The California Gold Rush in the mid-eighteenth and fourteenth centuries was a time of unparalleled opportunity and wealth for many. When news spread that gold had been discovered on the lands of pioneer John Sutter, it marked the beginning of one of the largest migratory movements in North American history.
Approximately 300,000 people from all over the United States and the world migrated to the region in pursuit of the wealth generated by rumors of gold’s existence.
Such was the impact of this movement that the San Francisco area, a small village at the time, transformed into a thriving city. There, numerous establishments and businesses were developed to cater to those arriving in search of a new life.
Those who managed to join the gold rush early enough, whether they were miners, traders, or other entrepreneurs, were able to amass fortunes. Unfortunately, not everyone who participated in the gold rush found success, and many ended up losing money.
This period stands as one of the most iconic examples of how new technology can generate immense wealth for those who grasp its potential. While thousands migrated to California in hopes of becoming rich by extracting gold, many entrepreneurs saw opportunities elsewhere: profiting from selling shovels, pickaxes, and leasing lands necessary for mining the precious metal.
The Gold Rush is often used as a metaphor in the investment world to illustrate that direct involvement in a product isn’t always the best way to capitalize on a sector. Often, providing infrastructure for a sector can yield high returns and can even mitigate various risks inherent to nascent industries.
In this article, we will compare the perspectives of entrepreneurs during the American West Gold Rush with bitcoin miners. From this comparison, we aim to draw parallels and conclusions about investing in bitcoin and specifically in bitcoin mining.
During the gold rush, shovel sellers played a significant role in the economy. They provided the necessary tools for the miners to extract gold from the ground.
While the miners were the ones actually doing the work of extracting the gold, they couldn’t have done it without the right tools. As a result, shovel sellers were able to make a good living during the gold rush.
Unfortunately, not all shovel sellers were successful. Those who were able to sell high-quality, durable, and effective shovels managed to establish a reputation for themselves and build a loyal customer base.
On the other hand, those who sold low-quality shovels that easily broke or were ineffective in prospecting for gold quickly gained a bad reputation and lost their business.
Others who indirectly benefited from the gold rush were the landowners in the region and those who acquired locations with metal stocks. Unlike many who ventured to directly extract gold and then resell it, or those who began to manufacture tools for mining it, many people saw the value of migration from the perspective of real estate and land.
Several individuals with purchasing power acquired lands during this period. Knowing the challenges of metal extraction and the value of scale in producing it, people migrated to the region focusing solely on the lands.
Such individuals would then lease their properties or hire contractors to mine gold on a larger scale and then sell it. This amplified the gains obtained from gold mining, as, in addition to the profit from the metal extraction itself, it was possible to achieve indirect profitability through land appreciation and increased rents.
Developers of Gold Extraction Techniques
As the movement progressed, and the number of people extracting gold from the region increased, the difficulty in finding it also grew. This required the development of new ways to locate and extract the ore.
The high concentration of gold in the sands of California, which initially allowed the use of only a pan to obtain a gold concentrate in rivers and streams, was quickly depleted. As a result, new sources were found in quartz veins.
Since veins are harder materials, however, different tools were needed to work with them. This led to the emergence of pickaxes. Just as with the pan, over time, mining using shovels and pickaxes also ceased to be an efficient way to obtain gold, even with the region’s previous abundance.
Thus, as time passed and the activity grew, numerous techniques were developed and refined. In more complex operations, miners diverted entire rivers to channels built along the river, to later dig in the riverbed. At other times, the river’s course was diverted, directing a high-pressure water stream to the gold deposits to aid in obtaining the gold that settles in the channels.
In quarries and mines, the pickaxes and shovels initially used gave way to dynamites and controlled explosions. These did the heavy lifting and paved the way for greater access to reserves, which were then further explored using pickaxes and shovels.
Bitcoin Mining and the Gold Rush
Today, we see a phenomenon similar to the gold rush with bitcoin and its mining. Bitcoin is a digital currency that has gained popularity in recent years. Just like the gold rush, those who got into bitcoin early managed to make significant profits, while others are still at a loss.
Bitcoin mining is the process of verifying transactions and issuing new units of the currency on the Bitcoin network. As compensation for this activity, miners are rewarded with the newly created bitcoins. As the popularity of this asset has grown, so has the demand for mining.
In the early days of bitcoin, mining was relatively simple and could be done using a standard computer. During this period, few users participated in mining, and little added value was associated with this activity and its surrounding commerce.
As the network grew and more people began to produce, use, and trade bitcoin, the difficulty of mining increased significantly, as did the remuneration rates for miners.
Today, bitcoin mining requires specialized hardware called ASICs (Application-Specific Integrated Circuits), which are specifically designed for bitcoin mining. This has sparked a new gold rush.
Just like the shovel sellers in the gold rush, landowners, and mining engineers, those who provide the necessary tools for bitcoin mining have often been able to achieve higher profitability than those who invest in the currency itself.
Companies that produce ASICs have taken the lead in this parallel gain structure surrounding bitcoin’s appreciation. The increasing number of individuals and companies demanding these products has driven significant gains.
Landowners and energy companies strategically located, as well as countries with legal issues and cheap energy, are also largely benefiting from the activity. They understood the potential of bitcoin mining and are on their way to making a fortune with the ecosystem to mine bitcoin.
Bitcoin mining companies that offer products associated with this activity, such as customized containers transformed into gigantic CPUs, as well as hosting and maintenance services for third-party equipment, have also been able to capitalize on the growing interest in bitcoin.
