Asked for his take on cryptocurrency in 2018, legendary Texas oilman and corporate raider T. Boone Pickens replied, “At 89, anything with the word ‘crypt’ in it is a real turnoff.”
Pickens died in 2019, and with bitcoin’s price down 75% and the multibillion-dollar collapse of the crypto exchange FTX dominating headlines, some critics see cryptocurrency hurtling into oblivion.
However, bitcoin mining entrepreneurs in Arkansas caution against overreacting. “Most crypto miners have no direct exposure to currency exchanges,” entrepreneur Frederick Huang told Arkansas Business. He and Alex Yeh lead GMI Computing, one of three companies that have made Newport a hub for bitcoin mining in Arkansas. “Miners store their bitcoin reserve in custody or in cold wallets,” he said, not in the hands of operators like the glib Sam Bankman-Fried, who presided over FTX until its bankruptcy pushed the emerging industry to the brink of a 2008-style financial crisis.
Cameron Baker, founder and owner of Cryptic Farms, which has mining sites in Malvern, Greenbrier, Russellville and Mountain Pine, concedes that the FTX scandal devastated public confidence and generated calls for more regulation, including a declaration last week by Arkansas Sen. John Boozman.
But he says miners are more concerned about the rising cost of power, the lagging price of bitcoin and threats to the power distribution supply chain.
He and the other miners are still betting on the long-term profitability of cryptocurrency, which is generated by vast banks of computers solving complex mathematical problems and verifying cryptocurrency transactions through blockchain technology.
“Bitcoin is not back up to $70,000 yet, so we could be better,” Baker said in a telephone interview last week. A single bitcoin, which was trading at close to $70,000 as recently as November 2021, was worth about $17,000 on Thursday.
“It’s concerning,” Baker said of FTX, “because it affects not just the public trust in the industry we’re working with, but also our ability to go out to the market and sell our produced goods for discounted rates. That’s where the mining sector is going to see the most pain.”
But Baker said he expects Bankman-Fried’s “black swan event” to soon be “water under the bridge.”
“What the banksters and the brokerage firms do is a very different world, and kind of inconsequential to us. The tools and the financial engineering they use [including the selling of derivatives] is far removed from what we do.”
One potential longer-term consequence could be greater regulation, something that Baker and Tom Harford, who runs Cryptic Farms’ Malvern operations, generally favor. Another complication for miners is an emerging public backlash against their heavy power consumption. New York recently became the first state to ban certain types of crypto mining.
Cryptic Farms’ leadership actually invites scrutiny, and has developed a version of cryptocurrency mining that uses less power than other operations, they say.
Cryptic Farms was also instrumental in organizing the first industry group in the state for cryptocurrency miners, the Arkansas Blockchain Council, which Harford said has elected a board of directors and will hold its first meeting soon.
“We hope it will play a critical function in addressing and educating people about some of the issues,” Harford said. “We operate in the real estate, mining and energy sector through blockchain technology, not in the financial world with everything that entails. Establishing this trade association, I think, will help not just Cryptic Farms but other entities who come in the state for crypto mining to set some guardrails and ensure the integrity of those that do come in. It will also work with governments, communities and the academic sector to make sure we’re doing things in a way that’s transparent and beneficial to the state.”
Boozman, the top Republican on the Senate Agriculture, Nutrition & Forestry Committee, which oversees commodity markets, including cryptocurrency, is a sponsor of the Digital Commodities Consumer Protection Act. The bill would require all cryptocurrency platforms to register with the U.S. Commodity Futures Trading Commission and face oversight.
Early this month, Boozman said a lack of regulation “leaves consumers at the mercy of those who prey on them,” and he specifically mentioned FTX, which filed for Chapter 11 bankruptcy on Nov. 11, listing billions of dollars in debt. “If there are exchanges where commodities are traded, be it wheat, oil or bitcoin, then they must be regulated,” Boozman said.
Harford sees irony in the FTX collapse in that bitcoin was developed in response to the 2008 financial crisis.
“When Satoshi [Nakamoto, the pseudonym for the anonymous creator of bitcoin] invented blockchain technology, it was mainly in response to the 2008 financial crisis. And one of the reasons he established it was to try to create a digital currency that would avoid some of the pitfalls that he saw in his 2008 analysis. But as with the dotcom bubble, as with Enron, what we’re seeing now is akin to what we saw in 2008,” Harford said. “Larger financial speculation, especially in the early days of any new paradigm, seems to create these black swan events.”
Reasonable regulation would be positive, he said. “Only people who are looking past some of the rise and fall that occurs in a new financial paradigm, only those miners will be serious contenders in the long term,” Harford said. “And frankly, that’s what we want in the state of Arkansas. We don’t want people to come in, plant a flag and lift it out.” He said Cryptic Farms is determined to associate with “really the adults in the room now that the children have messed up the sandbox for a while.”
Meanwhile, cryptocurrency miners face immediate obstacles like rising power prices, said Baker, the Cryptic Farms owner.
“The price of natural gas right now is extremely difficult for the industry, causing [electricity] rates to go up while the price of bitcoin is going down,” Baker said. “This is attacking the sector from both sides. And the power supply chain is fundamentally unable to keep up with demand.
“So it’s not helpful to have these headlines about bad actors or bad companies that are doing things that reduce value or qualify as quite standard fraud,” he said. “But ultimately, it’s neither here nor there to the mining sector.”