Despite the recent crypto-carnage this mining investment is a sign of bigger things

25 November, 2018

At the moment this post was being written, cryptocurrency was in the midst of a sharp decline. Bitcoin was down to below $4k and alt-coins were traveling even worse. Does that mean the crypto bubble has finally burst?

Perhaps not. While bitcoin and its competitors appear to be undergoing a correction, a powerful Chinese player is set to invest more than $20 million in a new mining data center to be built in the U.S. Pacific Northwest.

China's Bitmain Technologies made the news on November 18 (2018) thanks to a ribbon-cutting ceremony at a plot of land they own in the state of Washington. That land is very close to the Wenatchee Airport in Douglas County. What do they plan to do with the land? Build a brand-new data center for the sole purpose of mining bitcoin.

When complete, the complex will be home to six buildings filled with specialized computers constantly crunching the numbers and decrypting transactions before adding new blocks to bitcoin's chain. And with every coin mined, Bitmain Technologies will be adding to its balance sheet.

How mining occurs

Most of what we talk about in terms of cryptocurrency has to do with bitcoin gambling. After all, is a gambling-centric website. Yet we pay attention to all things cryptocurrency with the knowledge that what happens in the general market will affect the gambling space. That is what makes this particular story so important.

Bitmain Technologies is investing $20 million in a bitcoin mining data center. To understand why that's newsworthy, a basic understanding of how mining occurs is also necessary. That starts with an understanding of the bitcoin blockchain.

The blockchain is a distributed ledger to which records of new transactions are added as they occur. For security purposes however, just adding a single transaction to the ledger is not enough to make it official. Something else has to occur.

Multiple copies of the bitcoin blockchain are housed on computer nodes scattered around the world. Whenever a transaction occurs, information about that transaction is broadcast across the network so that each node gets a copy. Computers in those nodes then decrypt the information, look for some sort of proof of work, and then verify that all the data checks out.

Only when a transaction passes this rigorous process is it added to that node's copy of the blockchain. And only when all copies of the blockchain agree does a transaction become legitimate and irrevocable. Node operators are rewarded for their work with bitcoin. Thus, what they do is called Bitcoin mining.

Tremendous power resources

The nature of the bitcoin blockchain and its relative size dictates that mining is no easy task. Not only is it difficult, but it also consumes a tremendous amount of power. A company like Bitmain Technologies will spend a fortune running hundreds of servers all mining bitcoin. And that is just on power alone. That says nothing of the investment being put into the data center complex and the general resources needed to run the complex.

Perhaps now you understand where we are going with this. Here's the point: pumping $20 million into a new U.S. data center signals that Bitmain Technologies truly believes in the future bitcoin. They are not at all phased by this most recent correction. They are not terrified by the relative volatility of bitcoin and other cryptocurrencies.

Instead, Bitmain Technologies says they are very confident in their ability to take advantage of current market conditions in order to build a rock-solid future for their company. That confidence is rooted in the knowledge that the total number of bitcoins available to be had is purposely limited.

They are willing to invest millions now with the expectation that they will reap billions later. In order to reap those billions, they have to mine as many bitcoins is possible. That means mining more than anyone else. So if it takes an investment of $20 million to do it, Bitmain Technologies is willing to spend that much.

Value will eventually balloon

How can Bitmain Technologies be so confident that they will reap billions at some point down the road? They are counting on the principle of limited supply. If they are right, the $20 million investment will be nothing compared to the total value of their bitcoin holdings. If they are wrong, it is only a matter of time before they find themselves in the poor house.

Remember that the underlying foundation of cryptocurrency is the law of supply and demand. Because bitcoin is decentralized, there are no banks or government agencies manipulating coin value. Everything is market driven. Bitcoin investors themselves determine the value of their coin based on trading patterns.

Supply is ultimately fixed in cryptocurrencies. So the higher the demand, the higher the price. As demand falters, the price falters with it.

All of this leads to significant volatility as long as a large number of coins is still outstanding. But Bitmain Technologies is betting that the value of bitcoin will eventually stabilize, and then gradually climb, commensurate with the falling number of available coins.

In other words, every coin mined takes another coin out of circulation. As the total number of remaining available coins decreases, the laws of supply and demand should cause prices to increase. Bitcoin's price will eventually balloon when there are no more coins to be had. That is what Bitmain Technologies is banking on.

What it means to bitcoin gambling

It is obvious that Bitmain Technologies' strategy is based purely on speculation. What they expect to happen to bitcoin as supply slowly dries up is purely theoretical. Because we have never had a cryptocurrency reach critical mass, there is no way to know for sure what is going to happen. Yet we can extrapolate from what we do know to better understand what it all means to bitcoin gambling.

Unlike cryptocurrency investing, gambling is not a supply and demand industry. Gambling operators set prices irrespective of consumer demand. They reap their profits based on the willingness of people to gamble rather than the value of any one product. As such, online gambling is not subject to the same kinds of market forces that influence other industries.

The fact that Bitmain Technologies is willing to invest so much money in bitcoin tells us that, at least in the short term, bitcoin will still have enough value to attract investors. That means it will also have enough value to gambling operators to convince them to keep accepting it. As long companies like Bitmain Technologies continue to invest in bitcoin, gambling operators will embrace it as a gaming currency.

Another thing to consider is Bitmain Technologies' investment mindset. According to a recent news report, the company's strategy is to take advantage of the opportunities to mine bitcoin while there are still plenty of coins to be had. They see it as getting in on the ground floor, so to speak.

Bitmain Technologies' Director of Operations for North America considers the current market a bear market. He and his company are expecting the price to continue to fall for the time being. They are okay with that. They will be happy to continue mining over the long term, with the expectation that prices are going to climb significantly at some point.

This is also good for bitcoin gambling as well. Lower prices now should lead to more people investing in bitcoin and, ultimately, spending some of it at gambling sites. Operators with enough cash flow to keep some of their Bitcoin in reserve could increase their own wealth by holding on until the price explodes.

Crash or boom?

All this analysis leads us to ask ourselves if Bitmain Technologies' $20 million investment is a precursor to bigger and better things for bitcoin. No one knows for sure. But the smart money says it is. Why? Because $20 million is a lot of money to spend on a data center complex dedicated solely to bitcoin mining.

There are a lot of smart people out there who know more about bitcoin than the rest of us. If they are not down on bitcoin even during this most recent correction, Main Street investors shouldn't be either. Chances are the current bear market represents a natural correction of overheated prices. A crash to near zero, while possible, is not likely.

On the other hand, the chances of an eventual boom are pretty high. So if we were operating an online gambling site, we would embrace bitcoin with open arms. We would keep as much bitcoin in reserve as possible without negatively impacting cash flow. That way, a future boom would generate even more profits.

As for online gamblers, now is as good a time as any to start gambling with bitcoin. You know what they say: buy low and sell high. You can invest in bitcoin now, then use it to gamble in two ways: keep some of your coin as an investment and put the rest into casino gambling. You could do quite well if things go your way.