Block reward mining threatened by Paper Bitcoin, centralization

Block reward mining economics is under threat from BTC’s paucity of transactions, miner centralization, and Donald Trump’s hatred of windmills.

The U.S. Attorney’s Office for the Western District of Washington has appealed a sentence of ‘time served’ given to Estonian nationals Sergei Potapenko and Ivan Turõgin for their conspiracy to defraud block reward mining investors of over half a billion dollars.

In November 2022, the Estonian duo were charged with operating a fraudulent mining operation called HashFlare that sold contracts entitling investors to a share of mining profits. However, HashFlare’s operations were much too small to generate the estimated $577 million in funds they solicited from investors between 2015 and 2019.

The pair needed 80,000 mining rigs to produce their claimed volume of BTC tokens mined, while in reality, they had only 164 rigs, most of which were faulty. Instead, Hashflare relied on “fake online dashboards” showing bogus mining results.

Potapenko and Turõgin used these dashboards to convince investors to fork over their cash, which the pair used to buy BTC tokens for themselves, along with real estate, luxury vehicles, jewelry, and trips on chartered jets.

The Department of Justice (DoJ) seized or restrained many of these assets, which have since been “preliminarily forfeited.” The value of the forfeited assets reportedly totals ~$450 million.

Arrested in Estonia in 2022, the duplicitous duo were later extradited to the U.S. but have been out on bail for over a year. The sentence handed down earlier this month by U.S. District Judge Robert Lasnik imposed no additional jail time, only financial penalties of $25,000 apiece and orders to complete 360 hours of community service while on supervised release.

Having sought 10-year prison terms for the pair, the DoJ has challenged this sentence at the Ninth Circuit Court of Appeals. The Western District’s Acting U.S. Attorney Teal Luthy Miller called HashFlare a “classic Ponzi scheme” and noted the “hundreds of thousands of victims” impacted by the fraud, 60,000 of whom live in the U.S. The fraud was the largest ever prosecuted in the Western District.

Analysts aren’t bullish on the DoJ’s odds for a successful appeal. The Ninth Circuit has a history of deferring to trial judges unless the sentence is viewed as wildly out of bounds. Judge Lasnik called the case “one of the most difficult sentencings” he’s dealt with in his 27 years on the federal bench.

However, other scammers convicted this year for similar mining-related frauds have received prison sentences ranging from 30 months to ten years. And in those cases, the scale of the fraud was much smaller than the sum stolen by the Estonians.

Complicating matters, in April, the U.S. Department of Homeland Security ordered the pair to “immediately” self-deport as part of the Trump administration’s crackdown on illegal aliens. The pair chose to remain in the U.S. until their sentencing, claiming to be respecting the Western District’s order to remain in King County, WA.

‘Paper Bitcoin Summer’ threatens miner economics

Scammers preying on the gullible are indeed a danger, but the BTC network’s long-term future remains in doubt as the economics of mining get tougher.

A new report from Galaxy Digital (NASDAQ: GLXY) details the side effects of the movement toward ‘paper Bitcoin.’ This phenomenon is based on the growing number of (a) ‘treasury’ firms bulk-buying BTC then mothballing the tokens while the companies’ share price (theoretically) rises, and (b) BTC-based exchange-traded funds (ETFs) that similarly buy-and-park countless tokens. Between these two sectors, as many as two million BTC may be sitting idle.

While the sheer volume of BTC acquired by these firms has been good for BTC’s fiat price, the resulting falloff in network transactions has been stark. Despite the view that BTC is enjoying a ‘bull market,’ the number of transactions waiting to be included in a BTC network block is at lows not seen since late-2022, aka the depths of the last ‘crypto winter.’

In the long run, fewer transactions generating greatly reduced fees is a recipe for failure. As detailed in the Bitcoin white paper, the long-term plan was for the size of individual blocks to increase over time, with a corresponding growth in the number of transactions, allowing fees to compensate for the scheduled reduction in block rewards.

As Galaxy put it, “a fee market in retreat raises real questions regarding network security … If more BTC volume continues to migrate to ETFs, custodians, and fast alt-L1s, the core network risks becoming a settlement layer without sufficient settlement activity.” BTC’s security model is becoming “more reliant on a kind of usage that’s no longer guaranteed. Fee volatility is nothing new, but Bitcoin does need real reasons to use the chain.”

