Bitcoin miners sink millions into AI business, seek billions in return

AUSTIN, Texas — For five years, bitcoin miner Core Scientific has been quietly diversifying out of mining and into artificial intelligence, a market that will require immense amounts of power to handle training AI models and the massive workloads that follow.

The move is no longer a secret.

Late Monday, Core Scientific announced a 12-year deal with cloud provider CoreWeave to provide infrastructure for use cases such as machine learning. Core Scientific said the deal, which expands on an existing partnership between the two companies, will add more than $3.5 billion in revenue over the course of the contract. Kern Scientific shares were up about 30% on Tuesday morning.

CoreWeave, backed by Nvidia, rents graphics processing units (GPUs), which are needed for training and running AI models. CoreWeave was valued at $19 billion in a funding round last month. Core Scientific will provide approximately 200 megawatts of infrastructure to CoreWeave’s operations.

Core Scientific, which emerged from bankruptcy in January, has been mining a mix of 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 powershells for the data center industry,” Core Scientific CEO Adam Sullivan told CNBC.

Sullivan stepped into the role of CEO while the company was still in the process of bankruptcy, which was the result of the 2022 bitcoin crash. Since then, the former investment banker has settled debts with angry creditors and continued to grow the company’s non-bitcoin business stepped up as it re-entered the public market.

Although Core has risen more than 40% since relisting earlier this year, its market capitalization of about $865 million is significantly lower than its July 2021 valuation of $4.3 billion.

Demand for AI computing and infrastructure surged after OpenAI unveiled ChatGPT in November 2022, triggering a rush of investment in AI models and startups. Meanwhile, Core Scientific and other miners such as Bit Digital, Hive, Hut 8 and TeraWulf have been trying to bolster their revenue streams after the so-called bitcoin halving in April cut rewards paid out to bitcoin miners by 50%.

Many have rebuilt their massive facilities to meet the needs of the market.

“Bitcoin miners, often stationed in energy-secure and energy-intensive data centers, also find these facilities ideal for AI operations,” said James Butterfill, head of research at digital asset firm CoinShares.

Butterfill said the overlap leads to a competition for rack space between bitcoin mining and AI activities. While AI operations require up to 20 times the capital outlay of bitcoin mining, they are more profitable, according to a report from CoinShares.

“The introduction of AI activities leads to increased depreciation and amortization, which can improve gross profit margins,” Butterfill said.

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

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

“We have finalized commercial agreements for our new AI vertical under a GPU-as-a-service model, including a customer agreement that provides for fixed infrastructure payments plus revenue sharing,” said Hut 8 CEO Asher Genoot .

Genoot added that the company expects to start generating revenue in the second half of the year at an annual rate of about $20 million.

Bit Digital had 251 servers actively generating revenue from its first AI contract as of late April, and the company said it earned about $4.1 million in revenue from the operation that month.

Iris Energy expects to generate between $14 million and $17 million in annual revenue from its AI cloud services. Core Scientific’s expanded deal with CoreWeave is expected to generate annual revenue of $290 million.

“While we intend to remain one of the largest and most productive bitcoin miners, we expect to have a diversified business model and more predictable cash flow,” Sullivan said.

Bitcoin’s volatility has made mining a challenging business.

Although bitcoin is currently up more than 150% in the past year to around $69,000, the bear market of 2022 has driven many miners into bankruptcy or forced them to shut down altogether.

Turning to AI is not as simple as reusing existing infrastructure and machines, because high-performance computing (HPC) data center requirements differ, as do the needs of the data network.

“Except for transformers, substations and some switching equipment, almost all infrastructure that miners currently have will need to be built from the ground up to accommodate HPC,” Needham analysts wrote in a May 30 report.

The rigs used to mine bitcoin are called application-specific integrated circuits (ASICs). They are built specifically for crypto mining and cannot be used to do other things.

Needham estimates that HPC data centers run at $8 million to $10 million per megawatt in capital, excluding GPUs, while bitcoin mining sites typically run at $300,000 to $800,000 per megawatt in capital, not including ASICs.

Sullivan from Core says there is a lot of synergy between the two businesses.

“One of the most exciting parts of the bitcoin mining business is that we have access to large amounts of power across the United States with access to fiber lines,” he said.

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

Sullivan said the conversion is manageable because the company owns and controls all of its data center infrastructure.

“There are components we need to buy to repair for HPC, but those are things we can easily source,” he said.

In the next one to two years, Needham analysts estimate that major publicly traded bitcoin miners are expected to more than double power capacity, including both their mining and HPC business expansion plans.

Clean energy is a popular choice because it is the cheapest source of power in many markets. Miners at scale compete in a low-margin industry, where their only variable cost is typically energy, so they are incentivized to migrate to the world’s cheapest power sources. An industry report estimates that the bitcoin network is 54.5% powered by sustainable electricity.

The Electric Power Research Institute estimates that data centers could absorb up to 9% of the nation’s total electricity consumption by 2030, up from about 4% in 2023. The exploitation of nuclear energy is seen by many as the answer to meet that demand.

TeraWulf powers its mining sites with nuclear energy and is looking into machine learning. So far, the firm has committed two megawatts to HPC capacity, although it has plans to transition its energy infrastructure to AI and HPC.

OpenAI CEO Sam Altman told CNBC last year that he is a big believer in core power when it comes to serving the needs of AI workloads.

“I don’t see a way for us to get there without nuclear power,” Altman said. “I mean, maybe we can get there just with solar and storage. But from my vantage point, I feel like that’s the most likely and the best way to get there.”