{ "episodeId": "SLP158", "speakers": { "stephan": { "name": "Stephan Livera", "role": "host", "tag": "STEPHAN" }, "john_lee_quigley": { "name": "John Lee Quigley", "role": "guest", "tag": "JOHN" } }, "segments": [ { "speaker": "stephan", "time": "00:09", "start": 8.57, "text": "Welcome to the Stephan Livera podcast, a show about Bitcoin and Austrian economics. It's certainly been a very eventful last few weeks globally with coronavirus and all the movements in the markets, both Bitcoin and in the normal markets. Hope you're all doing well. Today my episode is with John Lee Quigley of Miner Update and Adaptive Analysis, and we're talking- Talking about some of the impacts of those big market shifts and price shifts on Bitcoin mining and some of the trends in Bitcoin mining. So this episode is brought to you by Kraken, one of the world's leading Bitcoin exchanges, offering a high quality platform with high liquidity, high trading volume and low fees, with no minimum or hidden fees. 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Orders are going out now, go and order yours at ciphersafe dot io. Here's my interview with John. John, welcome to the show." }, { "speaker": "john_lee_quigley", "time": "03:23", "start": 202.65, "text": "Stephan, thanks for having me on." }, { "speaker": "stephan", "time": "03:24", "start": 204.31, "text": "John, I've had a chance to read some of your work. I know you're working with Miner Update, and also you are writing, Bitcoin material at, Adaptive Analysis as well. So, I, I thought it would be good to get you on and talk about, you know, the mining world and other stuff that you're seeing in kind of the Bitcoin world. Obviously, it's, it's been pretty crazy the last week or so, but, let's, let's start with you. What, how" }, { "speaker": "john_lee_quigley", "time": "03:53", "start": 232.89, "text": "yeah, absolutely. So it's actually a bit of an interesting story there. First of all, I was a bit of, a finance man, was very interested in the markets and I was doing a degree in science in college, and it wasn't really doing it for me, so I just, started to get very interested in the markets and, started working my way up for a career in that. And, I was doing a sales job in Dublin, and I was walking by this, bakery, and it said, \"The world's first smart bakery.\" And I went in, and I met the owner, and, He was showing me all these cool things, he was saying, \"Yeah, we have the fridge connected to the phone, and it turns off at a specific time, and blah, blah, blah, and lots of things.\" And he said, \"We also set Bitcoin.\" And I was like, \"What is Bitcoin? \" And, he gave me probably the worst description of Bitcoin I ever received. It was 2014 or 2015 at that time. So I went back, I gave it to Google, and, I tried to learn a bit more and I was thinking, \"Wow, this is Ponzi scheme for sure. I'm gonna stick to monitoring the oil markets or looking at commodities or something like that.\" But, it stuck in my mind anyway, and I progressed with a finance career, and the second time I went to look back at it, I looked a bit deeper into it, and I was like, \"Wow, this is actually, this is an amazing technology here. This is something which is here to stay.\" And, Then at the end of 2017, I ended up leaving my, my job in finance and started working full time in the crypto industry and writing content and doing research." }, { "speaker": "stephan", "time": "05:34", "start": 333.66, "text": "Awesome. And I know you've done a lot of work with Miner Update. So what's your interest around Bitcoin mining? Why did you get into mining specifically?" }, { "speaker": "john_lee_quigley", "time": "05:42", "start": 341.59, "text": "Mining is always something which had interested me, even when I was mostly writing about the markets and about the technology side of things. And last year, I started working with the co- Founders of Miner Update, Daniel and Mia, who were doing an absolutely fantastic job there. They had a great vision for the company. I was used to doing writing work with a lot of clients who really had an emphasis on pushing out high volumes of content, but very low quality. And immediately working with Daniel and Mia, I could see their focus was something different. They were very picky with the topics to be released on the website, and I really vibe with that. It was, it was a nice change. And then over 2019, we started working closer and closer together, and, I manage the, the content and the research now for them, and, they also hosted a conference in China in October last year, which was a huge success, and, yeah, there's gonna be big things in store for Miner Update in the future." }, { "speaker": "stephan", "time": "06:54", "start": 413.78, "text": "It seems to me like a very undercovered aspect of Bitcoin in some ways, because If you think, okay, the man on the street, and they look, they think about Bitcoin, they might hear about Bitcoin mining, but amongst certain, you know, parts of the industry, mining isn't really discussed that often, and that was for me, it was something, it's like, oh, actually, I should, I should cover this a bit more myself as well. So obviously the big news over the last week has been the recent price drop. We've gone from whatever nine thousand USD to, at, at the time of recording now, we're sitting around five thousand three hundred Interesting when you're looking at it from a mining perspective, because a miner is thinking about, okay, at what price I'm a profitable. So what are some ways that you would think through that, or you might, you know, because I know you speak a lot with miners, obviously, what are some ways to think through that?" }, { "speaker": "john_lee_quigley", "time": "07:45", "start": 464.88, "text": "Well, firstly, I think it's worth pointing out that People now who have a lot of cash on the sidelines, it's an opportune time for them, because a lot of businesses are feeling the crunch, a lot of businesses