as its transparent business culture—crypto mining is a notoriously opaque industry—will help it succeed.

But access to inexpensive electricity still matters very much. To that end, Foundry is launching operations in places with affordable and abundant power, including Georgia, Kentucky, North Carolina, and upstate New York. Its sites also include British Columbia and Quebec in Canada—two provinces with massive hydroelectric capacity.

Despite the scope of Foundry’s ambitions, the company could face tough odds, given how other recent crypto mining ventures in North America have foundered. Examples include an aborted 2018 plan by Chinese mining giant Bitmain to create hundreds of mining jobs in Rockdale, Texas, that left local officials embittered. Earlier this year, a startup called Layer1 announced it raised $50 million to build U.S. mining operations—only to face recent accusations that it misrepresented its balance sheet and executive team.

“The mining space is littered with the carcasses of failed mining efforts,” Silbert acknowledges.

According to Colyer, these failures often arise because companies fail to understand the cyclical nature of crypto mining, which he likens to the price swings that occur in commodity markets. He and Silbert claim that DCG’s broad network of contacts, along with its deep experience in the crypto industry, will let Foundry succeed where others have not.

One factor that could boost Foundry’s efforts is geopolitics. According to a DCG spokesperson, lawmakers and policy groups in Washington, D.C., are becoming concerned about ceding the production of Bitcoin—whose circulating supply is now worth over $200 billion—to China. These sentiments could help Foundry find support for crypto mining among federal and local officials, who may in the past have been suspicious of Bitcoin.

While China may be a strategic competitor in the cryptocurrency industry, Foundry is nonetheless relying on Bitmain and other Chinese companies to supply mining equipment. Silbert says that despite earlier controversies over Bitmain, the company has become more reliable in recent years. He adds that as the crypto industry grows, it is likely American firms will begin manufacturing mining equipment.

As for Foundry’s partnerships, Silbert says the company has signed deals with crypto mining companies and manufacturers, and is in talks to do the same with energy firms and government agencies.

Foundry’s business plan also calls for offering “staking” services. This involves managing the voting rights that arise from owning certain cryptocurrencies—a process akin to proxy voting in traditional equity markets.

If Silbert’s Foundry gambit succeeds, it will further solidify Digital Currency Group’s position as a giant of the industry. The company has three other subsidiaries, including the trading firm Genesis, and Grayscale, a firm that packages currencies like Bitcoin and Ethereum into shares for the stock market. Over the past year, Grayscale’s Bitcoin offering has become more popular among millennial investors than Netflix and other prominent stocks.

DCG does not disclose its financial records, but the fact it is funding the new $100 million investment from its own balance sheet, according to Silbert, suggests it is in a strong position.

For Colyer, Foundry is not just an opportunity for DCG to earn more money. A native of upstate New York, he says he relishes the idea of communities like Rochester using their supply of power to attract a new industry and new jobs.

“When is the last time western New York enjoyed a competitive advantage?” he asks.

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