City of the big shoulders, hog butcher for the world, Chicago is looking to add another title for the digital age: cryptocurrency finance center.
From the Midwest’s largest cryptocurrency mining facility to a Chicago-based Bitcoin ATM operator, Illinois is becoming fertile ground for the fast-growing digital asset industry, which has developed from an arcane concept into a booming investment in a little over a decade.
With little regulation and no backing other than the faith of its fervent believers, cryptocurrency has turned into digital gold for early adopters, despite wild market fluctuations and no shortage of naysayers. Led by Bitcoin, cryptocurrency now has a market cap north of $1 trillion.
Billionaire investor Warren Buffett has been among the most vocal Bitcoin critics, saying it has no unique value and calling it a “delusion.”
“The real expert, the final arbiter of what’s happening, is the market itself,” said David Carman, a fintech consultant and board member at Global DCA, a Chicago-based cryptocurrency industry association. “People can pass judgment on Bitcoin all they want, but when you have a market that has reached over a $1 trillion, this is way beyond proof of concept.”
Launched in 2009 by anonymous computer developers, Bitcoin is a decentralized peer-to-peer payment network. While there is no central bank, the encrypted digital transactions are verified by blockchain technology, a type of database that forms a permanent ledger of all transactions across the shared computer network.
Bitcoin is the most valuable cryptocurrency, with a market cap of about $707 billion, according to CoinMarketCap, a price-tracking website for cryptoassets. The price of a Bitcoin went from about $600 five years ago to more than $60,000 before a May 12 tweet by Tesla CEO Elon Musk about the industry’s large carbon footprint precipitated a nearly 50% price tumble.
The price has since recovered to about $38,000 per Bitcoin.
Other major cryptocurrencies include Ethereum and Dogecoin, which was started in 2013 by a pair of software engineers as a joke. Early investors have gotten the last laugh however, with Dogecoin’s market cap hovering at about $40 billion, according to CoinMarketCap.
The total cryptocurrency market cap topped $2 trillion for the first time this spring before the May sell-off cut the industry valuation nearly in half.
Major banks are starting to warm up to cryptocurrencies. In May, Jane Fraser, CEO at New York-based megabank Citi, told the Economic Club of Chicago that cryptocurrencies are going to be “part of the menu” going forward, but warned to “not forget the power of the guardrails.”
With valuations growing, Illinois legislators are weighing a bill that would create a special purpose depository trust for digital assets, providing a regulatory framework for banks and other custodial institutions to hold cryptocurrency accounts for clients. The proposal, which unanimously passed the House in April, did not make it through the Senate before summer recess, and will likely be taken up in the fall.
If it passes, the bill would make Illinois the second state behind Wyoming to allow special trusts to hold cryptocurrency. In 2020, cryptocurrency exchange Kraken became the first digital assets company in the U.S. to be chartered as a bank under Wyoming law.
In addition to encouraging digital asset banks and exchanges to locate in Illinois, the proposed legislation could help build a broader ecosystem, turning Chicago into the cryptocurrency financial center of the U.S., according to its backers.
“It’s not only just about the charter itself, but it’s also the signal to businesses who are dealing in this space that we will create a stable regulatory environment,” said state Rep. Margaret Croke, D-Chicago, the bill’s chief sponsor. “This is the one time we could beat New York in financial services or in an emerging industry.”
The Chicago area is already home to an eclectic and growing list of cryptocurrency businesses that have staked their turf in the digital gold rush.
Bitcoin mining harnesses banks of computers called mining rigs to come up with the random alphanumeric sequences needed to mint new coins. The protocol calls for a maximum of 21 million Bitcoins. Currently, there are about 18.7 million Bitcoins in circulation.
It is projected to take more than a century before the last Bitcoin is mined.
The mining process requires huge amounts of electricity. The Cambridge Bitcoin Electricity Consumption Index pegs the energy consumed annually by the Bitcoin network at 96.63 terawatt hours of electricity — more than the amount consumed in a year in the Philippines or Kazakhstan, for example.
Sangha Systems, a New York-based company, launched the Midwest’s largest cryptocurrency mining facility in fall 2019 at a former steel mill in downstate Hennepin. It is planning to convert it to solar power to address growing concerns that the industry is creating a huge carbon footprint.
“It’s absolutely true that cryptocurrency mining uses an amount of electricity that is unprecedented,” said Spencer Marr, 33, president and co-founder of Sangha Systems. “I look at the demand for electricity that mining represents as effectively a subsidy for the build out of renewable energy supply.”
The 873-acre steel mill, located about two hours southwest of Chicago, closed in 2009 and much of the 1.35 million-square-foot complex was demolished in 2017. Sangha leases 50 acres, including a privately owned substation and a building housing the mining operation. The 25,000-square-foot facility, which formerly served as a boiler house for the steel mill, is about one-third filled with servers making the complex calculations that mine and mint Bitcoins.
The substation has the capacity to deliver 82 megawatts of electricity. The cryptocurrency mining facility is currently using about seven megawatts, or about half of the electricity used by the entire steel mill at full operation. It is enough electricity to power about 5,000 homes each day, Marr said.
Marr, whose background is in renewable energy, said he hopes to break ground on the solar array by the fall, and begin harvesting sunlight for the cryptomining facility next year. To make the conversion to solar power cost efficient, Sangha will be looking for renewable energy incentives from the state.