are just running because they have access to easy credit. And these businesses, now the high quality ones, can be picked up by people with cash on the sidelines. And mining's gonna be very similar. A lot, a lot of miners are just operating barely below the breakeven, and if you set up a mining operation, you're vulnerable to two things. You're vulnerable to price decreases, and you're vulnerable to an increase in difficulty level, and you have little control over these, especially if you're just operating below the breakeven. So the forty percent plus price drop we've seen on Thursday means a lot of miners now are gonna either be operating below their all-in, breakeven ROI or for money, they're gonna drop below their cash flow breakeven, which means they have to shut off their rigs. Maybe they wanna sell their rigs on the market, and those miners with huge cash balances can acquire them very cheap and really put the pressure on." }, { "speaker": "stephan", "time": "09:03", "start": 542.59, "text": "Yeah, that's fascinating to think about, because there's like this whole strategy game of playing for the long run and capital investment that you need to make, but then also keeping the lights running, maintenance costs in the interim, paying the electricity, how much of that in-- can be managed by the miners who are, say, speculating. On future price rise versus I need to, I need to be profitable right here and now. So John, in terms of the main costs that a Bitcoin miner faces, what are some of those and what are the ways that they normally pay for those?" }, { "speaker": "john_lee_quigley", "time": "09:40", "start": 580.24, "text": "So for the vast, vast majority of miners, the biggest cost is gonna be electricity. Very few miners can get access to very low electric rates. Miners in Sichuan miners in Kazakhstan can get sub three cent per kilowatt hour electric rates, but they're the exception and not the rule. Outside of electricity, the main costs are gonna be maintaining the equipment, labor The, factory or where you're gonna place the rigs, maybe some other hardware you might need like? To hold the rigs in. so there's, there's a couple of ways, miners can set up their operations. From one perspective, they can try and purchase everything. For their electric, they can try and get a power purchase agreement. They can try and raise funds to purchase all the other expenses. And from That perspective then, they would just be depreciating their capital, and they will be hoping that over the lifespan of what they've invested in, they turn a profit and make an ROI. On the other hand, you can Rent everything. You can rent the factories to leave the rigs in, you can rent the rigs, you can hire the labor, and from that perspective then it's all operating expenditure. And if the returns you're making, drop below your Cash flow breakeven, then it's, it's time to turn off your rigs." }, { "speaker": "stephan", "time": "11:33", "start": 693.48, "text": "Right, and as the different miners will be operating at different price points on the curve, so to speak, then the Bitcoin price variation will dictate which miners turn off equipment, and it may even be the case that miners have different- Sets of equipment and they turn off some pieces of equipment and keep others on, right?" }, { "speaker": "john_lee_quigley", "time": "11:57", "start": 717.03, "text": "Yeah, so it's we're expanding a bit on this idea of the cost curve. So the idea of the cost curve is that miners who have lower cost, the lower cost you have, the exponentially greater a position you're in, because your margins are bigger from the Bitcoin you've mined, you have more optionality. You can either hang on to the Bitcoin you generate to see if it has some upside potential, or you can convert into cash, and this cash then gives you more options. You can upgrade or acquire hardware from Miners who are under pressure, you can acquire hardware from the manufacturers," }, { "speaker": "john_lee_quigley", "time": "12:43", "start": 762.99, "text": "but the lower or the higher up the cost curve you go The more you're gonna be feeling the squeeze and the more vulnerable you're gonna be to either price drops or definitely increases. So those, this price drop we've seen on Thursday will, Probably wipe out a lot of miners. We haven't seen the difficulty est-estimates, drop just yet, but a lot of miners will probably be forced to turn off their rigs. the miners who are lowest on the cost curve will probably acquire these rigs, and the hash rate which comes offline, difficulty is gonna adjust downwards, and then the big miners are in a great position again because the hardware they've acquired and the hardware they've deployed is now mine- Running at a lower difficulty level, so they have greater returns." }, { "speaker": "stephan", "time": "13:36", "start": 815.61, "text": "Yeah, nice summary. So let's, put that into context for the listeners. Can you give us just a rough idea of the ranges that you're aware of? Obviously, these things are shifting over time, but as at the time we're recording, it's March twenty twenty, the current price is about five thousand three hundred USD. Do you know roughly where some of the miner breakeven costs would be? And, you know, and like Like what an example would be where, let's say, the miner at the low cost point can purchase equipment from the miner who's at a higher cost point?" }, { "speaker": "john_lee_quigley", "time": "14:10", "start": 850.05, "text": "I can give you some very, very rough numbers. It's been a while since I've looked into it, but it's also worth noting that every, miner will have a different cost because every miner has a different situation. They've acquired power at a different price, they've acquired rigs at a different price, and this is once again what's- gives the big miners the big advantage because they can negotiate the best deals, they can have the cost down the lowest, and they