{ "episodeId": "SLP493", "speakers": { "stephan": { "name": "Stephan Livera", "role": "host", "tag": "STEPHAN" }, "matthew_williams": { "name": "Matthew Williams", "role": "guest", "tag": "MATTHEW" } }, "segments": [ { "speaker": "stephan", "time": "00:09", "start": 8.59, "text": "Hi and welcome to Stephan Livera podcast, a show about Bitcoin and Austrian economics brought to you by Swann dot com. Have you wondered about hash price derivatives? I talk with Matthew Williams, head of derivatives at Luxa, about this. We talk about hash price, what is it, what are the inputs of this, how does hash price shift over time, as well as professionalizing Bitcoin mining. And having a non-deliverable forward product and what that means for Bitcoin miners going forward. Now, as this show is brought to you by Swan, a reminder that Swan is putting on Pacific Bitcoin again. It was a fantastic experience last year, the feedback was incredible. People were saying it was literally the best conference they had been to, they had so much fun, and they had so much opportunity to connect with other Bitcoiners, whether they are speakers or just other everyday Bitcoiners. This is going to be on LA October, and this time it's going to be a full- Festival, not just a conference like last year. So, awesome speakers that we have already, people like Lynn Alden, Greg Foss, Preston Pish, Corey Klipstein, Alex Gladstein, and so many more. And of course, I'm part of the Swan team, and I'll be there, and I'm looking forward to seeing listeners there. The dates are October 5th and 6th. Make sure you book those dates in your calendars now, and think about if you've got a f-- a friend or a family member who you wanna bring along. This is a great Bitcoiners. So check out the tickets over at pacificbitcoin dot com, use the code livera for a discount on your tickets, and I'm looking forward to seeing you there October fifth and sixth. Coinkites dot com are making the best gear that you can use to secure your coins, as we know, not your keys, not your coins. And Coinkite have a range of hardware and other accessories that you can use to secure your coins, most notably the Coldcard. This is my favorite Bitcoin hardware device. It's ultra secure, it has so many features and so many benefits that you can For example, with a lot of hardware devices, you actually have to phone home to their manufacturer in order to set it up, or it's very difficult to do that. With the Coldcard, you don't have to do this. You can literally plug it into the wall, generate your seed, and write down your twelve or twenty-four words, and initialize the device without phoning home. And you can use it easily with open-source software such as Sparrow Wallet, Electrum, or Specter Desktop, and you can use it in all kinds of configurations, whether you are a beginner or an advanced user. To get your cold card, go to coinkite dot com and use the code LIVERA for a discount. And now on to the show with Matthew. Matthew, welcome to the show." }, { "speaker": "matthew_williams", "time": "02:38", "start": 158.01, "text": "Oh, thank you for having me, appreciate it." }, { "speaker": "stephan", "time": "02:40", "start": 159.89, "text": "So I know, you guys are doing some interesting stuff around hash price derivatives and, you know, some interesting things there that we can dig into, but, let's just start with a little bit on yourself. Do you wanna just tell us a little bit of your background before you came to the world of Bitcoin?" }, { "speaker": "matthew_williams", "time": "02:55", "start": 174.68, "text": "Yeah, for sure" }, { "speaker": "matthew_williams", "time": "03:00", "start": 180.02, "text": "Most of my career in traditional finance, literally right out of high school, worked at the Chicago Board of Trade, spent a number of years as a commodities trader, traded oil and gas for a number of years out in New York, and then came back to Chicago again, traded agriculture products, so commodities space pretty much the whole time. spent a couple years at a company that built software for options traders called Option City, and then went to work for CME Group, the Chicago Mercantile Exchange. worked on the corporate strategy Side of things, was on the digital asset team that helped launch Bitcoin Futures back in twenty seventeen, which is kind of how I got my start in this, in the Bitcoin world. And then the last two years I was at CME, I was in the corporate venture capital side of things, and we invested in a lot of fintech type startups, which at the time was a lot of, digital assets and, and bi-- Bitcoin related companies. And then spent two years at a regulator, the National Futures Association, before joining Luxor in May. for about fourteen years or fourteen months now." }, { "speaker": "stephan", "time": "04:03", "start": 243.06, "text": "Great, okay. And so interesting, you mentioned, having been at CME at the time they launched, now that's, you know, two cycles ago, right? Like that's back in sort of, I guess the, 'cause I remember that, you know, being a big news item in, let's say, late 2017, right? Like that was the big hype, that was the big thing. I'm curious if you have any insight you can share from what it was being inside CME at" }, { "speaker": "matthew_williams", "time": "04:25", "start": 264.8, "text": "that At the time, at the time there was a number of exchanges kind of trying to compete to be first to market. So you had the CBOE, which actually beat us by like a week, you had ICE looking at it, you had NASDAQ looking at it, and a lot of it was like, you know, are you gonna have a cash settled instrument, are you gonna have a physically settled instrument, and then how you gonna deal with regulation, and then what the real challenge was, was going around and doing education to all like the traditional finance people. So going to was, and you had that, that crazy run where we would go to meetings and we would, you know, say, we'd give them Bitcoin one on one, and we would show charts, and the chart, you know, looked like this, and an hour later, our chart would be out of date because it was running so fast. So it was, it was super interesting. You know, it was coming from traditional commodities, it was like nothing I'd ever