As interest in cryptocurrency grows, Marr hopes to expand the capacity of the mining facility and the solar array needed to power it. That will require building a bigger facility to house the computers and leasing more land at the former steel mill site for the solar panels.
“Ultimately it would be a massive sea of a solar panels,” Marr said.
Founded in 2015, CoinFlip is a Chicago-based Bitcoin ATM operator with over 2,500 machines across 47 states, including more than 100 in Chicago and the suburbs. Many of the machines are located in gas stations, convenience stores and restaurants — the same places you might find traditional bank ATMs.
The Bitcoin ATMs, however, are much more of an investment tool than a quick way to get cash.
CoinFlip primarily changes cash into Bitcoin, selling over $5 million in digital assets per day. The average transaction is several hundred dollars, buying a fractional amount of the $38,000 Bitcoin, which is then placed in the customer’s digital wallet or a custodial account.
“Basically every transaction is always fractional amounts of Bitcoin,” said Deerfield native Ben Weiss, 26, CEO of CoinFlip. “No one’s buying a full Bitcoin. No one’s putting in $40,000 of cash into the machine.”
The maximum ATM transaction is $16,000. Less than 5% of transactions turn Bitcoin into cash, Weiss said.
Last year, CoinFlip did $750 million in cryptocurrency transactions. That number is projected to double in 2021 to $1.5 billion. The company generated $50 million in revenue from transaction fees last year, a number that is also projected to double in 2021, Weiss said.
Bootstrapped from inception, privately held CoinFlip has never raised any outside investor money, Weiss said. The company, which has offices near the United Center on the Near West Side, employs about 200 people in the Chicago area.
CoinFlip’s transaction fees are unaffected by the wild price swings in Bitcoin valuation, and business keeps ramping up as cryptocurrency gains wider acceptance. On Thursday alone, CoinFlip planned to install three ATMs in the Chicago area: liquor stores in Plainfield and Warrenville, and an African grocery store in Bolingbrook.
“We’re putting out like 300 ATMs a month now,” Weiss said. “So we’re in hyperscale mode.”
If cryptocurrency ever gains traction as actual currency, CoinFlip will be well-positioned to transition to the role of a traditional bank ATM, doling out cash for small purchases. But the business model does not depend on such an evolution, Weiss said,
“I don’t know if people are necessarily ever going to use Bitcoin to buy a $3 coffee,” Weiss said. “If you think the price is going to keep going up, you’re not going to use it as a currency.”
The CME broke new ground when it began trading Bitcoin futures in 2017. Since then, a growing list of dedicated cryptocurrency exchanges have sprung up, including one that recently moved to Chicago.
FTX.US, a fledgling cryptocurrency exchange previously based in California, opened its primary office in the West Loop on Wednesday.
The exchange, which launched last year during the pandemic, has an average daily volume of $150 million in spot cryptocurrency trades and is growing rapidly, according to Brett Harrison, 33, president of FTX.US.
“Chicago is a major financial hub of the U.S. and it’s really important for us to have a presence here as traditional finance firms continue to move into digital assets and we continue to onboard and form strategic partnerships with all these firms,” Harrison said.
FTX.US is still a relatively small player in cryptocurrency trading, where 308 spot exchanges had a 24-hour trading volume of nearly $263 billion on Thursday, according to CoinMarketCap. Coinbase, the largest U.S. cryptocurrency exchange, had a trading volume of $335 billion in the first quarter, according to financial reports.
While cryptocurrency has gained momentum as an investment, its use as an actual currency has yet to gain traction in the U.S., in part because of its wild fluctuation in value.
But amid growing ranks of consumers whose digital wallets are bulging with Bitcoins, an increasing number of companies are promoting their willingness to accept cryptocurrency as payment for goods and services.
A December 2020 analysis by small business lending website Fundera found that 2,300 U.S. businesses accept Bitcoin, including 43 in Illinois. In April, Lincolnshire-based Camping World announced it would begin accepting cryptocurrency as payment for RVs through BitPay, a cryptocurrency payment service provider.
“There certainly are companies who are advertising that they are accepting Bitcoin,” said Amy Park, a Chicago-based blockchain and digital assets consultant for accounting giant Deloitte & Touche. “It’s another form of marketing to their customers.”
Park said many of the companies accepting Bitcoin pay a third-party processor to turn the crypto into cash, so the transaction never reflects the volatility of digital asset valuation. She said adoption will grow as more companies get comfortable holding cryptocurrency and using it in their own business.
In March, EV automaker Tesla announced it would begin accepting Bitcoin as payment for its cars, providing a significant boost to the cryptocurrency, which hit an all-time high of $63,000 in April. Tesla CEO Musk did an abrupt U-turn in May, tweeting that the automaker, which bought $1.5 billion worth of Bitcoin in January, would no longer accept it as payment for its vehicles because of concerns over the “rapidly increasing use of fossil fuels for Bitcoin mining.”
Some decried Musk’s comments as market manipulation after it was disclosed that Tesla sold 10% of its Bitcoin assets for $272 million in the first quarter, boosting the automaker’s profits by more than $100 million for the quarter.
On June 13, Musk tweeted that Tesla would resume accepting Bitcoin when there’s confirmation of 50% clean energy usage by miners “with positive future trend,” which helped to boost Bitcoin prices back up to $38,000.
That’s just about enough to buy a Tesla Model Y with one Bitcoin.