{ "episodeId": "SLP389", "speakers": { "stephan": { "name": "Stephan Livera", "role": "host", "tag": "STEPHAN" }, "daniel_frumkin_jaran_mellerud": { "name": "Daniel Frumkin & Jaran Mellerud", "role": "guest", "tag": "DANIEL" }, "guest_2": { "name": "Guest 2", "role": "guest", "tag": "GUEST" } }, "segments": [ { "speaker": "stephan", "time": "00:09", "start": 8.51, "text": "Hi, you're listening to Stefan Livera podcast, a show about Bitcoin and Austrian economics. Today we're talking about Bitcoin mining analysis. But first, this show is brought to you by Swan Bitcoin, and Swan Bitcoin is putting on a conference. It's called Pacific Bitcoin. This will be the biggest Bitcoin only conference ever. It's going to be November 10th and 11th of 2022. It will be in LA. California. You can hang out with thousands of Bitcoiners from around the globe. You can catch your favorite Bitcoin educators on the main stage. You can ask questions on the Q&A stage and hang out with them through the week. I'll be there, I'm excited for this. It's going to be optimized for fun with sports, games, music, photo ops, and high fives. This is also going to be the main event of LA Bitcoin Week, so this will be a whole week of events and opportunities. So come and join us. Go and check out the website, it's p a c bitcoin In this show, we're chatting Bitcoin mining analysis and one of my sponsors, Brains, are a Bitcoin mining software service and products company. So you can install Brains OS Plus on your ASIC machines and you can get some more efficiency. So this can be really useful for you. You can improve your efficiency by as much as twenty-five percent, and you can point your hash rate to any pool, but if you use Brains OS Plus and point your hash rate to Slush Pool, you get a zero percent pool fee, so another bonus for you there. Don't forget, Brains also have excellent- content on their website, such as their blog, and you can also use their Insights dashboard to check out things like the mining profitability calculator. So go to the website brains dot com, that's brains with two i's. Lend at HodlHodl is a peer-to-peer Bitcoin-backed lending platform, so you could go to the platform, select an offer with the terms, the amount, the interest rate, and you can borrow some stablecoins against your Bitcoin in an overcollateralized loan. You still hold one key out of the three through this whole deal. And at the end, you pay back the loan and you get your Bitcoin back. Now, HodlHodl are also organizing Baltic Honeybadger. This is a really well-known conference in Europe, so this is going to be in Latvia in September. So go and check that one out as well. So the websites here are lend.hodlholdl.com and for Baltic Honeybadger, it's baltichoneybadger.com. So with the recent price drop and the recent changes in the dynamics with Bitcoin mining, I thought it would be good to get some Bitcoin mining experts and analysts on. So I've got Daniel Frumkin, who is rejoining me from Brains, and also Jaran Mellerud of Arcane Research, and we're chatting about Bitcoin mining market analysis, which public miners are in trouble, operating cash flows, Bitcoin miner treasury management strategy, the impacts for home and retail miners, and whether there were bull market errors. And so now onto the show. Daniel and Jaran, welcome to the show. Thanks, Stefan. So, we're gonna chat about an update on the Bitcoin mining world. Obviously, you guys are both, doing a lot of work in this space. Obviously, Daniel, working at Brains and Jaran working at Arcaine Research. so let's just start with a little bit of an overview for listeners. So obviously, where we are today, it's the end of June 2022. Market price now, if we're talking this last cycle colloquially, let's call it Two and a half years, let's say, that price, the max, the top price is about sixty-nine thousand, we're down to about seventeen thousand three hundred, and the hash rate has sort of come from, you know, if we're talking mid two thousand and nineteen, it was sort of sixty-four exahash, and now, as we speak, it's something around two hundred exahash. So these are, I guess, some of the broader trends that we've seen, and arguably we've seen some trends in terms of where mining has changed a little bit. We They've got more access to capital markets and debt than previously, so I guess that's maybe just setting the stage, so do you wanna both just offer a bit of a general comment what you're seeing in the market and in the world of Bitcoin mining? So, Daniel, we'll start with you." }, { "speaker": "daniel_frumkin_jaran_mellerud", "time": "04:05", "start": 244.58, "text": "Yeah, we posted at Brains a, a tweet maybe a week or two ago that was, \"Everybody gets into mining at the hash price that they deserve,\" and kind of the, the point of the tweet is that you wanna get in when hash price is low, when everybody houses struggling to scale or maybe they've already planned to scale, which is the case now with a lot of miners that they have machines still waiting to be delivered that they paid a much higher dollars per tera hash for, and now they're gonna come online when profitability is relatively low. and everybody tends to scale in the bull markets because that's when it's easiest to get access to capital. But yeah, looking at the, the market right now, the Bitcoin market and the conditions and everything, like if you can get Access to capital, this is the real time to, to make a play either to get into the industry or try to scale because, everybody else is struggling." }, { "speaker": "stephan", "time": "04:59", "start": 299.18, "text": "Excellent. And Jaran, do you wanna, add any just overall thoughts on as you research and analyze the Bitcoin mining world?" }, { "speaker": "guest_2", "time": "05:07", "start": 307.19, "text": "Yeah, I can add to Daniel's point there that, because Bitcoin mining is such a cyclical industry, we see a lot of investments when the Bitcoin price is high and there's big access to capital, but this is leads to over-investments, which, leads to too high hash rate compared to the Bitcoin price. So usually when the Bitcoin price falls later in the cycle, the hash rate is too high compared to the Bitcoin price, which for- Further reduces the profitability of mining and leads to very, very low ASIC prices. So ASIC prices are now on the way down, they have been falling during, since Bitcoin's peak in November, I think, and, they will probably fall more as miners are forced to, to offload all their, all these, ASICs. And, yeah, this can be a great, great entry point for, for new people into the industry if they are looking Lucky enough to have, spared some, some capital." }, { "speaker": "stephan", "time": "06:11", "start": 370.95, "text": "Excellent. And so you made a great point there as well, and I, I might as well bring this up as well. So from the Insights dashboard, as an example, so listeners go to insights.brains.com and you can see, there's a hash value and hash price chart, and if you change that period to say three years, there's a really interesting thing you can see. So what you see is this big divergence between hash value and hash price, as-- and this happened sort of end of 20 Now we're actually seeing them come back to converge together. So, maybe Daniel, could you maybe just explain and