Original Title: Why These Bitcoin Miners Are Becoming Summer’s Hot AI Stocks

Author: Nina Bambysheva, Forbes

Translation: Luffy, Foresight News

Electricity resources have become a hot commodity in the field of artificial intelligence (AI). For example, cloud computing provider CoreWeave recently signed a $3.5 billion cooperation agreement with Core Scientific at the beginning of this month. According to the agreement, CoreWeave will pay $290 million annually to this Austin-based Bitcoin mining company's data center for 12 years to host AI-related computing hardware. In addition, CoreWeave will also bear all capital expenditures.

This transaction is very profitable for Core Scientific, as its stock price doubled at the beginning of June, reaching $10. Some observers believe that Core Scientific has become a new "weapon" in the field of artificial intelligence. On June 26, CoreWeave announced a second collaboration, which is expected to bring Core Scientific $1.2 billion in revenue in the coming years. As one of the largest Bitcoin miners in North America, Core Scientific had once faced operational difficulties and only emerged from bankruptcy crisis in January of this year.

The demand for large-scale computing capacity, driven by artificial intelligence applications such as ChatGPT, has surged (the power consumption of ChatGPT is 10 times that of traditional Google searches), making companies like Core Scientific highly favored because they can use cheap electricity in regions such as Texas and North Dakota and have signed agreements to obtain more energy from elsewhere. According to the Lawrence Berkeley National Laboratory, it typically takes 3-5 years to build a high-performance computing (HPC) data center from scratch, and the waiting time for grid connections is as long as 6 years, making having enough power crucial at present.

Adam Sullivan, CEO of Core Scientific, stated, "The demand is infinite. If we only execute within the scope of the current contract, we will become one of the top ten data center companies in the United States and will host a significant portion of AI hardware in the United States in the coming years."

According to research by JPMorgan, since Core Scientific announced its first CoreWeave cooperation agreement on June 3, the total market value of 14 publicly traded Bitcoin miners in the United States has surged by 22%, in sharp contrast to Bitcoin's 12% decline and the S&P 500 index's 4% increase.

JPMorgan's research report on June 24 showed that these 14 miners control about 5 gigawatts of power, of which 3.6 gigawatts can be used for HPC. They have also signed additional purchase agreements for 4.5 gigawatts with new power plants in different construction and permitting stages.

This energy is enough to provide power for approximately 3.4 million households for a year. The Electric Power Research Institute stated that driven by the AI boom, by 2030, the energy demand of data centers may surge to 9% of the total U.S. electricity generation. This expected increase is more than twice the current electricity consumption.

However, miners cannot easily redirect excess power to artificial intelligence. Wes Cummins, CEO of data center developer Applied Digital, stated, "It is difficult to obtain a large amount of power in the short term, which is a major asset that many U.S. Bitcoin miners currently possess, but they will only have value if they have some supporting facilities (mainly fiber connections). Fiber optic cables are crucial for high-performance computing because they enable high-speed data transmission."

HC Wainwright analyst Kevin Dede pointed out, "Bitcoin purists may argue, 'No, you cannot host AI machines in Bitcoin mining centers.' Well, I understand. You need cleaner air and better cooling." But he added that smaller AI participants may not be interested in large-scale companies (such as Amazon's AWS, Microsoft Azure, and Google Cloud) with huge data centers and cloud infrastructure, but they may integrate better into the service range provided by Bitcoin miners, which could ultimately lead to a hybrid of Bitcoin mining/HPC data centers.

Investors also agree with this view.

Benchmark investment bank analyst Mark Palmer wrote in a research report on June 21, "Over the past three weeks, as the value of miners' power assets has become apparent, the ratings of publicly traded Bitcoin mining stocks have been readjusted. A group of publicly traded miners, including IREN, TeraWulf, and BitDigital, currently have an average enterprise value multiple of 7.8, higher than 5.2 two months ago."

For mining companies that have just experienced the halving of Bitcoin block rewards, the rise of artificial intelligence has brought about a significant demand for electricity. The halving reduced mining rewards to 3.125 BTC, resulting in historically low mining profits. In addition, we found that the 10 mining companies that ventured into AI projects last year were all unprofitable, and although Bitcoin has slowly recovered from the impact of the cryptocurrency winter in 2022, the trading price is still below the mining cost.

While Core Scientific has been in the spotlight, several other mining companies have been adjusting their operations to ride the wave of artificial intelligence.

IREN

IREN, formerly known as Iris Energy, is one of the earliest companies to recognize this opportunity. According to JPMorgan, based on IREN's timely construction of high-quality data centers, it is the miner most likely to capitalize on HPC/AI demand. The company recently also purchased 816 Nvidia H100 GPUs (arguably the most powerful chips in the AI field). Another analyst, Mike Colonnese of HC Wainwright, stated, "Apart from Core Scientific, IREN, and Hut 8, we have not really seen mining companies generate such high levels of revenue from AI business."

Hut 8

This Bitcoin mining company based in Miami announced a $150 million funding from Coatue Management for building infrastructure related to artificial intelligence. Coatue will purchase a five-year bond, which can be extended for up to three years. This debt will pay 8% interest, and Coatue can convert the debt into stock at $16.395 per share, which is 45% higher than the stock price at the time of the announcement, and Hut 8's stock price has now risen to $14.99.