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Next stop: Central(ized) Station

Another threat to BTC’s security could be much more immediate. On August 19, the two largest mining pools—Foundry and AntPool—saw their combined share of the overall BTC network hashrate exceed 50%. Foundry claimed a 33.6% share while AntPool added nearly 18%.

While these numbers have since retreated somewhat, it would only take one additional pool (either SpiderPool or F2Pool) for that 50% level to be breached. Some BTC historians don’t find this comforting, recalling earlier periods when miner centralization led to undesirable outcomes.

Obviously, mining pools are comprised of individual operators who conceivably would object to any temptations to exploit dominance over BTC’s network security by withdrawing their contribution to the pool’s hash. But they could only do so after the fact, by which point all sorts of damage could have been done.

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With cheap power comes great responsibility

More than ever, mining profitability depends on access to abundant supplies of cheap energy. As Matt Schultz, CEO of CleanSpark (NASDAQ: CLSK), noted at last week’s crypto shindig in Wyoming, he and his mining peers no longer talk about hashrate, only about “how to monetize megawatts.”

CleanSpark has 800MW of energy infrastructure in operation with a further 1.2GW in development, giving the company what Schultz called opportunities to “look at ways to monetize power beyond just Bitcoin mining.”

Patrick Fleury, CFO of TeraWulf (NASDAQ: WULF), called mining “an incredibly difficult business,” with power alone consuming over half the company’s mining revenue. Worse, ASIC mining rig makers like Bitmain—responsible for 90% of ASIC production—keep churning out new rigs regardless of market demand, deploying excess rigs to cheap power regions like Pakistan to self-mine BTC, boosting the already sky-high network difficulty rate and making mining even costlier for everyone else.

With more and more miners choosing to base themselves in the U.S. following President Trump’s electoral victory, the U.S. share of global hashrate recently topped 75%. Combined with the expansion of AI-fueled data centers, U.S. electricity demand grew by ~3% in the first half of 2025.

Wind power claimed a 12% slice of the national electricity grid during this period, well ahead of other renewables but well shy of natural gas (39%), nuclear (18%), and coal (17%). So it’s probably not great that the Trump administration continues to tilt at windmills, including issuing a stop-work order on August 22 to an offshore wind project that was 80% of the way to completion.

The Revolution Wind Project was expected to power up to 350,000 homes in Connecticut and Rhode Island. The order from the Department of the Interior’s Bureau of Ocean Energy Management justified the halt by citing unspecified “concerns related to the protection of national security interests.” In a Truth Social post on August 20, President Trump declared that the government “will not approve wind or farmer destroying Solar.”

Trump has always had an undisguised animus toward windmills, but, given rising energy demands and his desire to lead the world in both mining and AI, this anti-renewable campaign seems both Quixotic and more than a little counterproductive.

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Hut 8 to more than double power capacity

On August 26, mining operator turned ‘energy and digital infrastructure platform’ Hut 8 (NASDAQ: HUT) announced plans to develop four new sites across the U.S. Hut 8 said the new sites will add 1.5GW to its current capacity, bringing total capacity to over 2.5GW once the four sites are ‘commercialized.’

Said commercialization will involve both BTC mining and powering high-performance computing (HPC) operations. Hut 8 is in the process of transferring the bulk of its mining operations to American Bitcoin Corp (ABTC), a majority-owned subsidiary that also involves the president’s sons Don Jr. and Eric Trump.

Hut 8 CEO Asher Genoot said the four expansion sites—two in Texas, one each in Louisiana and Illinois—are intended “to broaden our geographic footprint as we seek to capture opportunities in markets where we see energy demand rising most rapidly.”

Neither the cost nor the timing of this expansion was specified, but Hut 8 says not to worry on the cost front, as it has “assets and available financing arrangements supporting up to $2.4 billion in liquidity, including cash, Bitcoin, credit, and the Company’s at-the-market (ATM) equity program.”

The markets apparently liked what they heard, as Hut 8’s share price jumped 10% on Tuesday, rising another 1.7% on Wednesday to close at $26.35.

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