give us your interpretation of what's going on there?" }, { "speaker": "daniel_frumkin_jaran_mellerud", "time": "06:46", "start": 406.47, "text": "Yeah. So really quick refresher, the hash price is a revenue metric, not a cost metric. it's the dollars per tera hash per day of revenue, and then the hash value is the Bitcoin per tera hash per day revenue. So the way that I would like characterize bull markets and bear markets in mining is slightly off from The way I would do it with Bitcoin price in isolation, which is that in mining, a bull market is a hash price bull market, meaning that the dollars per tera hash per day revenue is rising faster than the difficulty. When Bitcoin price goes up, if difficulty is also going up, then you might not necessarily see an increase in mining revenue in dollar terms. It depends on that ratio of price to difficulty. So, difficulty of course always takes longer Time to go up because you have to build infrastructure, you have to buy machines, the machines have to be manufactured, you have to deploy them and, and all the things that go into it. So what we saw in, in late 2020 is that price started going up very quickly, there wasn't enough- Hash rate ready to come online for difficulty to increase very quickly, and in fact, difficulty increased rather slowly, so we had a hash price bull market. But then the interesting thing is that with the China mining ban, we had Bitcoin price drop significantly, which resulted in hash price dropping significantly, but meanwhile, there was also a big difficulty drop, so hash value went up, so they nearly converged in mid twenty twenty-one. When, like, first there was hash rate going offline in Xinjiang in northern China, and then when they outright banded in all the hash rate, and Sichuan also went offline, that was a spike in, in hash value, because now difficulty dropped a lot, but hash price still went down because price dropped so much as well, at the same time, that was when Elon tweeted about renewable energy for mining and, and all that stuff. So basically, w-what we're seeing now is the difficulty Has finally caught up to the price action of the past two years, starting with that when we shot up from eight thousand or whatever it was, late twenty twenty into new all-time highs, difficulty reacted extremely slowly to that, and then it got slowed down even further by the China mining ban, but people have been scaling all around the world, and particularly in North America, so now we're at the point where difficulty has kind of caught up to the price- Action and of course, price coming down helps that happen sooner, unfortunately. So yeah, it's just basically the Bitcoin revenue has kind of done what you would expect it to do over this time, but now the dollar revenue, the cost of production for miners is much closer to the actual Bitcoin price." }, { "speaker": "stephan", "time": "09:42", "start": 581.59, "text": "Yeah, it's really fascinating. So in a way, we can think of it like, because of this massive price run from, let's say, late twenty twenty, it's almost like the price was running up faster than the hash rate could catch up to it. And And so that's why we saw a bit of this divergence happen, and now that we've seen the price come down a lot, it's sort of, they're sort of, the two numbers are almost coming back to, at least closer to each other. Jaran, anything to add there, or perhaps you wanna, also just tell us a little bit about your public miner research as" }, { "speaker": "guest_2", "time": "10:11", "start": 610.95, "text": "well? yeah. so I looked into the public miners, mostly because I'm looking to invest in these companies myself, and, because I use them as a high- Bit, Bitcoin investment, and I believe there will come a lot of good opportunities going forward for buying some of these companies cheaply. so yeah, I've looked into these companies, and, what I've found is that most of them struggle with cash flows right now. That's their, their major problems because they have a very low cost of production producing Bitcoin, all of them, because they have low electricity costs and- Very energy efficient machines, but some of them have a lot of machines just standing there without producing Bitcoin, and when these machines will be-- they have huge upcoming machine deliveries this year where they need to pay for these machines as they are delivered, and if they're not able to, to immediately plug in these machines when they get them, a lot of these companies can, can get in a big liquidity squeeze, and we will likely see a big, A number of mergers and acquisitions where the s-stronger players can buy the che-the struggling miners very cheaply or simply buy their, buy their assets, really cheaply, buy their machine orders, maybe even buy some of their existing ASICs." }, { "speaker": "stephan", "time": "11:43", "start": 703.25, "text": "Yeah, that's really interesting. And so as part of your analysis, which we'll link in the show notes, listeners, a part of your analysis there was around the operating cash flows for these public mines. Miners. Now, perhaps if we could clarify the position a little bit in terms of calculating their operating cash flow, are we making the assumption that they sell the coins at the point they mine them, or is it sort of trying to look further than that?" }, { "speaker": "guest_2", "time": "12:07", "start": 726.89, "text": "Yeah, so, I assume that, they sell the coins when they get them. I calculate Bitcoin coming in. For me, that's as good as cash, because Bitcoin is extremely liquid. You can, a miner can sell these bitcoins if they want to, so What they do with their balance sheet shouldn't really impact their cash flow, in my opinion. yeah, so it's the Bitcoin coming in every month, and it's also some of these miners, they have a hosting component to the revenue, some also have an engineering component where they provide services to other miners, but for the most part, it's just the direct Bitcoin mining income, that's their cash flow, and then I subtracted their cost, their cost of mining Bitcoin. Excellent." }, { "speaker": "stephan", "time": "12:53", "start": 773.04, "text": "And so So that also does raise this whole question, and maybe this is more of a treasury management question, I saw there was some discussion about this also. If you could comment on this idea that maybe some of those miners may have been trying to, let's say, huddle some of those coins, they may have mined them at forty thousand or fifty thousand, and now if the price now is twenty thousand, then are they in even more trouble than what your analysis would imply?" }, { "speaker": "guest_2", "time": "13:18", "start": 798.36, "text": "Yeah, yeah, it's, it kind of strengthens this cyclical, cyclical quality of Bitcoin mining that these companies, they want to hold their Bitcoin, they don't want to sell Bitcoin, one, because they're big believers in Bitcoin, they're Bitcoin bulls, and two, because, this treasury management strategy has attracted a lot of investors. There's a lot of investors who simply look at the number of bitcoins these companies own, and they, they think the best companies to invest in are simply those who hold, hold the most Bitcoin. So that has incentivized these companies to To hold as much Bitcoin as possible. This