Original title: Crypto & Blockchain Venture Capital – Q2 2024
Original article by Will Canny and Aoyon Ashraf
Original source: coindesk
Translated by: Eason, Mars Finance
Private equity firms have seen the value of working with bitcoin miners to help with artificial intelligence computing since Core Scientific signed a 200MW deal with CoreWeave in June, the company’s CEO told CoinDesk in an exclusive interview.
Adam Sullivan, CEO of Core Scientific, said the company has received funding and partnership interest from several top private equity firms since announcing the CoreWeave AI infrastructure deal.
PE firms are chasing data center business for AI-related computing power and see the existing infrastructure of bitcoin miners as an attractive option.
Sullivan said the miner was not concerned about CoreWeave’s recent takeover bid but expected merger and acquisition activity to accelerate across the mining industry.
Private equity (PE) firms are finally seeing the value of Bitcoin (BTC) miners, thanks to the growing demand for data centers capable of powering artificial intelligence-related (AI) machines. It’s no secret that Bitcoin miners require a lot of energy — in fact, it’s a hotly debated topic. With the rapid rise of the AI industry, it’s no surprise that AI-related companies are thirsty for energy. Reports suggest that the industry already uses as much energy as a small country, and that it’s likely to increase further. This surge has created a problem for the AI industry: Investors are pouring a lot of money into the sector, but companies don’t have immediate access to infrastructure to meet the growing computing demands. In an exclusive interview with CoinDesk, Adam Sullivan, CEO of one of the largest mining companies, Core Scientific (CORZ), said that Bitcoin miners and their data centers are becoming a lucrative option for investors.
“Private equity is clearly going after the data center space now; even private equity firms that have never been in the data center space before are evaluating the space,” Sullivan said. These private equity firms are finally seeing the value of bitcoin miners because they can help AI-related companies place their machines in already built mining infrastructure or work with miners to build data centers faster than starting from scratch. “One of the biggest constraints right now (for data centers) is finding sites with more than 100 megawatts of power and high-voltage substation transformers in place. Those sites are hard to find, and that happens to be the standard for finding bitcoin mining sites over the past four years,” Sullivan said. Core Scientific recently signed a 12-year, 200 megawatt (MW) agreement with cloud computing company CoreWeave to meet AI-related computing needs, with options to expand capacity further. Sullivan noted that since news of the deal broke, Core Scientific has been approached by multiple first-tier private equity firms looking to finance further AI-related collaborations. In fact, the deal has sparked a re-rating of the bitcoin mining sector as it has reignited investor interest in the sector. JPMorgan even went further, saying the deal validates the viability of the mining industry’s involvement in high-performance computing (HPC) and could usher in a new era of mergers and acquisitions for mining companies.
Post-halving struggle
One of the main reasons private equity is interested in mining right now is the recent Bitcoin halving, which cut the Bitcoin reward in half, making competition among miners more intense. Many miners are struggling to keep their operations profitable, and some are looking to sell their companies or diversify their revenue streams by repurposing data centers to host HCP and AI-related computers. “The halving has also caught the attention of private equity firms, which see the event as an opportunity to consolidate smaller companies and incorporate existing infrastructure into their own,” the firm said in a July 2 report, adding that some mining stocks, including Hut 8 (HUT) and Bitfarms (BITF), have performed “exceptional” since the halving.
However, the capital required to build or repurpose data center clusters to accommodate AI computing isn’t cheap. The cost of doing so has become prohibitive for some miners in such a competitive market that private equity now sees an opportunity to help provide financing and other expertise, Core Scientific’s CEO said.
“Right now, a lot of bitcoin mining companies are working to build their own bitcoin mining facilities, and these private equity firms are looking at the potential returns and looking at ways to extract economic value from these potential transitions (from mining to HCP),” Sullivan noted, adding that in many cases, these private equity firms can provide a lot of help to some of the “less qualified” miners, including bringing in new partners or introducing new potential customers. Another reason private equity firms are now starting to pay attention to the mining industry after ignoring it for several years is that previously “the value fluctuations were too large and did not fit their return profile.” Sullivan added that longer-term HPC deals, such as the 12-year contract signed by Core Scientific, “are more viable and more investment-worthy for private equity firms.”
Existential threat?
The business model of private equity is to “own and sell”: buy a business or asset, tweak or completely change the business model, and then sell the company to maximize returns. Does this mean the end of Bitcoin miners? Sullivan believes that the answer is not that simple. First, it will be part of a broader shift in certain areas of the mining industry. Future production cuts will continue to make the industry more competitive, driving the development of low-cost mining sites, which are likely to be of most interest to HCP and PE companies. Second, not all mining sites currently in use can be converted to data centers. Many variables may make certain sites unsuitable for conversion to HPC, he said, adding that as long as it is economically viable to continue in the mining business, these sites will remain mining sites.
However, before miners can survive the next halving, they must first survive the one that just occurred this year. The crowded mining space is now feeling the pinch of shrinking margins, leading to a flurry of acquisitions and renewed deal talks among miners. In fact, on the same day the 200MW deal was signed, Core Scientific rejected CoreWeave’s $5.75 per share takeover offer, saying the offer severely undervalued the company. When asked about the status of the deal, Sullivan said both companies are now focused on organic growth opportunities. Meanwhile, Core Scientific is actively looking for new locations and talking to new potential customers. Unsurprisingly, though, the CEO of the publicly traded mining company said the company would have to consider the offer if a potential acquirer was willing to pay a price that shareholders and the board believe is the full value of the company. Despite the rebuff to the offer, Sullivan believes that mergers and acquisitions in the mining sector are just beginning. The recent wave of M&A activity, which also saw a hostile takeover battle between Riot Platforms (RIOT) and Bitfarms, CleanSpark (CLSK) acquiring GRIID (GRDI), and Hut 8 raising AI-related funding, is just the beginning. “I think we’re still in the early days of M&A that’s going to happen over the next 12 months,” Sullivan said.
“I think many companies would prefer to sell their operations to other large companies, or look to convert more facilities to HPC, given the infrastructure constraints,” he noted, adding that most “mid-market” miners would likely put themselves up for sale.