will have the biggest, margins. So on the lowest end of the cost curve, miners can get electric rates at the mysterious less than one kilowatt, one cent, less than one cent per kilowatt hour. And I would believe these miners are probably mining for two thousand or less, but up the higher end of the cost curve," }, { "speaker": "john_lee_quigley", "time": "15:11", "start": 910.54, "text": "I normally take what the publicly listed companies are mining at, their, their cost, because these are pretty inefficient miners, because They have to, they have a lot of, a lot of costs. They have to pay a CEO salary, they have to pay, high salaries for labor, they have to pay high accounting fees to the big four, to, To meet the financial reporting standards, and I believe they were probably mining at eight thousand or nine thousand per Bitcoin mined, and, then Charles Edward released a methodology and indicator on trading view which estimates the average price or average cost of production based on the, energy draw that Cambridge are estimating and I believe it was about six thousand five hundred, he estimated the average cost of production across the industry was. So this price drop is, yeah, is the, is the biggest miners are remaining profitable, but a lot of those in the middle and, and small end are just, now unprofitable and will be forced to go offline." }, { "speaker": "stephan", "time": "16:33", "start": 992.7, "text": "Right, yeah, it's a really interesting insight there, because then, as you're saying, those less profitable miners will either turn off their equipment and wait or, or- Even go out of business and just sell that equipment to, you know, probably one of the miners who's operating at a higher point or at a lower point on the cost curve. but there are also some, I guess, some lag time, there would be some lag time involved with this as well because it takes time to ship those, to ship that equipment over or for people to negotiate these different rates and so on. and I, as I understand, the, the lag time between ordering equipment and then actually being able to plug it in and turn it on That can be very, very costly to a miner, correct?" }, { "speaker": "john_lee_quigley", "time": "17:16", "start": 1035.97, "text": "So there's a big lag when you're acquiring hardware and turning it on, because, yeah, as you said, you need the broker deals, you need to source the hardware, a lot of time can go into it, it can be costly. But the interesting thing is the same logic doesn't apply to the downside. When price drops forty to fifty percent, people are just in a position to immediately turn off their rigs, and that's why When we look at hash rate estimates, we see gradual declines and sometime, sometimes sharp falls. And it's, it's kinda the, the same for the market as well, People gradually build up confidence and the market is gradually, gradually building off, and then when, some fear kicks in, it can catalyze a cascade of selling. Everybody wants to get out at one time." }, { "speaker": "stephan", "time": "18:11", "start": 1091.0, "text": "Yeah, and as you're saying then, there is a difference there between a big price drop and a big price jump, let's say. So if there's a big price drop, it's easy for someone to turn the mining off, but if there's a big price rise, then a lot of people are scrambling to try and buy mining equipment and start up a mining operation, correct?" }, { "speaker": "john_lee_quigley", "time": "18:29", "start": 1108.85, "text": "Yeah, absolutely. So, it's kind of like hash rate follows price, right? If price rises, miner margins increase, miners are We're thinking, oh, it'd be nice to have, more hash rate deployed now, greater profits, and people scramble to get mining rigs, but this obviously takes some time." }, { "speaker": "stephan", "time": "18:49", "start": 1129.39, "text": "I suppose there would also be the cost and the time associated with integrating that mining rig into your warehouse or your factory or wherever your mining data center, whatever you wanna call it, and you'd have to, you know, configure it all and do all that stuff as well, right? So that's obviously an engineering" }, { "speaker": "john_lee_quigley", "time": "19:10", "start": 1149.96, "text": "Yeah, that also takes some time. And, I visited a, a mining farm in, in, Sichuan during the event which Daniel Amia hosted in October last year, and it just looked like the, rigs were all put up in such a, such a scramble, the wires were, were all over the place, and it's also why, China has, has such an advantage when it comes to mining. They're, they're close to the manufacturers, they can get cheap labor, there's maybe not the same, regulatory standards when it comes to data centers and stuff like that." }, { "speaker": "stephan", "time": "19:50", "start": 1189.99, "text": "Yeah, and you mentioned also, and this is, I think most people understand this, a big driver in the cost of your mining operation is the power arrangement that you have. And so there might be some small operations or, let's say, somebody has basically free power kind of thing, in some certain marginal scenarios, people might just be able to plug in miners and basically just get it for almost free. But generally speaking, at the professional level, once you're having a certain size, you basically have to get these power agreements. agreements negotiated and that might be, attention that you face with the local, local government or state government where you want to try to have a, a good price rate, and reliable power, but that can be difficult for some miners to get, correct?" }, { "speaker": "john_lee_quigley", "time": "20:38", "start": 1237.72, "text": "Yeah, so every miner will have their own unique circumstances. In the region Sichuan where, A lot of the, of the hash rate is residing. It's very much a high risk type environment. there's an abundance of hydro power and miners will- Move in to take advantage of this, and