is a risky strategy, it has proved to be a risky strategy now because, that means they only sell Bitcoin when they, when they are forced to sell Bitcoin, which means that they will only sell it at the bottom. So this, like I call this strategy the hold at any cost strategy. And, it's a really reckless strategy, in my opinion. but I still don't think it should be considered when calculating their operating cash flows, because they all have the opportunities to, to sell their Bitcoin. So that's another, another discussion." }, { "speaker": "stephan", "time": "14:32", "start": 871.86, "text": "Yeah, that's a fair point to make. And so it does, I guess, have to factor into the analysis. So if you know, for example, what their strategy is, if they're trying to, let's say, borrow against the coins, and obviously what happens in, in even- Just in human, you know, crowd, herd mindset is everyone's bullish, oh, now everyone's super bullish. It's, you know, everyone, and, and this is what people were saying, they were saying, oh, super cycle, Bitcoin isn't gonna crash that much. And then there were others who were saying, no, no, like it's not gonna be a super cycle, like we should, you should be planning for an eighty percent drop because we've had that before. Yeah. So maybe that's, you know, part of the, the prudence of," }, { "speaker": "stephan", "time": "15:15", "start": 914.88, "text": "Comments on the strategy, the treasury management strategy that, miners have been undertaking or should be undertaking?" }, { "speaker": "daniel_frumkin_jaran_mellerud", "time": "15:22", "start": 922.07, "text": "Yeah, I started viewing Bitcoin mining more and more as a race to accumulate Bitcoin as opposed to making those big fiat profit margins. so I was probably overly bullish and I was in that camp of thinking like, \"Oh, we're, we're gonna keep going up.\" And you don't wanna lose your upside. but that said, I think miners still need to have a rainy day fund, just like a family would, where, like, okay, we know we have ten thousand machines coming or one thousand machines, whatever it is, and we're gonna have to pay this much money, and we don't wanna be beholden to price volatility in that short term, so we're gonna cash out twenty percent of our bitcoins even though price is going up and everybody's bullish, we'll cash out Push out twenty percent just to have that, that fund ready so that we have the fiat on hand to pay our machine orders and to pay a little bit of our operating expenses and stuff like that. So that's what we talked about in the last episode that I did with you, that there's the huddle ratio, metric on the calculator, and currently it's only on profit, so it means you're automatically selling whatever amounts you need to pay your electricity and your labor and all those operating expenses, and then you determine And what percentage of the remainder you wanna keep in Bitcoin versus keeping in fiat cash. and in the next version of the calculator coming pretty soon, we're changing that input or updating that input so that you can also hold on revenue, which is what miners have actually been doing. It's not just that they've been holding all of their profits in Bitcoin, they've actually been financing their operating expenses with debt or equity or whatever it is, this, so that they can hold 100% of the bitcoins that they mine, and that has proven obviously to be a very reckless thing to do during a bull market, because now they're cashing out bitcoins like you said that they might have mined at fifty thousand or sixty thousand or certainly above the current price, so they're getting capital losses because of their balance sheet management on top of now having their profit margins squeezed further. And the real, like, catastrophe of that is that This is the time that you actually wanna be holding all the Bitcoin that you mine, but you needed to have a lot of cash on hand ahead of this in order to do that because, it's gonna be a lot harder to raise capital now than it was six months ago or a year ago, and that's like not really the case for, for any of the miners, but, Jaran's research showed that some of them certainly have done a better job being prepared for this type of situation than others." }, { "speaker": "stephan", "time": "18:07", "start": 1086.6, "text": "Yeah, and, Jaran, as you were saying- In your thread and in your article, you were talking about cash outflows and which miners are in a relatively stronger position, because there are some miners who have a lot of machine orders outstanding that they, that they are still going to have to outlay the cash for, and so if you could just comment a little bit on that, which miners are in a stronger financial position?" }, { "speaker": "guest_2", "time": "18:29", "start": 1108.66, "text": "Yeah, so based on the, on the operating cash flows that are coming in every month, these cash flows are based on the, their current operating capacity, their current- Current hash rate, which is plugged in, I don't take into consideration the future increases in hash rate. So for example, Marathon has a huge upcoming machine payments. I estimate that in twenty twenty-two, they have about two hundred and sixty million in, remaining machine payments, but they only have about seven million dollars a month in, operating cash flow. So, they're like accumulated the operating cash flow Throughout the year, if they're not able to plug in any more miners, it will be-- it's like six times less than their upcoming machine payments. So they will have to fin-- to finance these machine payments by other means than just their cash flow. And this, remember, this cash flow is given that they sell all their Bitcoin that they mine. So they will have to finance these machines by either raising, debt at the- A higher interest rate and they would be able to during the good, the old days of, twenty twenty-one, or they can raise equity at a very significantly lower valuation, or they can, sell their Bitcoin, which they hold, they hold like nine thousand, almost ten thousand Bitcoin, which they can sell to generate cash to pay for these machines. They also hold, hold a lot of, of cash. So, like on their balance sheet, they are in a pretty strong position, they have a lot of Bitcoin Bitcoin, but, but their cash flow is, is really, it's, it's not, not enough to pay for these machines. And we-- It's not only Marathon which are in this difficult cash flow situation, we also see Riot also have a lot of, of machine payments upcoming, but they have a higher cash flow than Marathon. and also Riot has, has, rack space for their incoming miners. They have a huge facility in Texas where they can just plug these miners in. So I believe that they will be able to, to generate cash flow for them. And we see some companies that have very high cash flows right now, like Core Scientific, they will, I think they will be able to pay for their upcoming machine deliveries, without raising additional capital. They're in a A really strong situation, based on their cash flows. But what we are going to see is that miners will continue selling Bitcoin. In May, they sold more than hundred percent of their production, and, I think we-- I think most people will be shocked when they see the production updates for June, because I think they will