Bitcoin miners pour millions into AI business, hoping for billions in return

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Core Scientific's 104-megawatt bitcoin mining data center in Marble, North Carolina

Carrie McKelvey

Austin — Five years. Bitcoin Miner Core Scientific The company has quietly been diversifying from mining into artificial intelligence, a market that requires huge amounts of power to train AI models and handle the massive workload that comes with it.

The move is no longer a secret.

Core Scientific announced on Monday that it has signed a 12-year contract with cloud provider CoreWeave to provide infrastructure for machine learning and other use cases. Core Scientific said the deal, which expands an existing partnership between the two companies, will add more than $3.5 billion to its revenue over the life of the agreement.

CoreWeave is NVIDIACoreWeave, which rents out the graphics processing units (GPUs) needed to train and run AI models, was valued at $19 billion in a funding round last month. Core Scientific will provide about 200 megawatts of infrastructure for CoreWeave's operations.

Core Scientific, which emerged from bankruptcy in January, has been mining various digital assets since 2017. The company began diversifying into other services in 2019.

“The best way to think about bitcoin mining facilities is that we are essentially a PowerShell for the data center industry,” Core Scientific CEO Adam Sullivan told CNBC.

Sullivan became CEO when the company was on the brink of bankruptcy following bitcoin's collapse in 2022. Since then, the former investment banker has further bolstered the company's non-bitcoin business as it settled debts with angry lenders and re-entered the stock market.

Bitcoin miners are moving to AI

While Core has risen more than 40% since relisting earlier this year, its market capitalization of about $865 million remains well below its July 2021 valuation of $4.3 billion.

Since OpenAI launched ChatGPT in November 2022, demand for AI computing and infrastructure has surged, leading to a surge in investment in AI models and startups. Meanwhile, miners such as Core Scientific, Bit Digital, Hive, Hut 8 and TeraWulf have been looking to bolster revenue streams following the so-called bitcoin halving in April, which cut rewards paid to bitcoin miners by 50%.

Many companies have renovated large facilities to meet market needs.

“Bitcoin miners are often located in energy secure and energy intensive data centers, which we believe are also ideal for running AI,” said James Butterfill, head of research at digital asset firm CoinShares.

Butterfill said this overlap has led to competition for rack space between bitcoin mining and AI activities, which require up to 20 times the capital expenditures of bitcoin mining but also have higher profit margins, according to a CoinShares report.

“The implementation of AI activities could result in increased depreciation expense and improved gross margins,” Butterfill said.

Bit Digital derives 27% of its revenue from AI, according to CoinShares, Hut 8 derives 6% of its revenue from AI, and Hive, which has data centers in Canada and Sweden, derives 4% of its revenue from these services.

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Hut 8 said in its first-quarter earnings report that it has bought its first batch of 1,000 Nvidia GPUs and secured a customer deal with a venture-backed AI cloud platform as part of its expansion into new technologies that it believes will bring it higher revenue.

“We have signed commercial agreements for new AI verticals based on a GPU-as-a-Service model, including customer agreements that provide for fixed infrastructure payments and revenue sharing,” Hut 8 CEO Asher Genault said.

Genault added that the company expects to start generating annual revenue of about $20 million later this year.

As of the end of April, Bit Digital had 251 servers generating revenue from its first AI contract, and the company said it had generated about $4.1 million in revenue from operations that month.

Iris Energy expects to generate $14 million to $17 million in annual revenue from its AI cloud services, and the expanded Core Scientific and CoreWeave contracts are expected to bring annual revenue to $290 million.

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“We intend to remain one of the largest and most productive bitcoin miners, but with a diversified business model and more predictable cash flows,” Sullivan said.

Bitcoin's volatility makes mining a difficult business.

Bitcoin is currently trading at around $69,000, up more than 150% over the past year, but the 2022 bear market has forced many miners to go bankrupt or shut down altogether.

The transition to AI is complex

The transition to AI is not as simple as reusing existing infrastructure and machines, because High Performance Computing (HPC) data centers have different requirements and data networks have different needs.

“Transformers, substations, some switchgear and virtually all of the mining company's current infrastructure would need to be ripped out and built from scratch to accommodate HPC,” Needham analysts wrote in a May 30 report.

The equipment used to mine Bitcoin is called an Application Specific Integrated Circuit (ASIC): they are built specifically for cryptocurrency mining and cannot be used for anything else.

Needham estimates that HPC data centers run at a capital investment of $8 million to $10 million per megawatt, excluding GPUs, while bitcoin mining sites typically run at a capital investment of $300,000 to $800,000 per megawatt, excluding ASICs.

Core's Sullivan says there are great synergies between the two businesses.

“One of the most exciting things about the bitcoin mining business is that it gives us access to a ton of electricity across the United States using fiber optic lines,” he said.

In addition to its partnership with CoreWeave, Core Scientific also announced that it is working to convert 500 megawatts of bitcoin mining infrastructure across the country into HPC data centers over the next three to four years.

Sullivan said the renovations are manageable because the company owns and manages all of its data center infrastructure.

“There are some components that you have to buy to adapt for HPC, but they're readily available,” he said.

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Needham analysts expect the largest publicly traded bitcoin miners to more than double their power capacity over the next one to two years, including to accommodate expansion plans for their mining and HPC businesses.

Clean energy is a popular choice as it is the cheapest power source in many markets. Large miners compete in an industry with low margins and their only variable cost is usually energy, so they have an incentive to move to the cheapest power source in the world. Industry reports estimate that 54.5% of the Bitcoin network runs on sustainable electricity.

The Electric Power Research Institute estimates that data centers will account for about 4% of the country's total electricity consumption in 2023, but could account for up to 9% by 2030. Many see the use of nuclear energy as the answer to meeting this demand.

TeraWulf uses nuclear energy for its mining facilities and is also looking to get into machine learning. Currently, the company has 2 megawatts dedicated to HPC capacity, but has plans to transition its energy infrastructure to AI and HPC.

OpenAI CEO Sam Altman told CNBC last year that he sees great potential in nuclear power when it comes to serving the needs of AI workloads.

“I don't know how we get there without nuclear,” Altman said, “I mean, maybe we could get there with just solar and storage. But from my perspective, I feel like this is the most likely and best way to get there.”

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