they will set their, facilities and rigs up as fast as possible. But sometimes they also face high risk because a lot of these farms are based in mountainous regions where there, could be risk of mudslides. Some farms have been wiped out by mudslides before. Also sometimes the bandwidth can be extremely low, so the miners need to use the best mining pool technologies. And, then in, let's say a place like North America, the process is gonna be a lot slower." }, { "speaker": "john_lee_quigley", "time": "21:52", "start": 1312.0, "text": "The process of acquiring hardware, the process of hiring the right people, of, setting up the facility is just a lot longer curve and in a fast changing market that Puts North America at an extreme disadvantage, but it seems like they're making some leaps and bounds once there's clearer regulation and we're seeing some farms also set up in, in West Texas now, so they may pave the way for, for other farms and have a model on how North American miners can, can compete." }, { "speaker": "stephan", "time": "22:32", "start": 1352.43, "text": "Let's talk about the mining industry and just a little bit of a breakdown then. So, can you tell us who are some of the main well-known mining hardware manufacturers and how to think about that?" }, { "speaker": "john_lee_quigley", "time": "22:44", "start": 1364.47, "text": "Yeah, so Bitcoin is, is the biggest, by far, and, oftentimes they maybe get a, get a bad rep. I think it's, People don't like when, when one firm is dominant, they kind of wanna, wanna see its, its downfall, right? But Bitmain in, in reality have done an outstanding job, they've- There any reports I've heard about the rigs is the rigs have been highly reliable, and under normal circumstances, their rigs ship on time and the orders you put in, you can be assured you will, you will receive, and they're also doing a lot of Works in other fields in the mining industry. They own Antpool, they own bdc dot com, they have a large share in via bdc, that's three mining pools. They also have Bitdeer, which is a cloud mining platform, and they're doing a lot of research in AI and really pushing, they're really leading the way for making the most powerful and the most efficient mining chips for ASICs. And they've been a leader for a long, long time, and it seems like they'll be a leader for the foreseeable future. So they're, they're the dominant leader. Then the other hardware manufacturers would be Canon, E-Bang, InnSilicon, and MicroBT. And these five, essentially make up the vast, vast majority in the market. The other hardware manufacturer which would be worth noting would be MicroBT. So MicroBT was founded by the, a former Bitmain employee who designed the Antminer S7 and Antminer, S9. And the Antminer S9 was a big jump in power and efficiency of Bitcoin ASIC mining rigs, and the fact that it's still being used online today is a testament to that, because before this, every time a new Release of Bitcoin ASIC will come out, it would typically wipe out the previous generation. But, over some disagreement, the Bitmain employee, Dr. Zuo Xing Yang, left, Left Bitmain and has now set up his, has set up MicroBT and MicroBT produced the Watts Miner, series of mining rigs, which are also very powerful, very efficient, and they're starting to put the pressure on Bitmain and eat away at some of their market share." }, { "speaker": "stephan", "time": "25:49", "start": 1549.38, "text": "And there are a range of different products that they offer, as I understand this, what Antminer, this Watts Miner, Avalon Miner, So as you're saying, then the Bitmain product, the S9 is-- well, that's the older product, but that's one of the well-known and well-used, pieces of equipment," }, { "speaker": "john_lee_quigley", "time": "26:12", "start": 1571.56, "text": "So each, each, manufacturer has their own series of mining rigs. Bitmain have the Antminer series of mining rigs, Canaan have the Avalon miner series of mining rigs, and MicroBT have the Wattminer series of mining rigs." }, { "speaker": "stephan", "time": "26:29", "start": 1589.11, "text": "These are all the ASIC, equipment that is used for mining hardware. And then in terms of the actual, Mining companies, and maybe it would make, actually, maybe it would make sense to think of, mining pools as well. So in terms of mining pools, can you give us just an over—overview there in terms of who are the big names, and sort of what roughly what kind of hash rate, percentage they make up?" }, { "speaker": "john_lee_quigley", "time": "26:57", "start": 1616.56, "text": "Yeah, so the biggest mining pools currently, just speaking about Bitcoin, would be Poolin, bdc dot com. Antpool, via BTC, also Slush Pool are typically in the top ten. we have some upcoming ones which are Luxor Mining based in North America, they offer pooling services for a lot of cryptocurrencies. And typically the top four or five will represent over fifty percent. Of the Bitcoin hash rate. So how it works is, let's say I set up my mining operation and I control a small, small percentage of the total Bitcoin hash rate. I can generally expect payouts in proportion to what percentage I represent, but because I'm gonna represent such a small percentage, it makes sense for me to pool my hash rate with other- miners, which is done by each miner connecting to a mining pool, and then the mining pool essentially would pay you based on, more regularly, based on the hash rate that you submit to them. They will send you a block header, you fill it with transactions, submit it, and every time you, every time a miner across the pool Finds a block, a, reward may be paid out under one, under one, payout scheme. So a lot of people, are concerned about the health of Bitcoin because just a small number of pools control such a large portion of the hash rate. But what you have to also bear in mind is that people who are in the Bitcoin mining business are extremely exposed to Bitcoin. They've