sell well over hundred percent of their production in, in, June. CoinMetrics had an ex- Excellent, newsletter, I think one or two, one week ago, and it showed, just showed, they estimated how many bitcoins the miners sold in June, and it was, really crazy, like mu-much more than in May. So, I think if the Bitcoin price continues to stay, depressed, at these levels, most of these miners, the public miners, they will basically drain their Bitcoin holdings, they will need to sell most" }, { "speaker": "stephan", "time": "22:01", "start": 1320.56, "text": "Right. And, if, as you were saying earlier, part of the investment case for some people is that they want to be holding companies who have a lot of Bitcoin, and so it sort of starts to cut against the investment case for equity investors. And as you were alluding to earlier, we may start to see some of the miners who are in trouble start to have to sell either their mining equipment or sell their company or get acquired. And so I'm curious if either of you have any commentary on how acquisitions in the- The space may play out. I, it, it-- would you say that, given where Bitcoin is today in twenty twenty-two, we're so much more developed and there may be, let's say, market actors who are more able to sort of raise their own debt or their own equity to do these acquisition plays?" }, { "speaker": "guest_2", "time": "22:46", "start": 1366.05, "text": "Yeah, I, I would say that the bigger the company, generally the easier it is for them to pursue these special opportunities, and of course, the better situation is on their balance sheet, the more they can- And take advantage of the situation. And, I think the biggest, the most important thing here is the machines. Those are the assets of these companies, and, those are the assets that will mostly be, be liquidated and purchased by better capitalized players, like, for example, Riot. They have a lot of rack space available, access to cheap electricity, they may be able to buy, for example, Marathon's rigs that are just sitting there in storage because- Then they can actually plug them in and generate some, some Bitcoin. So yeah, it's the, it's the mining rigs, it's their, like, that's the big target of these acquisitions." }, { "speaker": "daniel_frumkin_jaran_mellerud", "time": "23:41", "start": 1421.18, "text": "Yeah, I agree completely with that. I agree completely. I think I, I would be surprised if, if there's full-blown mergers or company acquisitions. I think it'll be, the assets will get split up and, maybe a few of the companies don't survive. I think it kinda depends on how How long we have to go with price suppressed like this, but I think machines will start getting sold and Bitcoin will start getting liquidated, by the companies who are in the worst positions, and Marathon in particular, right now I think the vast majority of their hash rate that was online before isn't even online because their Montana facility is down, like the actual generator, something happens that they're doing maintenance and trying to- repair the generator so they, they don't even have access to power for most of their machines that are already here, let alone all the machines that they have coming, including the Antminer S19xPs, which they, they made a massive order for those, I think it was like nine hundred eighty million dollars or something worth of those. So I would expect most likely they would sell the machines that they already have, like the, the regular S19s S19s and S19 Pros and J's and whatnot, and then try to plug in the XPs because those will give them the best margins. And if they already have to, to pay for those XPs, then you might as well try to plug them in and generate as much cash flow as you can with the, with the power that you have available, considering that they seem to have a, a crunch on the infrastructure side of things. But yeah, they, they have a massive inventory of machines that it's clearly been an issue for months. If I just- Look at the, the pool rankings table on, Mining Insights and Marathon has been steadily in the like two x hash, x hash range based on the blocks that they're mining, which is well below what they would be expected to be at at this point in time based on projections that they were making six months to a year ago. and I think that they've had all those machines delivered, they just haven't had the place to put them because of problems with the infrastructure, which is their sharded- Energy has always been the asset accumulation model as opposed to being involved on the energy side of things and the infrastructure side of things. And that's one of the things that I look at the most with, with any mining company, public or private, is like, how involved are they in the full vertical integration? Are they trying to acquire energy assets? Are they trying to control the actual generation? Are they mining behind the meter, or are they just like basically accumulating ASICs? And trying to find somebody else who can plug them in and host them and stuff. so there's very different strategies on that front, and I think the superior bear market strategy is being vertically integrated and owning your energy, because that also gives you the option, particularly in, in the current climate where industrial and commercial energy prices are, are going up everywhere because of supply chain shortages and whatnot, that potentially if you have to, you can just start selling The energy and if you have inefficient mining rigs, for example, or there's just opportunities in, in ERCOT where like there are price spikes because of demand spikes that you can, stabilize your incoming cash flow by being an energy seller on top of having the Bitcoin mining revenue, so that vertical integration really gives a lot of flexibility, and I think that model is going to prove itself as the better model during this period Market and going forward." }, { "speaker": "stephan", "time": "27:32", "start": 1651.8, "text": "Back to the show in a moment. If you're looking for Bitcoin hardware security, CoinKite dot com are the place to go. You can get the Coldcard, which is my favorite Bitcoin hardware signing device. You can use it in all kinds of configurations. It looks like a little calculator. Now, if you're a beginner, you can just directly plug that to your computer and use it easily with wallets like Sparrow Wallet, Specter Desktop, or Electrum. Now, if you're intermediate or advanced, you can use the SD card method to move things back and forth, Like multi-signature or you can use SeedEx or or BIP85 to generate multiple child seeds off of your one master seed so you can help out your friends and family or just have different wallets all off the same seed, you just have to remember the index. So there's all kinds of features you can learn a lot more by going to the website coinkite dot com. 