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DAM: Question & Answer

April 05, 2022

Read Time 9 MIN

In this Q&A, we explain the logistics of digital mining, its often misunderstood energy requirements and the underlying features of the DAM strategy.

Digital assets mining companies provide critical infrastructure to the broader digital assets ecosystem, and pose a unique investment opportunity when compared with the broader crypto landscape.

This blog focuses specifically on digital asset miners and is intended to answer the frequently asked questions related to the digital assets mining process and VanEck’s Digital Assets Mining ETF (DAM).

Some of the more popular questions are:

Q: What are Digital Assets Miners and how do they generate a return?

A: Mining is the process by which new units of cryptocurrency are created. Miners use specialized computer chips in conjunction with software to solve complex math problems. In solving these problems, transactions that exist in the current block are verified by multiple participants. As the problems are solved, miners are rewarded with newly issued cryptocurrency.

Digital Assets Mining

Source: VanEck as of 2022.

Q: We always hear about bitcoin mining: are other crypto currencies “mined”?

A: Currently, Bitcoin and Ethereum are both mined. The vast majority of cryptocurrencies, by market capitalization, are “Proof of Work.”i That means they are mined. However, the vast majority of cryptocurrencies, by number, will eventually beii “Proof of Stake”.iii

Q: Where are most Bitcoin mined?

A: The U.S. heads the list. As of August 2021, more than 35% of the power used to mine Bitcoin is sourced from the U.S. This has increased dramatically over the past couple of year: up from just 4% in 2020. The main reasons? China threw out the miners (and made mining illegal) and, Texas policy makers overtly began to invite crypto miners, and their capital, into the state. The U.S. is followed by Kazakhstan, supplying 18%; Russia, supplying 11%; and Canada, supplying 10%.iv

Bitcoin Mining—Country Share

Bitcoin Mining - Country Share

Source: The Cambridge Centre for Alternative Finance as at August 1, 2021.

Q: Where can I find out information about crypto mining energy consumption?

A: The Cambridge Centre for Alternative Finance is one of the definitive sources and produces monthly data. Another one is the Bitcoin Mining Council, an industry association, which now puts out a quarterly report.

Q: Which consumes least energy: Proof of Work or Proof of Stake?

A: Proof of Stake can use over 99% less energy than Proof of Work.v But, Proof of Work networks are, mathematically, more secure. Generally speaking, you would need 51% hostile actorsvi colluding to destroy a Proof of Work network. That number can decline to 33%vii for a Proof of Stake network.

Q: How much energy does crypto mining consume each year?

A: It depends on the units of measurement. First, gigawattsviii (“GW”). You may remember that, back on October 21, 2015, in “Back to the Future Part II”, Marty McFly and Doc Brown used 1.21GW of power to travel through time in Doc’s DeLorean. A more “down to earth” comparison would be that one gigawatt can power approximately 750,000 homesix and is the output of an industrial-sized power plant. (Some other interesting comparisons can be found here.)

The current estimate is that, at any one time, Bitcoin mining’s “draw” on the grid is approximately 10GW.x It’s important, though, to put this in some kind of perspective: in 2019, globally, the total installed electricity capacity was 10,000 GW.xi

Having said that, vis-à-vis that number of 10GW, there currently are a wide range of different figures, ranging from approximately 3GW to 36GW. The Cambridge Centre’s estimate of 14.27 GW is in the mid-point of that range.xii But, in a recent report from Coinshares, the figure for total “known” power draw was 3.3 GW.xiii So, a definitive figure is very hard to come by.

One thing to remember, however, is that, here in the U.S., the figure for the country’s energy consumption is three to four times that for its electricity alone. The number globally is probably even more than that. So, rough numbers for Bitcoin mining consumption are about 28 bps’ worth of global energy production and 56 bps’ worth of global electricity production.xiv

Perspective is important, though:

  • The cruise ship industry consumes two times the energy of bitcoin network.xv
  • “Always-on” devices (just in the U.S.) consume 12 time as much. (That’s just the energy expended for the convenience of having something respond instantly, rather than after a few seconds!)xvi
  • Christmas lights in the U.S. consume the equivalent of the bitcoin network.xvii
  • In 2016, the online ad. industry’s energy usage was equivalent to that of the Bitcoin network in 2021.xviii

Essentially, it’s a question of “tradeoffs”. Galaxy has done some work on trying to figure out just how much energy the banking industry uses, e.g., in banking data centers, bank branches, ATMs and card network’s data centers. (There has been an open source project on GitHub to try and figure that out.) The answer, as of mid-2021, was estimated at 239 TW a year, i.e., some 50%-100% more than bitcoin network. Estimates for gold industry are comparable at 241 TW a year—depending upon when you are measuring it.xix

Q: How much of that energy is sustainably sourced?