made billions and billions of- Capital investment into this industry, and if they do something which harms the network, their balance sheet is both tied to the rigs they own and the value of Bitcoin itself. So if they do something which harms, the industry, and let's say, let's say their rigs can't be used to mine Bitcoin anymore, well, they can't be used for anything else because they're ASICs, they're, they're specific towards mining Bitcoin. So all that money invested in the rigs is gone, and plus they're directly exposed to Bitcoin. So if Bitcoin drops fifty, seventy, ninety, ninety-nine percent, then they also lose this value." }, { "speaker": "stephan", "time": "29:52", "start": 1792.28, "text": "And that could be said as one of the benefits of proof of work, which is that in order to do it, you have to put in all this capital investment into the equipment, and so that in some sense Forces people to have skin in the game of Bitcoin because they can't just mine it on their, you know, on a normal computer and repurpose that. It's, it's, it's one of those things where it's the equipment you're buying, the SHA-256 hashing mining equipment, is basically only useful for this purpose, correct?" }, { "speaker": "john_lee_quigley", "time": "30:23", "start": 1823.48, "text": "It's massive skin in the game, absolutely, and, Any network which is using CPUs or GPUs to mine, think about how much CPUs and GPUs are in the world and available to attack that network. But in terms of Bitcoin, the whole world is, is striving to increase their hash rate and get their hands on more ASIC chips. So if you wanna attack that network, you need to acquire these rigs off other miners, which is a hard, hard task, and you'll be paying huge, huge premiums for a task that is Pretty much near impossible to complete." }, { "speaker": "stephan", "time": "31:07", "start": 1866.73, "text": "Yeah. And so you gave us an overview there on the large pools within Bitcoin. it's also useful to understand that miners aren't the same thing as pools as well, and there may be mining companies who don't necessarily run, their own pool, right? so what are some of the, maybe some of the large mining companies who don't necessarily run their own pool and they're just running a mining operation?" }, { "speaker": "john_lee_quigley", "time": "31:32", "start": 1891.72, "text": "Miners are typically Typically private, so if, if you're running a pool, you're not in the mining business. You may have some factories, or you may have shares in some factories. But people who set up, mining facilities, let's say in China, they're typically private and just industry professionals will know who they are, they'll know where their factories are based, et cetera, et cetera. We're seeing, in regions like North America, more firms become more publicly known for some reason, for example, Layer One, raised I believe fifty million BDCU with Peter Thiel being one of the lead investors. So when you're operating in a regulated environment like that and you're gonna be doing fundraising, then these firms are gonna be known, but many of, many of the actual pure mining firms aren't known. one which I can't say the name of is Failurhash, which is based in Chengdu, and they actually both operate a mining pool. Plus they have huge factories where I believe they host mining equipments and have some cloud mining contracts as well." }, { "speaker": "stephan", "time": "32:54", "start": 1974.12, "text": "Yeah, thanks for that context as, yeah, it's, it can be For somebody who's not familiar with the space, it might be difficult to appreciate the difference between, you know, the mining pool and say the miners who are contributing hash power into a pool. And as you mentioned, we are seeing some shifts in the- Trends now with, some US and North American mining, some in Canada as well, so I've noticed also that, in some places around the world, there's a use of those sea containers as a way of perhaps flexibility or agility to move those miners around. do you have any comments around that, as a business practice, as a mining practice?" }, { "speaker": "john_lee_quigley", "time": "33:41", "start": 2020.6, "text": "It's, it's interesting for sure. and I also believe that there could be some benefits. I know some people are, are setting up like immersion cooling systems within containers, but to be honest, I wouldn't, yeah, I wouldn't be the, the best to comment on it because I haven't experienced, hands on these containers and had a look around and Really got to understand the details of it." }, { "speaker": "stephan", "time": "34:10", "start": 2049.87, "text": "Sure, sure. and also, while we're talking about Layer One, as I understand, their strategy is a little bit more around vertical integration, so they're not necessarily-- Well, I think right now they are using other, you know, other mining equipment, but I think the aim is that they would eventually be producing their own mining equipment and also mining it. What, what are your thoughts on that as a strategy? Do you think that's something we'll start to see?" }, { "speaker": "john_lee_quigley", "time": "34:38", "start": 2078.01, "text": "yeah, it's an interesting strategy, you're spot on. They aim to be a vertically integrated mining company, which means they're gonna control all aspects of the production line. They're gonna produce their own ASICs, deploy their own ASICs. It is an interesting strategy. It would take a lot, a lot more capital, and it would take careful, careful planning. You would need to be in a place like where they are in West Texas to benefit from From such low electricity prices. But I suppose it, it puts you in a better position because you're not as dependent on, you're not as vulnerable to changes in the environment around you. you're working on building your own ASICs, so if, if another Hardware, if a no- another series of hardware gets released and miners are scrambling to purchase