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So if you're one of those people who has been putting it off and has left your coins on an exchange or a broker service, Concierge onboarding is a great way to get it done sooner rather than later. So go to Unchained dot com slash Concierge, use the code Livera for a discount. And finally, for those of you who are builders in the space or perhaps you are a merchant who wants to accept Bitcoin payments over Lightning, Voltage can help you. Voltage have made it really easy for anyone who's building in the Bitcoin space or anybody who wants to easily run a node on the cloud, Voltage can help you. So this decision to integrate Lightning no longer has to be an afterthought. Voltage makes it hassle-free for any organization to integrate or build on Lightning, so you can now scale nodes instantly by the thousands, and you can also make use of their facility where you can get quality liquidity easily, and the interface that Voltage have created is really slick and simple. So if you go to their website, Voltage dot cloud, you can get your node set up really quickly. So as an example, if you wanna set up your own BTC pay- Pay server, you go to the website, you set up your own LND node and then connect a BTC Pay server node, and you connect them two together and off you go. So that website, voltage dot cloud Back to the show. Right, and so as I understand you, it's like long term, we should anticipate that Bitcoin mining, like we're all bullish on Bitcoin, we think it's going to go bigger, Bitcoin mining will become a big industry, and then it just naturally makes sense for these Bitcoin miners to vertically integrate so they can control more of the stack per se and have more control over their energy price as opposed to being beholden to somebody else. But perhaps to, to what you were saying is that maybe it's more important during a bear market, and then maybe during a bull market, there's More profit margin going around for people to just try to quickly take advantage and try to quickly expand, but of course, there's always that risk if you try to expand too quickly, you're not conservative enough, and if the cycle turns back while you're doing that, you know, you're swimming, you're swimming naked." }, { "speaker": "daniel_frumkin_jaran_mellerud", "time": "30:55", "start": 1854.65, "text": "A lot of that is the lack of sophistication of the, the market participants who are like trading these public mining stocks and investing in them, that they're looking at, what's the current hash rate online, what's the Bitcoin on the balance sheet and the cash on the balance And what's the projected future hash rate? And that's kind of very surface level stuff, wh-which is where like Jaran's research comes in and shows like there This is the, the stuff that really matters if, if you're investing in these companies by doing like deep analysis and looking long term, then you wanna know things like debt to equity ratio and, and like how much machine, what their machine costs are gonna be on incoming orders and things like that. That I don't think the market was paying attention to that at all. It was a very irrational, investment market. It was basically just like Bitcoin price go up and hash rate go up, then stock price go up. And there was- There's not really a lot of differentiation as far as people investing in, into these stocks didn't seem to really take into account the different strategies of like energy plays versus pure mining plays, just acquiring ASICs versus trying to build out really good infrastructure and things like that. So it'll be interesting to see if the market becomes more rational now as well and then in the next cycle there's more of a tie into the actual things that miners are doing apart from just, Acquiring more machines and more hash rate. Yeah." }, { "speaker": "guest_2", "time": "32:23", "start": 1942.65, "text": "Jaran, do you wanna add something? Yeah. So, Bitcoin mining is a very capital-intensive business, and, you should-- I, I believe you should analyze Bitcoin miners just like you analyze, any other capital-intensive industry. you need to look at their balance sheets, and I think also people should focus more on the current hash rate and not so much on the future hash rate because Because in twenty twenty-one, you could just like say a number and like we're going to have this much hash rate in one year, and people actually believed it. They, they based their pricing in their models of, like they were saying like almost for certain that, yeah, this company's going to have this much hash rate next year, there was almost not critical to it at all. But adding hash rate is, is hard, you, especially for, for companies that- That aren't vertically, vertically integrated, like for example Marathon, because, you don't have full control over your infrastructure, and you, you also need to time the, the ASIC deliveries with the, with the rack space build out, and if you're not vertically integrated, you don't have full control over that. If you're not vertically integrated, you also will pay a higher price, higher power price, you need to pay a hosting fee, and as Daniel said You said it's, it's a more risky strategy because if, let's say you own your own power generation assets, then if the bear market gets really, really, really bad, at least you have the ability to sell, power to the grid. Like for example, Stronghold is a really interesting company because they own two power generation facilities and they can sell the power to the grid, and they are actually selling a lot of power to the grid because the electricity prices are increasing. Now, throughout the whole world. So there will come times during the day when, when it's more profitable to actually sell electricity to, to the grid than using this electricity to mine Bitcoin. So there's less risk by being vertically integrated, and as Daniel said, this helps you survive the bear market because it's really during the bear market you need to decrease your, your risk. And those, the miners who sur-survive the bear market and are able- able to, to capitalize on the good opportunities there, during the bear market, they will be the kings of the next bull market. So, in the long-- to be a long-term successful miner, I believe you need to, you need to be vertically integrated. You can't just be an, ASIC company that just, collects ASICs and don't plug them in. It won't work. It works in the bull markets, but, don't, not in the bear markets. In the bull markets, it's always the companies who take the most risks Who, they are like the geniuses, but, we see in the, in the bear market they go, they go under one after another." }, { "speaker": "stephan", "time": "35:29", "start": 2128.97, "text": "Right. And that, and that very much it mirrors over into the broader world where everyone looks like a genius in a bull market, right? So it's a very similar thing where maybe there are certain ideas and practices that make sense in a bull market or look like they make sense, let's say, air quotes, but actually once the cycle turns, they're not. so I also wanted to get the view on retail miners. so perhaps Daniel, maybe you have any comments to add here? What's happening for the typical retail miner? How should they be looking at it right now in terms of the current situation of the price drop and the hash rate where it is?" }, { "speaker": "daniel_frumkin_jaran_mellerud", "time": "36:01", "start": 2161.49, "text": "I, I would separate retail and home miners because I think a lot of home miners are actually going to benefit from this because they were already not looking at really good profit margins to begin with compared to the large public mining companies and other large mining