Asher Genoot, CEO of Hut 8, stated, "We hope to grow and build with partners who have scale or can coexist in the long term, and these partners must be well-known companies in the wider ecosystem and the field of artificial intelligence. We are in discussions with many such partners." He claimed that the key is not only which companies will have the opportunity to enter this market, but also which companies will have the ability to achieve this goal, and Hut 8 is one of them.

Palmer of Benchmark agreed, "Hut 8 has proven that it can establish energy assets and data centers in an oasis in a relatively fast and low-cost manner." He rated Hut's stock as a buy with a target price of $17.

Applied Digital

Applied Digital is one of the first miners to shift towards building HPC data centers. The company recently signed a letter of intent with an unnamed U.S. hyperscale computing provider to lease 400 megawatts of power. Dede of HC Wainwright stated that the company's facility in Jamestown, North Dakota, is an interesting example as it attempts to balance mining and HPC work, known as the "catfish" data center. When there is excess power capacity, such facilities combine high-performance computing with Bitcoin mining.

"I think people are very focused on power right now, but if you want to transition your business from Bitcoin mining to HPC, there are many other factors that are also very important," CEO Cummins said, pointing out that the waiting time for critical electrical equipment is over 2.5 years, and there is a shortage of talent with experience in large data centers. "We have invested a lot of time in this, solved supply chain issues, and hired business experts. We really see ourselves as a future HPC infrastructure company."

Needham analyst John Todaro rates Applied Digital as the top choice in the HPC/AI field, while also highlighting IREN, Core Scientific, TeraWulf, Bitdeer, Hut 8, Bit Digital, and HIVE Digital Technologies.

For more pure-play crypto companies like Riot, CleanSpark, and Marathon Digital Holdings (the three largest Bitcoin miners in the U.S. by market value), traditional crypto business remains strong. Bitcoin is approaching historic highs, and the support from rising macroeconomic and political uncertainty is unlikely to diminish soon.

Zach Bradford, CEO of CleanSpark, stated in a statement to Forbes, "I believe the best use of our resources is to focus on Bitcoin mining. This not only helps stabilize the grid, but also helps shape the future of currency. Some of our data centers can support HPC, but we believe that under the current strategy (Bitcoin mining business), we are making a more positive impact and succeeding."

Marathon has actually expanded its mining operations to support the new PoW mechanism cryptocurrency kaspa (KAS). Adam Swick, Chief Development Officer of Marathon, stated in a statement on the company's website, "By mining kaspa, we are able to create a source of income different from Bitcoin." In March of this year, Forbes listed Kaspa as a zombie blockchain due to its limited utility.

CleanSpark announced earlier this month that it has added 5 new mining facilities in Georgia, with a total investment of $25.8 million, and on June 27, it agreed to acquire peer Grid Infrastructure in an all-stock transaction valued at $155 million. Meanwhile, Riot is attempting a hostile takeover of competitor Bitfarms.

An analyst named pennyether on X warned that pure mining investors should be more cautious. "They have already factored in the rise of Bitcoin into their pricing range, but if Bitcoin does not rise as expected, for example, if the price of Bitcoin remains flat for a year, I can't imagine what kind of disaster many mining stocks will face."

However, entering a new and highly complex industry is challenging, as Colin Harper, Director of Content and Research at Bitcoin mining service company Luxor Technologies, wrote, "When you realize that miners will be competing with some of the world's largest and most well-capitalized tech companies, the prospects become even more difficult."

Colonnese of HC Wainwright stated that the cost of building AI data center infrastructure could be as high as $10 million per megawatt, while the cost per megawatt for Bitcoin mining facilities is between $300,000 and $500,000. "The market generally responds well to anything related to AI, but these are very capital-intensive areas," he said.

Nevertheless, for those with available infrastructure and power capacity, transitioning to artificial intelligence could bring compelling benefits. Miners can benefit from more stable income from AI computing, replacing the volatility of Bitcoin, and can benefit from predictable budgets funded by existing clients. Analysts at Morgan Stanley summarized in a report in April that this also helps miners increase revenue, enabling them to afford the high capital investments required to compete with new mining equipment.

"The fact is, AI companies are willing to pay more for this because they don't care. Their business model is stronger. For Bitcoin mining, you don't know what the price of Bitcoin will be, and you don't know how difficult mining will be, so you have to take on more risk," Dede said.

Morgan Stanley's report focuses on several mining facilities suitable for retrofitting data centers, including facilities in Texas, Georgia, Canada, the UAE, and Bhutan. Needham analysts stated that most mining facilities seeking retrofitting will face capital expenditures of over $6 million per megawatt.

For many mining companies, this is an opportunity not to be missed.

"This does not mean that miners will completely transform their business," Phil Harvey, CEO of hosting service provider and digital asset mining consultancy Sabre56, said. "They have already invested a lot of money, time, and effort in cryptocurrencies." But "not treating it (data centers) as a business is foolish," he added, "it broadens your investment scope, and private equity firms are investing in HPC/AI because investors don't want to miss the wave of artificial intelligence."

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