this, you're not so concerned with this, because you're focusing internally on pushing the performance of the ASICs which you're ma-manufacturing, making them more powerful, making them more efficient, and making sure they can compete. So it takes more capital, but it seems like they're more insulated against the risks in that position." }, { "speaker": "stephan", "time": "36:00", "start": 2159.94, "text": "And would you also say that it's, it's also true or fair to say that Bitcoin mining is further decentralizing around the world? We're seeing more geographic, what's the word, diffusion around the world, that it's not all just concentrated in China over time?" }, { "speaker": "john_lee_quigley", "time": "36:18", "start": 2178.42, "text": "For sure we're seeing more of a transition towards areas where you can get very low electric from Coal production, such as in Iran and in Kazakhstan, and also we're seeing more of a push towards North America, but Let's not say just yet that hash rate is more distributed globally, because really it remains to be seen, what the distribution will look like over the coming years, but for sure it's looking more promising and there's some more prospective regions popping up. it's also worth noting as well that, hash rate being located in one region May not be as bad as people make it out to be. So first of all, I pointed out that the miners are extremely, their incentives are tied to the health of the network, which is one point, but also there's been some Interesting work done on the software and technology side of things. brains have been working hard on releasing Stratum version two, which is the protocol that miners use to connect the mining pools, and as part of version two, miners will have The option to run their own full node, which essentially means that if they're in a position where they feel there's a risk of the big mining players censoring, censoring transactions, then they can, they can run their, their own full node and choose what transactions to select in each box or in each block." }, { "speaker": "stephan", "time": "38:09", "start": 2289.16, "text": "Awesome, and, listeners who are interested, check out my earlier interview with, Jan Chapek from Slush Pool and Brains, who, who we spoke a little bit about Stratum v2. so, another one that I've heard of is, Bitmain having a facility in Texas, and I he-- I hear it's fifty megawatts and that they're going to three hundred megawatts. So, can you tell us a little bit about that? That idea that, different facilities or different, rather, mining companies are setting up facilities in other locations around the world." }, { "speaker": "john_lee_quigley", "time": "38:47", "start": 2327.47, "text": "So my understanding of it, I haven't been to West Texas, but from the people I've spoke to and from the research I've done on the area, it seems to be extremely, extremely promising area. They have, a huge- amount of wind energy, renewable energy sources, built up in West Texas, far, far west of, of the big consumers, and it's very costly to transport that to the east. So it's, providing a big opportunity for miners to come in, set up their centers, and, And essentially tap into this very, very low electricity. And there's even businesses such as Hodo Ranch setting up which Their whole business model is to help Bitcoin miners set up the lowest cost, center that they possibly can, and even They have techniques to deal with the high levels of temperature in the region. So this huge abundance of energy, and plus I believe the energy market in Texas is unregulated, gives miners a huge opportunity to negotiate very, very low electric rates, and we're seeing firms such as Bitmain and, Layer One Launching their facilities in this region to capitalize on this. And that's one of the beautiful things about Bitcoin mining is, that it forces miners to source the lowest cost. Energy. Sometimes that's bad, such as regions in Kazakhstan and, and Iran where they're gonna be using coal power. But sometimes it's extremely good. People come in and take an abundance of renewable energy in regions such as Sichuan, West Texas, and there's even regions in Africa which have a, an abundance of renewable electricity, and the consumer demand is just not there. And sometimes the, cost of storing or wasting the energy is put on consumers in the region by increased electric prices. So if a Bitcoin mining operation can come in and take- Take that energy and get to the lowest position on the cost curve. It's a beautiful thing." }, { "speaker": "stephan", "time": "41:22", "start": 2482.13, "text": "Yeah, that's a really interesting dynamic to see play out as well. So my understanding there is generally with electricity grids, they- They can't easily kind of stop and start, right? So that energy has to go somewhere, and so that means typically they would either have to turn on and off the baseload power, and then that can, typically the baseload power will be like the coal power or the, you know, natural gas, whereas in the kind of solar and, wind power game, this is one of those things where because it's costly to transport the electricity, then it's- It sort of makes sense to have a Bitcoin miner there to soak that up, the excess amount that's not being used, and that can be very cost effective. Now, the-- I guess the interesting question there is, what's your view around the use of- fossil fuels as opposed to renewables over time, because to me, I, I get this sense that maybe it's being overplayed a little bit, this idea of, \"Oh, it's all gonna be renewables,\" when there, there might still be a case for a, a high percentage of fossil fuel Bitcoin mining." }, { "speaker": "john_lee_quigley", "time": "42:33", "start": 2552.6, "text": "absolutely. There, and there might be, there's a push in some cases towards miners using fossil fuels, but I just believe that, At this point in time, it's not an issue. Bitcoin uses a fraction of the energy