companies, but that's not typically the- Motivation of home miners, for example, maybe the biggest motivation is like acquiring BTC off of exchanges, like KYC compliance, yeah. So now because we're in a bear market, there's gonna be slower investments into mining, some hash rate might come offline because it's no longer profitable, so difficulty should start going up more slowly or even potentially going down. I think it's gonna keep going up, but just not as fast as it otherwise would have, and that means that- But the hash value revenue, the bit-- revenue in Bitcoin terms is actually going to do better than I would have projected it doing six months ago, because I would have projected faster difficulty growth. So for the home miners who are viewing things entirely in terms of like, \"I'm using this to accumulate Bitcoin, my energy bill is basically me buying Bitcoin,\" and they're not gonna sell any of the coins because they're doing it at a small enough scale that they can afford to just keep paying the energy bills from that center It's like, okay, now I get to accumulate Bitcoin a little bit faster than I otherwise would have. But when, once you graduate to like small scale miners, the retail, but who's not doing it at home, maybe they're doing it, they have twenty machines hosted somewhere, they have their own little small facility, one of the interesting factors will be the increase in industrial electricity prices that maybe they have more exposure to than the larger mining companies. CoinMetrics did another report maybe a day or two Two ago, following up on their one last week, where they, they looked at the energy prices, of the top ten states in the US according to the hash rate distribution, so like Georgia, Texas, and, Washington and, and those states, and I think nine out of ten, or at least eight out of ten, energy prices had gone up significantly in the last six months. so if these miners, these retail miners don't have long-term PPAs, then they- They're now looking at paying more for their electricity, which was already probably much higher than the public miners are paying because they have those larger facilities and benefit from the economies of scale. so they're probably looking at, like, if they have any profit margin left at all, it's getting pretty slim, except for the ones who have purchased the newest gen hardware, which of course was very expensive depending on when they purchased it, and that's another nuance that I think we talked about in the last- Last episode that there's marginal cost to mine a Bitcoin and then there's total cost to mine a Bitcoin, and the difference between those two is that in total cost to mine a Bitcoin, you factor in the hardware depreciation. That's kind of the way that you can factor in, I had to purchase this hardware and I had a big capital expenditure up front, and how do I bake that into the long-term mining profitability margins? And if you look at those total profit, the total costs of production, where you factor in machine depreciation Then I think most miners are already underwater, meaning that they're not making enough Bitcoin to cover both all of their operating expenses, mainly electricity, but on top of that to cover if they were to distribute out the, the payment for the hardware, they're not making enough to cover that extra hardware margin that they needed. So breaking even on the hardware purchase is becoming a lot more difficult. but the thing is, as long- As long as their marginal cost of production is still lower than the Bitcoin price, it makes sense to stay online because you're still making payments on that hard-- you're still getting returns on that hardware. It's just they're too slow to, to fully break even in the long term, unless price starts going up. so that's where retail miners who were looking at the bull market six months ago or a year ago and seeing, okay, the only available hosting capacity is seven cents per kilowatt hour, eight cents per kilowatt- Kilowatt hour. That might have looked good at the time because the profit margins were huge, like you could make thirty-five cents per kilowatt hour with an S19 Pro, but the issue is you had to spend twelve thousand dollars to get that S19 Pro, and you're not gonna get that back in these market conditions. so I think there's a probably a big squeeze on retail miners, but at the same time, the, the ones coming out of this, I mean, they're still feeling the pain, the home miners are still feeling The pain of like now their returns on their electricity bill are a lot smaller in USD terms, but I think a lot of them just don't care about that, at least they care as little as they have to. Maybe some of them have to sell a little bit of Bitcoin to pay their power if they've got like five mining machines at home instead of just the one M30s or something. So there's that component. The other thing I wanted to mention is that with BrainOS Plus, the, the phototuning firmware that we do, we've seen the shift Very, very clearly in strategies from overclocking to now people are asking us like, okay, what's the, what's the maximum efficiency that we can get with this firmware? So people are now going below the stock power consumption in their settings. and this is like everywhere in the world, miners are, are starting to do this, that a year ago they were like, okay, how much hash rate can we get on an S19 Pro if we do a custom PSU and immersion and we overclock it to six thousand? and Watts and like basically two x the stock power consumption. And now the strategy is totally flipped to like, can we get this down to twenty five joules per tera hash if we decrease the power consumption to two thousand Watts per machine? so the ones that do have to pay those electricity bills each month are trying to consume less power if they can according to their PPAs, 'cause some of them require purchasing a full quota that they can't actually reduce Reduce their power consumption that much, but then on top of that, it's, it's just like it became an efficiency game as opposed to a maximized production game." }, { "speaker": "stephan", "time": "42:29", "start": 2548.75, "text": "Yeah, that's fascinating, and I, I wouldn't have thought of that, unless you, you mentioned it. It's a really interesting point. And so I suppose the other aspect, as Jaran you mentioned earlier, is that we're seeing falling ASIC prices because, right, in the bull market, let's say people got very exuberant about the price of ASIC machines, and now, let's say they're coming A little bit. so Jaran, did you have any comments there around home miners, retail miners, or ASIC pricing?" }, { "speaker": "guest_2", "time": "42:56", "start": 2576.31, "text": "Yeah, I actually have two S9s myself that are, that are just, collecting dust. So I'm kind of like a micro, marathon here, but, but yeah, for retail miners, I believe there will be a big increase in people, at least in the northern hemisphere trying to reuse the waste heat because miners just- Generate a lot of heat, and at least where I live in Norway, like if you can use the heat from the miner, it's, really good because it's expensive for heating here, and, we, we need a lot of heating in Norway because it's so cold here. And, I think we will see not only the retail miners starting to exploit other