A: The Bitcoin Mining Council was formed to answer questions just like this. Their survey covers about half of the Bitcoin network. Of those covered by the survey, 66% is the ratio for sustainable power usage, with their overall estimate being that in the fourth quarter of last year, over 58% of total Bitcoin mining was powered by renewable sources.xx

Q: Should we really be thinking about efficiency as opposed to consumption?

A: That’s the story of humanity, right? We use more energy more efficiently every year. Bitcoin miners have been seeing massive efficiency gains thanks both to Moore’s Law and to innovations in cooling. A combination of those two primary factors has led to efficiency gains. The average compound annual growth of efficiency of Bitcoin (we measure that in Joules/gigahashes) has been around 20% over the last six to seven years.xxi When it comes to cooling innovation, historically miners have used air-cooling, but they are now starting to put their machines in fluid and using software to regulate which rigs need the coolant and which don’t.

As an afterword, it is worth mentioning that batteries are widely acknowledged as a limiting factor in meeting the goals of the Paris Climate Accord. Bitcoin mining should be thought of as an economic “battery” that captures wasted energy that wouldn’t be able to be used and puts it to productive use. It allows that energy to be stored and monetized instantaneously. Therefore, Bitcoin mining should be viewed as an “economic” battery, with a focus on what value is created based on the energy usage, not a focus on just much energy is consumed.

Q: What are the similarities and differences between VanEck’s Digital Transformation ETF (DAPP) and VanEck’s Digital Assets Mining ETF?

A: VanEck’s Digital Transformation ETF (DAPP) and VanEck’s Digital Assets Mining ETF (DAM) do have common thematic elements, but they are not the same. We view digital assets miners as a distinct sub-segment of the broader digital assets ecosystem. Crypto miners currently represent over 50% of the broader digital assets landscape, as represented by the VanEck Digital Transformation ETF. DAM is providing targeted exposure to the mining segment, while DAPP provides exposure to the broader opportunity set.

Digital asset miners represent the largest segment in the publicly-traded digital assets ecosystem

Digital asset miners represent the largest segment in the publicly-traded digital assets ecosystem

Source: MVIS, VanEck as of 12/31/21. Weights reflect the percentage the MVIS Global Digital Assets Equity Index with primary exposure to a specific business line. Business lines are defined and evaluated by the index provider and VanEck. See disclosures at end.

Broadly speaking, the funds are both utilizing the same core methodology to provide pure-play exposure to a specific theme (digital assets and digital assets miners). Because the focus is different, the resulting portfolios are different as well, despite working within the same broad universe. DAM’s underlying index tilts towards smaller companies, meaning that its weighted average market cap is materially lower than DAPP’s.

Q: What are the underlying features of the VanEck Digital Assets mining strategy?

A: The VanEck Digital Assets Miners ETF is a passive investment vehicle which seeks to track as closely as possible, before fees and expenses, the price and yield performance of the MVIS Global Digital Assets Mining Index (MVDAMTR). This index is intended to track the performance of companies that are participating in the digital assets mining economy.

Digital Assets Mining Companies are companies that engage in and/or assist mining activities, including mining-technology companies that provide hardware, software services or other technologies to companies engaged in digital asset mining activities, and companies engaged in digital asset-related projects that facilitate the adoption of digital assets.

VanEck’s Digital Assets Miners ETF offers investors targeted exposure to the largest portion of the publicly-traded digital asset ecosystem, digital asset miners. The mining space is an integral part of the blockchain and a high-growth segment of the digital asset economy. To accommodate the fast-paced nature of this market, DAM’s underlying index includes fast-track inclusion rules for investors to gain access to mining companies promptly after their initial public offering.