which is wasted, not wasted necessarily, but used on other, utilities and industries that could be considered wasteful. Bitcoin kinda gets the, the Bad rep here because it's an experimental technology, but things such as Christmas lights use a phenomenal amount of energy, and the amount of energy which goes into- Running, like say the forex industry must also be phenomenal. So if people, on the market believe that using this energy is worthwhile and they're, they're essentially putting their capital where their milk is, then it's, it's, it's a worthwhile allocation of capital." }, { "speaker": "stephan", "time": "43:44", "start": 2624.23, "text": "Yeah, I think so, and I think it's one of those things where there is a, there's a famous book by this, name. It's called The Moral Case for Fossil Fuels by Alex Epstein. And, I think the other fundamental way to think on this is simply, as you said, if that is what people voluntarily chose to spend their money on, and the Bitcoin miner has successfully bid for that electricity, well then who, who is everyone else to judge that? Because by the same Same token, are we gonna have electricity police run around and police someone's use of Instagram and the smartphone battery power required for that and the cost required? Because ultimately it just comes down to what was the cost for that electricity, and if somebody was willing to pay for it, well then that's-- that, how can we really start judging this one use of electricity versus another use of electricity?" }, { "speaker": "john_lee_quigley", "time": "44:38", "start": 2677.83, "text": "Yeah, I'm all, I'm all for this discussion, but it can't be just Bitcoin in isolation. Other industries need to be taken into account." }, { "speaker": "stephan", "time": "44:47", "start": 2687.37, "text": "so John, I know you've also got a new research paper coming in terms of hash rate. Can you tell us, give us a bit of a background, what are you looking at here with this research paper?" }, { "speaker": "john_lee_quigley", "time": "44:56", "start": 2696.14, "text": "Yeah, so, this year, it was originally planned that a week before consensus, we would, Miner Update would do their second conference in Chicago, but unfortunately, this conference has been cancelled due to the corona- Virus is smart thing to do, the world is coming to a standstill and, everybody's essentially cancelling everything. So the idea was originally to do this research ahead of the conference and present the findings. At the moment, we're unsure of the timeframe of the research, but We feel it's an interesting area to explore, looking into hash rate as an asset, really defining it and making it transparent. What are the what are the attributes of hash rate? What makes it unique? Where is it based? Is it based at the rig or is it based at the mining pool? How does, variables in the outside environment impact the hash rate which is produced by a rig, such as heat, such as immersion cooling? And then another angle is to look at how can this, asset be valued and how can this asset be traded? So it would look at things like projecting how price and how difficulty would impact the value of hash rate, it would look at things such as risk associated with the asset, maybe time value of money, also How might a market trade this asset look? How would a spot exchange where people can buy and sell look? we feel this, this area is ex-extremely interesting. It's a big area for the future of the industry, and it's something we, we plan to look into more." }, { "speaker": "stephan", "time": "46:50", "start": 2809.86, "text": "And the aim for this research paper is this to be done mostly w-through discussion with the miners and, pool operators or, looking at At the research in the area or what are the main, vectors of, inquiry that you're going down for this?" }, { "speaker": "john_lee_quigley", "time": "47:09", "start": 2829.44, "text": "So we're still, fleshing this out. The coronavirus has thrown a bit of a spanner in the works," }, { "speaker": "john_lee_quigley", "time": "47:20", "start": 2839.84, "text": "But we're gonna, we're gonna talk to people in the industry, we're gonna talk to researchers, come up a plan and, then execute from there, but it's still in early stages at the moment." }, { "speaker": "stephan", "time": "47:34", "start": 2853.85, "text": "Yeah, and a-as you mentioned, it's a really interesting space that perhaps could have more thought and development done on that area. So, for example, if you're a miner and you are inherently short difficulty, i.e. you don't want the difficulty to rise, then wh-what scope is there for you to have some kind of financial instrument that allows you to trade that off?" }, { "speaker": "john_lee_quigley", "time": "47:59", "start": 2878.95, "text": "Yeah, and as well, people, people are gonna be interested in, in speculating on this. If the value of an asset is, is volatile, so for example, the- The price drop on Thursday would have a huge impact on the value of a unit of hash rate. So speculators and, and, Other institutions will be extremely interested in, in trading such a volatile asset." }, { "speaker": "stephan", "time": "48:32", "start": 2911.97, "text": "Right. And so hypothetically, the miner might want to play less of a financial and capital markets game and just play the mining game, and they would rather throw that risk off to somebody else who is willing to take on and speculate on that particular risk, right?" }, { "speaker": "john_lee_quigley", "time": "48:48", "start": 2928.19, "text": "Yeah, absolutely. It gives, gives the miner more optionality, right? They can, they can reduce their, their exposure." }, { "speaker": "stephan", "time": "48:56", "start": 2936.41, "text": "So let's walk that through as an example. So for argument's sake, let's say you're a miner and you're worried that the difficulty will rise, you know, or you're, you're worried that, you know, there would be a, or there