advantages of mining besides just getting the Bitcoin, because Bitcoin mining, it generates a lot of heat, it is, an interruptible- process so it can be, integrated into energy markets. So we, we will see, we will see a big growth of Bitcoin miners trying to lower their electricity cost by providing different services for the energy industry, because now, now they're forced to be creative to lower their, their costs." }, { "speaker": "daniel_frumkin_jaran_mellerud", "time": "44:10", "start": 2649.94, "text": "Fantastic point." }, { "speaker": "stephan", "time": "44:11", "start": 2651.2, "text": "Also, I'm curious for either of you if you have thoughts on this, does the recent price drop and the recent action change anything around? The case for renewable Bitcoin mining, as in mining using renewable energy, suppose, you know, or just doesn't change it that much compared in terms of fossil fuel energy usage?" }, { "speaker": "guest_2", "time": "44:30", "start": 2670.27, "text": "Yeah, I can answer that. I would say that it's, increasing the demand for mining with renewables because, because of two factors. One is that renewables doesn't have a fuel price, and it's really fuel prices that are increasing right now. It's natural gas, coal, and oil prices are increasing. So if you- You can get electricity without having a fuel price, it's, it's very good right now. The second factor is that renewables is often stranded, and that's also why they're so cheap. And miners who don't need to compete with other grid customers right now for increasing electricity prices, they can instead go to, for example, in West Texas, I don't believe the power prices there will increase that much because it's already really stranded energy, it will increase somewhat Because, natural gas is sometimes the price setter there and natural gas is increasing, but generally the stranded energy, which is mostly renewables, it will, not increase that much in price and that will incentivize more miners to, to use these energy sources." }, { "speaker": "stephan", "time": "45:40", "start": 2739.92, "text": "Yeah. So on that, actually, on the point of stranded energy, perhaps you could explain, is it also in the case where, let's say, okay, so let's say the wind isn't blowing and the sun isn't shining? In that case where you're a Bitcoin miner and you've purchased some ASIC machines and you're trying to do the stranded energy play, are you having to turn off your ASIC machine and is that making you not as profitable now because you're just off for this time that the wind's not blowing and the sun's not shining?" }, { "speaker": "guest_2", "time": "46:06", "start": 2765.63, "text": "Most miners who, who mine in these highly renewable energy places, they are also connected to the grid, so they can, they can draw grid energy if the sun isn't shining, even, even miners Are located behind the meter at wind or solar farms, they still take the grid energy when the, wind and solar aren't producing energy." }, { "speaker": "stephan", "time": "46:30", "start": 2789.75, "text": "I see. So this is a, in a case where they are still connected to the grid, they can achieve that, sort of thing. Where in a case where they're not connected to the grid, then it just, the business case for it wouldn't really stack up, would you say?" }, { "speaker": "guest_2", "time": "46:41", "start": 2800.78, "text": "Yeah, you, you would, not have enough uptime to pay for all the CapEx, generally, and uptime lower than eighty percent isn't, isn't profitable in Bitcoin mining." }, { "speaker": "stephan", "time": "46:54", "start": 2814.0, "text": "Of course, yeah. So thinking about where we are in the cycles and all of this, do you believe it was an error for large public miners to, let's say, borrow against their coins or to borrow potentially even against their machines as collateral? Like, was that just a bull market error or do you think it's-- it made sense at the time?" }, { "speaker": "guest_2", "time": "47:13", "start": 2833.27, "text": "I think it kind of made sense at the time, like Daniel said, the Bitcoin miners need the liquidity on their balance sheet because it's a very risky industry, a lot can happen. So you should have that liquidity on your balance sheet, and I think a lot of these miners, they think that if they need to have a big treasury, on their balance sheet, they might as well, hold it in Bitcoin. Like if MicroStrategy converts their cash to Bitcoin, why shouldn't we also just hold our Bitcoin? But I think in the, in the aftermath, it has proved to be, bad strategy, because miners are already very vulnerable to the Bitcoin price, even miners like Iris Energy that sell older Bitcoin, they're still extremely correlated to the Bitcoin price because their, their assets, their, their ASICs, they're very correlated to the Bitcoin price. So a Bitcoin miner will, will, will always be very correlated to the Bitcoin price, even if they don't, don't, hold the Bitcoin on the balance sheet. So, for a miner, it might actually make more sense to be, to be short Bitcoin or in, in some kind of way hedge. I'm not saying directly short Bitcoin, but at least try to hedge, your production. Like in all commodity industries, they, they hedge, it's, it's a normal thing, and I think it's going to be normal for Bitcoin miners as well. Daniel, anything to add there?" }, { "speaker": "daniel_frumkin_jaran_mellerud", "time": "48:44", "start": 2923.86, "text": "Yeah, pretty much agree with Jaran there. It's easy to play. Monday Morning Quarterback or I guess Hindsight 2020 is the way to say that internationally, like I, I would have done the same thing in that situation 'cause I was extremely bullish on short term, I didn't foresee the Fed's monetary policy being this abruptly, like doing the tightening stuff and raising interest rates this quickly, I didn't foresee Bitcoin responding as strongly as it has, which is probably due to all the, the other market conditions, the companies getting liquidated and whatnot, that, like, I think this This was if I was modeling a worst case scenario six months ago, these six months have been worse than I was modeling. So" }, { "speaker": "stephan", "time": "49:25", "start": 2965.39, "text": "unfortunate." }, { "speaker": "daniel_frumkin_jaran_mellerud", "time": "49:27", "start": 2966.53, "text": "Yeah, and I, I try to go super conservative with those, but, but also it's like I, I generally don't model for six months at a time. I would do three or four years, and it's hard to, to model with like, okay, cyclical nature of the market because we just do a, price is gonna do this percentage increase per year and difficulty's gonna do this per- Percentage increase per year. So it's, it's really difficult to model in these like inter-month volatility events and stuff. But yeah, I, I think it's, it's obviously it was a bad strategy in hindsight, but at the time, I wasn't viewing it as a bad strategy per se. That said, I, six months to a year ago, I was already thinking like the companies that are vertically integrating are setting themselves up much more sustainably to handle these type of events than the ones who are just doing The things that are pumping their stock price, because ASICs are basically a leveraged Bitcoin long. However much Bitcoin goes up, if you have the ASICs, then