Key Differences for Success in the Evolution of the Ecosystem
The success stories of gold mining participants create a sampling bias focused on the winners, often overshadowing a more complex side to understanding the results obtained by those who took part in the venture. Among shovel sellers, landowners, and developers of new techniques who were successful, many also failed along the way, primarily due to neglecting the need to offer quality products and services with cost control.
Poor-quality materials, lands acquired without prior analysis of economic potential, and poorly developed techniques resulted in a large number of failures. However, these stories are little known today due to the overwhelming success of those who diligently did their work.
Investing in bitcoin mining and its ecosystem is no different. The activity has reached such a level of professionalization that it now requires an advanced level of specific technical knowledge and understanding of the industry to operate.
Manufacturers of poor-quality hardware or those not specialized in the field will invariably be unable to compete in supplying equipment to the industry. Similarly, energy providers from regions hostile to the activity will also face challenges. The same goes for bitcoin miners, as observed last year when less efficient players in the ecosystem went bankrupt due to poor cash management and resource allocation.
It is the bitcoin miners who consume the hardware for mining and are responsible for seeking energy sources to make the activity as cheap as possible. For their activities to be viable, miners evaluate: the performance of the machines; the best locations with the best energy contracts; and the ability to build mining structures that mitigate possible risks and optimize the productive capacity of the structure.
Parallels of the Success of the Gold Rush and Bitcoin Mining
In the 19th-century gold rush, those who employed the best techniques and tools managed to extract gold more efficiently, surpassing those who relied on traditional methods. This same principle applies today to the bitcoin mining industry.
ARTHUR, due to its efficiency in bitcoin mining, is a clear demonstration of how the application of better techniques and complete knowledge mastery of the different areas involving bitcoin mining can generate a more profitable result, as shown in the chart below.
To illustrate how bitcoin mining can be seen as analogous to selling shovels, that is, providing infrastructure for the crypto-asset ecosystem, we ran a simulation with real data taken from Trading View, Hashrate Index, and Coinmetrics. All data is public.
The above simulation compares the price variation of bitcoin, other commodities (coffee, gold, corn, and soy), and the indices of the Brazilian and American stock exchanges (Ibovespa and S&P500) with the gains related to bitcoin mining.
The mining gains are calculated based on the gross mining profit considering the sale of the bitcoins on the day they were mined and the price variation of the ASICs, which is calculated assuming that the infrastructure does not depreciate and that the machines depreciate logarithmically over 5 years. A management fee of 6% is included in the calculation, and the average energy cost considered was R$ 0.066/kWh.
In summary: on a specific date, the value in the “Mining” curves is the sum of everything that has been received from mining up to that point, the value of the complete infrastructure, and the price of the machines purchased at that time.
The gray curve of bitcoin mining profitability represents a hypothetical generic mining company and was plotted using generic data about the sector to infer profitability. The blue curve presents the profitability of ARTHUR, calculated using proprietary data based on ARTHUR’s operational information and strategy.
The simulation shows how ARTHUR manages to maximize the profitability of bitcoin mining by combining a management strategy of the mined bitcoins using a proprietary algorithm with expertise and mastery of the technical aspects of its operation. Just as the most successful entrepreneurs during the gold rush period were those who managed to master and better implement techniques and provide infrastructure and raw materials for that race.
The main factors that contributed to ARTHUR’s success are its continuous technological innovation, low energy cost, and expertise in system management. All these factors, when carefully maximized, reflect the result of the chart seen above.
ARTHUR knew how to invest in mining equipment at the right time, thus increasing its operational efficiency in bitcoin mining compared to other companies in the sector. In addition, ARTHUR also mastered the aspect of energy efficiency, which is a crucial issue in bitcoin mining. By constantly mapping potential cheap energy suppliers, ARTHUR manages to secure cheap energy deals.
Another fundamental aspect for ARTHUR has been its mastery over the complexities of the cryptocurrency market. The company understands that bitcoin mining is not just a technical issue but also involves a deep understanding of financial markets and fluctuations in the value of bitcoin. This strategic understanding of the markets allowed ARTHUR to make informed decisions about when and how to sell the mined bitcoins, thus maximizing its profits. ARTHUR, through the use of advanced techniques, continuous innovation, and deep knowledge of the multiple areas involving bitcoin mining, managed to make its operations more profitable than the industry average.
Investing in the bitcoin mining ecosystem and in the activity itself, not just in the buying and selling of the asset, can be compared to the gold rush due to the factors listed in the text.
Just like the shovel sellers, landowners, and mining engineers who provided the necessary tools for migrants to extract gold from the ground, those who invest in bitcoin mining provide the infrastructure and technical capacity for the structuring of this ecosystem and the creation of new bitcoins.
The growing interest in Bitcoin and its appreciation means that those who invest in this ecosystem can potentially reap significant rewards as the demand for miners’ equipment and services increases. For the investor potentially interested in mining, we suggest considering which companies in this segment are capable of offering high-quality options to decide where and how to start.
As mentioned in the introduction, investors often seek an indirect way to invest in an ecosystem by developing infrastructure for it. In the market, this strategy is compared to investing in infrastructure during the Gold Rush. Its main advantage is risk mitigation by reducing uncertainty.
A bitcoin miner can obtain cash flow, in the form of block rewards and transaction fees, regardless of the appreciation or decline of bitcoin. In other words, they can extract cash flow from a risky investment, just like the heuristic of shovel sellers during the Gold Rush.