might be a big, price drop. for argument's sake, they might put, they might have some sort of forward rate or some sort of future contract, to sell, at a certain rate so they could lock in their prices and then do their business planning based on that locked-in price rate. Is that kind of an example that, you know, we might think through there or how, how would you, modify that example?" }, { "speaker": "john_lee_quigley", "time": "49:38", "start": 2977.6, "text": "Yeah, so let's, let's leave futures markets to the side for the moment because it gets extremely complicated When you think about it from a futures perspective. Well, let's say there is a spot exchange for hash rate, and you know exactly how much, one unit of hash rate is worth, and you have- X un-hundred units of hash rate. And as it stands, you are long the value of hash rate. You want your value of hash rate to go up because you own a hundred units of hash rate, but at the same time You are long price, so you want the price to go up, because the price going up improves the value of your hash rate, and at the same time, you are, short. Difficulty. You want the, price, or you want the difficulty to go down because it improves the value of your hash rate. But let's say you are concerned that the opposite is gonna happen, that based on your knowledge and based on market dynamics, you believe the price is gonna drop. And there's some new hardware releases that your friend told you about, so definitely it's gonna come up. so you have exposure to a hundred units of hash rate, well, you are in a position where you want to decrease your- exposure because of your unique knowledge, so you sell fifty units of hash rate on a spot exchange, your mining rigs are still in your farm, but fifty percent of your hash rate has been purchased by a speculator who now- has exposure to the same variables you have exposure to." }, { "speaker": "stephan", "time": "51:31", "start": 3090.76, "text": "Yeah, gotcha. Yeah. and so, so that's hopefully an interesting, thing that might get explored a little bit further and, might be made a little bit clearer for people in terms of how to think through that problem or how to think through that, business. and I think another area that has perhaps shifted and morphed over time with Bitcoin is perhaps in the earlier years of Bitcoin Bitcoin, the mining game was kind of chasing the world around and chasing down the cheapest electricity, and there wasn't perhaps as much of a focus around the capital aspect of it and the funding aspect of it, and now we are starting to see more, Professionalized capital, you know, capitalized operations in this area, so we're seeing things like, okay, you know, the Layer One funded by Peter Thiel, and some others, and There might be more, more that can be done in, in that aspect on the capital side. do you have any views on how that might change over time?" }, { "speaker": "john_lee_quigley", "time": "52:35", "start": 3154.94, "text": "it just seems to me like the natural- Evolution of an industry, it comes back again to the, to the cost curve. There's huge exponentially greater advantages to be lower, to being lower on the cost curve, and that will naturally drive people to seek greater capital, greater investment, get themselves into a lower position on the cost curve, and, Get them, get themselves into an exponentially greater position. I believe what we'll see, we'll see more of that, we'll see more fundraising, we'll see the, the industry become more regulated, and we'll see bigger and bigger players." }, { "speaker": "stephan", "time": "53:18", "start": 3198.28, "text": "Yeah, I think you're right. so John, did you have any, anything else you wanted to talk about in terms of, what you're doing with adaptive analysis or any other things that you're writing about?" }, { "speaker": "john_lee_quigley", "time": "53:29", "start": 3208.71, "text": "For adaptive analysis, a lot of the work I do Who is, on Bitcoin and on the markets. So Adaptive Analysis is an essentially an agency that will produce content and writing services and, Our, our main value proposition is that we can, is that we have, we have a good knowledge of the industry, we have a good knowledge of finance, of Bitcoin, of cryptocurrency in general, and, We can, we can produce high quality content. And, personally, I've been monitoring the markets for a long time now, My first, first job out of college was in a derivative trading firm, and I've kept monitoring the markets on the, on the side. So something I'm gonna experiment with is I'm gonna start doing a market analysis newsletter and, and, and see how that goes, and if, if it's well received and people find value in it, I'll, I'll continue it. and I'm, I'm excited to, to, start releasing some of my, my thoughts on, on the markets, both traditional and Bitcoin." }, { "speaker": "stephan", "time": "54:45", "start": 3284.87, "text": "Well, look, I think that's gonna do it for today. So, John, make sure you let the listeners know where they can find you online." }, { "speaker": "john_lee_quigley", "time": "54:51", "start": 3291.12, "text": "Yeah, find me on Twitter at John Lee Quigley, and make sure to follow Miner Update at Miner Update, because there's gonna be excit-exciting stuff from, from that company moving forward. once the coronavirus dies- 'Cause then we're certainly looking to, run the, the second phenomenal conference for Miner Update." }, { "speaker": "stephan", "time": "55:14", "start": 3313.89, "text": "Awesome. Well, look, thank you very much for joining me, John." }, { "speaker": "john_lee_quigley", "time": "55:17", "start": 3316.93, "text": "Thanks, Stefan. It's been a pleasure." }, { "speaker": "stephan", "time": "55:19", "start": 3319.06, "text": "You can subscribe to the show at stephanlivera dot com slash one five eight and find the show notes and transcript for this episode there also. Thanks for listening, and I'll see you in the citadels." } ] }