you get the cash flow from those ASICs, but also your ASIC might appreciate even more than Bitcoin in that time, and then however much it goes down, I think the bottom for ASICs will be deeper than the bottom for Bitcoin price, and just because there's not that much access to capital in these types of, scenarios where For people to be able to purchase tens of thousands of machines now is gonna be pretty difficult to do, so when those machines are hitting the market trying to be sold, it's just gonna, like, supply will exceed demand and prices will keep going down even if Bitcoin looks like it's starting to recover and go back up. I think that the bottom on the hardware market will happen later and deeper. So, yeah, it's easy to say now in hindsight, of course, was really difficult at the time to see it, other than the fact that you should probably vertically integrate." }, { "speaker": "stephan", "time": "51:17", "start": 3077.0, "text": "Of course. Of course, yeah. And on the same kind of theme of twenty twenty hindsight, the question around borrowing against machine, machines. So do you think that is a practice that will continue, for the lending companies? Because there are companies out there giving miners a loan and collateralizing against the Bitcoin machine, but as you just said, it's like a levered play on Bitcoin itself. Now, potentially, that could be seen as, well, if they're, if, if that lending company is really long-term focused and they're like, \"Well, let's acquire these ASIC machines,\" well, is Is there an aspect there or do you think that's not really going to continue into the future?" }, { "speaker": "daniel_frumkin_jaran_mellerud", "time": "51:52", "start": 3111.68, "text": "I would say if you look at the, the biggest lenders in North America now, all of them are also miners, so it is possible maybe they are prepared for that situation where they actually repossess the ASICS, but they're also willing to offer Bitcoin backed loans where the Bitcoin collateral is two hundred percent the actual loan amount just for companies that don't wanna sell their coins in order to- Purchase hardware, and I think that we'll still see that, maybe with an even higher collateralization ratio than before. If people get burned by this, then they'll learn their lesson and be a little more risk-averse the next time around. But I, I think it'll still be there because there's not a, a lot of ways to use traditional financing methods to purchase machines, and these are huge orders that some of the public miners are making, hundred million plus dollar orders that pretty much the only place that they can get those are the- Designated Bitcoin mining lending companies because nobody else understands it well enough or wants to, to even be involved from like traditional banking and investment." }, { "speaker": "stephan", "time": "52:58", "start": 3178.33, "text": "So looking forward in terms of where things are going, obviously as a miner, it's becoming clear that it's important to have, I guess, different scenarios and forecasting is really important for a Bitcoin miner, whether that's future price, future hash rate, future electricity price, future ASIC mining, ASIC machine price. Price, do you have any thoughts on where forecasting is like, is that forecasting going to change based on what's happened recently? Like, did people, do you think people will be more conservative in their forecasting going forward?" }, { "speaker": "daniel_frumkin_jaran_mellerud", "time": "53:31", "start": 3211.05, "text": "I would like to think so, but to be honest, I think if we go back into a bull market, people will We'll start getting more greedy and optimistic again. I think people will learn the lesson, but only partially, and maybe some companies will, will learn it fully and they'll be better about treasury management and being prepared for these types of risky events. But I think that in any bull market, there's a lot of the investment is coming from new entrants who don't fully understand this stuff yet, and if you're a mining company that wants to scale It's hard to turn down that opportunity of like people throwing money at you wanting to invest, when you know that that's gonna dry up in the bear markets. So because there's always that, like, the time when you actually want to have that capital available, it's not, and then the time that maybe it's not the best opportunity to use it is the time when it's actually available to you. I think that will still be the case in the future, but hopefully to a diminishing extent with each market cycle, or maybe we, we do eventually break out of these cycles. Super volatile cycles and they, they start to dampen over time and, and then there's more stability and less long term risk and then, like, it'll just be a longer process than, I don't think it'll happen in the next couple of years. Jaran, anything to add there?" }, { "speaker": "guest_2", "time": "54:53", "start": 3292.81, "text": "yeah, I agree with Daniel. Greed will always, get the best of people and during the bull market, people get really greedy. And also, it's difficult for a public company to, to raise, or a company in general to raise money. Without investing it in assets, you can't just raise money and have it in your balance sheet. No investors would, would agree to do that. But at the same time, like the Bitcoin mining, mining industry has been through these cycles before, but at that time, the, I don't think there were any Bitcoin mine, public Bitcoin mining companies. so now we will have much more data and Bitcoin miners have enough information now to- To hopefully learn from these past mistakes, but at the same time, a lot of people make the mistake of thinking that these cycles will not happen in the future, especially as standards and new, new entrants to come in. But yeah, I, I also hope that, it will diminish at least that Bitcoin will become less, less volatile in the future, but," }, { "speaker": "stephan", "time": "55:58", "start": 3358.03, "text": "we'll see. Well, I think that's probably a great spot to leave it there. So thank you both for joining me and, where can people find you? Online, Jaran." }, { "speaker": "guest_2", "time": "56:09", "start": 3368.78, "text": "you can find me at Twitter, my name is j mellerud. I know mellerud isn't, it's a difficult name, but, I think you will manage to find me. I'll, I'll be in the show notes, guys." }, { "speaker": "stephan", "time": "56:20", "start": 3379.71, "text": "Yeah." }, { "speaker": "daniel_frumkin_jaran_mellerud", "time": "56:20", "start": 3380.01, "text": "And Daniel, where can people find you online? I'm the same on Twitter, dfrumps, d f r u m p s, and we'll have a new mining insights update out pretty soon, so stay tuned for that. Fantastic. Well, thanks again" }, { "speaker": "stephan", "time": "56:33", "start": 3393.04, "text": "for joining" }, { "speaker": "daniel_frumkin_jaran_mellerud", "time": "56:33", "start": 3393.38, "text": "me," }, { "speaker": "stephan", "time": "56:36", "start": 3396.34, "text": "Show notes for everything we spoke about are available at stephanlivera dot com slash three eight nine, and if you're enjoying the show, remember leave a review and share it with your family and friends. Thanks for listening, and I'll see you in the citadels." } ] }