Q: What are the potential risks these miners face?

A: One of the primary risks that crypto participants are focused on right now is regulatory risk. Globally, governments are in a state of flux when it comes to how they should go about regulating the mining, exchange and tax of digital assets. While some countries have outlawed cryptocurrencies in their entirety, others have adopted Bitcoin as legal tender. Many countries have yet to establish a regulatory framework for the asset class leading to increased concern when it comes to investor access and sentiment.

Digital assets miners also have to deal with the risk of the underlying volatility of the broader digital asset class. Miner’s margins and profitability are typically closely tied with the price of the cryptocurrency being mined. If crypto prices fall, miners may become unprofitable, which would affect share price.

Finally, digital assets miners could be broadly considered to be part of the fast-growing and richly-valued segment of the broader market. High growth stocks are prone to valuation risk, meaning that any downward revision to growth figures could lead to a sizeable re-valuation of the stock price to more normal levels.

Q: How can investors buy VanEck ETFs?

A: Learn more here.


Have More Questions? - Ask VanEck

Have More Questions? - Ask VanEck

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Important Disclosures

i Proof of Work is a decentralized consensus mechanism that required members of a network to expend effort solving an arbitrary mathematical puzzle to prevent anybody from gaming the system.

ii Cryptoslate, https://cryptoslate.com/, as of February 8, this assumes Ethereum will transition to Proof of Stake in 2022.

iii Proof of Stake is a class of consensus mechanisms for blockchains that work by selecting validators in proportion to their quantity of holdings in the associate cryptocurrency.

iv The Cambridge Centre for Alternative Finance: https://ccaf.io/cbeci/mining_map.

v Bloomberg: Crypto’s Energy Guzzling Sparks an Alternative That Merely Sips, November 17, 2021, https://news.bloomberglaw.com/esg/cryptos-power-guzzling-sparks-an-alternative-that-merely-sips.

vi NBX: What is a 51% attack?, https://nbx.com/crypto101/what-is-a-51-attack.

vii Stalking Rewards: Research Report: Is Proof of Stake better than Proof of Work?, October 2, 2019, https://www.stakingrewards.com/journal/proof-of-work-vs-proof-of-stake-research-report/.

viii A gigawatt is a unit of power. There are one billion watts in a gigawatt.

ix CNET: Gigawatt: The solar energy term you should know about, November 16, 2021, https://www.cnet.com/home/energy-and-utilities/gigawatt-the-solar-energy-term-you-should-know-about/.

x Coinshares: The Bitcoin Mining Network, January 2022.

xi Statista: Installed electricity capacity worldwide in 2019, by source https://www.statista.com/statistics/267358/world-installed-power-capacity/.

xii The Cambridge Centre for Alternative Finance: https://ccaf.io/cbeci/index on February 8, 2022.

xiii Coinshares: The Bitcoin Mining Network, January 2022.

xiv Ibid.

xv Iowa Mining Facility: Is Bitcoin and Bitcoin Mining environmentally friendly?, September 17, 2021, https://www.linkedin.com/pulse/bitcoin-mining-environmentally-friendly-jp-baric?trk=articles_directory.

xvi Galaxy Digital: On Bitcoin’s Energy Consumption: A Quantitative Approach to a Subjective Question, May 2021, https://docsend.com/view/adwmdeeyfvqwecj2.

xvii Mawson: Bitcoin Mining Uses Less Energy Than Christmas Lights, December 13, 2022, https://mawsoninc.com/bitcoin-mining-uses-less-energy-than-christmas-lights/.

xviii This Machine Greens (documentary): https://thismachinegreens.com/.

xix Galaxy Digital: On Bitcoin’s Energy Consumption: A Quantitative Approach to a Subjective Question, May 2021, https://docsend.com/view/adwmdeeyfvqwecj2.

xx COINTELEGRAPH: Bitcoin mining becomes more sustainable: Mining Council's Q4 survey, January 19, 2022, https://cointelegraph.com/news/bitcoin-mining-becomes-more-sustainable-mining-council-s-q4-survey.

xxi Hashrate Index: https://data.hashrateindex.com/rig-index-data.

