Private equity (PE) firms are finally seeing value in bitcoin (BTC) miners, thanks to growing demand for data centers capable of powering artificial intelligence (AI) machines.
Bitcoin miners’ need for massive amounts of energy is no secret – in fact, it’s a debated intensely topic. With the rapid rise of the AI industry, the thirst for power of AI-related companies is not far behind either. There are industry reports already using The global economy needs as much energy as a small country and could grow even more. This surge creates a problem for the AI industry: Investors are flocking to the sector, but companies don’t have immediate access to the infrastructure needed to meet the ever-growing computing needs.
This is where bitcoin miners and their data centers become a lucrative option for investors, Adam Sullivan, CEO of one of the largest mining companies, Core Scientific (CORZ), said in an exclusive interview with CoinDesk.
“Private equity is obviously looking at data centers right now; even private equity firms that haven’t necessarily done data centers before are evaluating this space,” Sullivan said. These private equity firms are finally seeing value in bitcoin miners, because they can help AI-related companies host their machines in already-built mining infrastructure or partner with miners to build data centers faster than starting from scratch.
“One of the biggest constraints [for data centers] “The goal right now is to find sites that have over 100 megawatts of power and have the high-voltage substation transformer in place. Those are hard sites to find, and that happens to be the criteria for locating bitcoin mining sites for the last four years,” Sullivan said.
Core Scientific recently signed a 12-year, 200 megawatt (MW) contract agreement with cloud computing company CoreWeave for AI-related computing needs, with options to further expand capacity.
Sullivan noted that since news of the deal broke, Core Scientific has received several approaches from leading private equity firms offering funding for other AI-related partnerships. In fact, the deal has sparked a revaluation The deal has helped renew investor interest in the mining sector. JPMorgan went further, saying the deal validates the mining sector’s involvement in high-performance computing (HPC) and could usher in a new era of mergers and acquisitions for miners.
One of the main reasons private equity is interested in the mining sector today is the recent Bitcoin halving, which cut bitcoin rewards in half, making it more competitive for miners. Many miners are struggling to maintain profitability in their operations, and some are looking to either sell the business or diversify their revenue streams by repurposing their data centers to host HCP and AI-related computing machines.
“The halving has also attracted the attention of private equity firms, who see the event as an opportunity to consolidate smaller companies and integrate their existing infrastructure with their own,” the firm said in a July 2 note, adding that some mining stocks including Hut 8 (HUT) and Bitfarms (BITF) have performed “exceptionally well” since the halving.
However, the amount of capital needed to build or repurpose data center clusters to accommodate AI is not cheap. In such a competitive market, it is becoming prohibitive for some miners and private equity now sees an opportunity to help these miners by offering financing and other expertise, Core Scientific’s CEO said.
“A lot of these Bitcoin mining companies are struggling to build out their Bitcoin mining facilities right now, and these private equity firms are looking for potential returns, ways to extract economic value from some of these potential conversions. [from mining to HCP]”, Sullivan noted. In many cases, these private equity firms can provide significant assistance to some of the more “underqualified” miners, including bringing on a new partner or introducing them to new potential customers, he added.
Another reason private equity firms are now looking at mining, after ignoring it for several years, is that previously “the value was too volatile for their return profile.” Longer-duration HPC deals, such as Core Scientific’s 12-year contract, are “much more viable and investable for private equity firms,” Sullivan added.
The business model of private equity is one of sale: buy a company or asset, modify or completely change the business model, and then sell the company to maximize the return. Will this mean the end of bitcoin miners?
The answer is not so simple, according to Sullivan.
First, it would be part of a broader shift for some sectors of the mining industry. The upcoming halving will continue to make the sector more competitive, favouring lower-cost mining sites, which are likely to attract the most interest from private equity and private equity firms.
Second, not all mining sites in use today can be converted to data centers. A number of variables can make some sites unsuitable for HPC conversion, and he added that these will remain mining sites as long as it is economically viable for them to remain in the mining sector.
However, before miners can move on to the next halving, they must survive the one that just happened this year. The crowded mining space is now under pressure from margin compression, leading to a wave of acquisitions and new negotiations among miners.
In fact, Core Scientific rejected CoreWeave made a $5.75 per share buyout offer the same day the 200 MW deal was signed, saying the company was significantly undervalued. Asked about the status of the deal, Sullivan said both companies are now focusing on organic growth opportunities. At the same time, Core Scientific is actively looking for new sites and talking to potential new customers.
Unsurprisingly, the CEO of the publicly traded mining company said that if a potential suitor was willing to pay what shareholders and the board considered to be the full value of the company, the company would have to consider the offer. Despite the outright rejection of the offer, Sullivan believes that mergers and acquisitions are only just beginning in the mining sector.
The recent wave of M&A activity has also seen a hostile takeover battle between Riot Platforms (RIOT) and Bitfarms, CleanSpark (CLSK) buying GRIID (GRDI), and Hut 8 securing AI-related funding, and that’s just the beginning.
“I think we’re still in the early stages of the mergers and acquisitions that are going to happen over the next 12 months,” Sullivan said.
“I think there’s a lot more incentive for many companies to sell their operations to other, larger companies, given infrastructure constraints or to look to convert more of their facilities to HPC,” he noted, adding that most “mid-market” miners are likely to put themselves up for sale.