The information herein represents the opinion of the author(s), an employee of the advisor, but not necessarily those of VanEck. The securities/ financial instruments discussed in this material may not be appropriate for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security/financial instrument, or to participate in any trading strategy.

Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data.

The Funds will not invest in digital assets (including cryptocurrencies) (i) directly or (ii) indirectly through the use of digital asset derivatives. The Funds also will not invest in initial coin offerings. Therefore the Funds are not expected to track the price movement of any digital asset.

Investors in the Funds should be willing to accept a high degree of volatility in the price of the Fund’s Shares and the possibility of significant losses. An investment in the Funds involves a substantial degree of risk. An investment in the Funds is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Therefore, you should consider carefully various risks before investing in the Funds, each of which could significantly and adversely affect the value of an investment in the Funds.

An investment in the Funds may be subject to risks which include, among others, risks related to investing in digital transformation companies, investing in equity securities, Canadian, Chinese and European issuers, small- and medium-capitalization companies, information technology and financials sectors, foreign securities, market, operational, index tracking, authorized participant concentration, new fund, absence of prior active market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, non-diversified and concentration risks which may make these investments volatile in price or difficult to trade. Small- and medium-capitalization companies may be subject to elevated risks.

The technology relating to digital assets, including blockchain, is new and developing and the risks associated with digital assets may not fully emerge until the technology is widely used. Digital asset technologies are used by companies to optimize their business practices, whether by using the technology within their business or operating business lines involved in the operation of the technology. The cryptographic keys necessary to transact a digital asset may be subject to theft, loss, or destruction, which could adversely affect a company’s business or operations if it were dependent on the digital asset. There may be risks posed by the lack of regulation for digital assets and any future regulatory developments could affect the viability and expansion of the use of digital assets.

Digital asset miners and other hardware necessary for digital asset mining are subject to the risk of malfunction, technological obsolescence, the global supply chain issues and difficulty and cost in obtaining new hardware. Malfunctions and normal wear and tear will, at any point in time, cause a certain number of digital asset miners to be taken off-line for maintenance or repair. Any major digital asset miner malfunction could cause significant economic damage. The physical degradation of miners will require replacement of miners. Additionally, as technology evolves, there may be a need to acquire newer models of miners to remain competitive, which can be costly and may be in short supply. Given the long production period to manufacture and assemble digital asset miners and the current global semiconductor chip shortage, there can be no assurance that miners can acquire or maintain enough digital asset mining computers or replace parts on a cost-effective basis for efficient and profitable digital asset mining operations.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. The value of cryptocurrency may be derived from the continued willingness of market participants to exchange fiat currency for cryptocurrency, which may result in the potential for permanent and total loss of value of a particular cryptocurrency should the market for that cryptocurrency disappear.

Cryptocurrencies are not covered by either FDIC or SIPC insurance.

Investing in cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing. There is no assurance that a person who accepts a cryptocurrency as payment today will continue to do so in the future.

The features, functions, characteristics, operation, use and other properties of the specific cryptocurrency may be complex, technical, or difficult to understand or evaluate. The cryptocurrency may be vulnerable to attacks on the security, integrity or operation, including attacks using computing power sufficient to overwhelm the normal operation of the cryptocurrency’s blockchain or other underlying technology. Some cryptocurrency transactions will be deemed to be made when recorded on a public ledger, which is not necessarily the date or time that a transaction may have been initiated.

  • Investors must have the financial ability, sophistication and willingness to bear the risks of an investment and a potential total loss of their entire investment in cryptocurrency.
  • An investment in cryptocurrency is not suitable or desirable for all investors.
  • Cryptocurrency has limited operating history or performance.
  • Fees and expenses associated with a cryptocurrency investment may be substantial.

There may be risks posed by the lack of regulation for cryptocurrencies and any future regulatory developments could affect the viability and expansion of the use of cryptocurrencies. Investors should conduct extensive research before investing in cryptocurrencies. Past performance is not a guarantee of future results.

Information provided by Van Eck is not intended to be, nor should it be construed as financial, tax or legal advice. It is not a recommendation to buy or sell an interest in cryptocurrencies.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

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