seen before, but yeah, it was, it was a crazy time." }, { "speaker": "stephan", "time": "05:26", "start": 325.64, "text": "Yeah, and I think it's subjective, right? But volatile of a beast back in those days than it is today. Now, for all we know, there could be another cycle coming and the craziness comes back, but I think at those times, you're right, like the price would just be rollercoastering up and down, and I'm sure that would have made it a lot harder to try and teach someone, 'cause you might say, \"Oh, the price as we speak today is ten thousand dollars, \"and then like the next day it's" }, { "speaker": "matthew_williams", "time": "05:52", "start": 352.31, "text": "fourteen thousand dollars, \"you know? \" Oh, it was crazy. Like you talk to these Instruments. And typically, if you launch a new product, you start at like a twenty percent margin, which means like twenty percent of the value of the contract. Well, these like, we were starting the conversation at fifty and going all the way up to a hundred just 'cause the volatility was so crazy and no one really understood it. And you'd get the typical questions like, \"Well, this is a Ponzi scheme, \"or \"What's the intrinsic value of it? \"And like, trying to answer those, you know, intelligently at the time was, was a challenge to people that" }, { "speaker": "stephan", "time": "06:30", "start": 390.06, "text": "I, I understand that, from a financial markets perspective, some of the futures and forward, forward agreements and things like this actually were formed from starting from, as an example, farmers wanting to come and lock in their rate, let's say. So do you wanna just elaborate a little bit on that? Obviously, you have a perspective as coming from the trading world yourself." }, { "speaker": "matthew_williams", "time": "06:53", "start": 413.28, "text": "Yeah, well, I mean, it's, it's very relevant to the, the products we launched at Luxor, but yeah, to your point, like every trad- Traditional commodity space, there's derivatives that exist for hedging, and this dates back, I mean, like, literally like a thousand years back to, you know, times in Egypt when people would use hedging, but like the modern derivatives date back to like the late 1850s in Chicago, and it was kind of how the Chicago Board of Trade was formed as a way for farmers to come meet, you know, with purchasers of their products and kind of agree to, to prices before delivery, so they knew, like, they, they knew how to, like, you know, lock in You know, and, and, and plan for their operations, and that kind of exists in, you know, in corn, it exists in energies, it exists in metals, and, you know, and if you look at Bitcoin as a commodity, much as we do, there's definitely a need for that in the space, and even more so in the, in the hash rate space as well." }, { "speaker": "stephan", "time": "07:47", "start": 467.01, "text": "Great. And so then you have these natural participants, right? You have natural buyers and natural sellers in a sense. And so obviously we're talking about Bitcoin, Bitcoin miners are the natural, you know They're producing, right? And then, do you wanna just talk a little bit about who's normally taking the other side of that trade?" }, { "speaker": "matthew_williams", "time": "08:06", "start": 486.44, "text": "Yeah, I mean, to, just to elaborate a bit on, you know, the risk exposures that miners have, right? They have, you know, they're natural producers of Bitcoin, and whether or not they huddle completely or don't huddle at all, they still have price exposure, right? So one of their main, probably their predominant risk is Bitcoin price exposure. But when you get down to the operational level, you know, a lot of And then you also have revenue exposure, which is where, hash price comes in. And so, so basically, you know, in a, in a traditional commodity space, you wanna figure out ways to manage your revenue so you can, you can manage your operations, you can manage your CapEx, that doesn't really exist in the Bitcoin mining world or didn't until very recently. And so the mining space has needed, you know, they've had, they had Bitcoin derivatives that exist, right? Like you can trade them on exchanges You can trade them on, you know, soon to be ETFs. Like, there's a different variety of different, derivatives, futures, options, you name it. Hash rate, not so much. And then there's a lot that goes into your hash rate risk. And so, you know, we felt when we launched this product, that we can get into a minute, it felt, you know, it, it fixed a gap that was existing in the space." }, { "speaker": "stephan", "time": "09:21", "start": 561.03, "text": "Gotcha. And so, out of curiosity, and maybe some people are curious about this as well" }, { "speaker": "stephan", "time": "09:30", "start": 570.34, "text": "You know, let's say they do a call or they, you know, maybe they sell a call or buy a put on the Bitcoin price on some derivative exchange without having a specifically hash rate derivative. Can you just explain why?" }, { "speaker": "matthew_williams", "time": "09:43", "start": 583.37, "text": "Yeah, I mean, look, you, you gotta kind of-- I think what I touched on a minute ago is you, you kinda have to break down the exposures that miners have, right? So, you know, historically, you really only could-- Well, I'd take a step back. Miners, I think miners have been adverse to hedging To begin with, right? So it's, they kind of lived in a huddle culture where Bitcoin only goes up, right? Number goes up, and you don't really worry about things. And then historically, like, energy prices been relatively flat, and so you didn't have to worry about that. And then Bitcoin, you know, you've seen some tremendous rallies in there, so hedging, you're averse to it 'cause you don't wanna miss out on the upside. And so, and sorry, it was a long-winded answer to your question, but I promise I'll But it's, you know, the futures launch, you could hedge with futures. But really, if you're a miner, that only, that only covers one of your risk exposures, and that's basically your treasury risk, right? You still have-- You're still exposed to difficulty, you're still exposed to transaction fees, and as I mentioned, you're still exposed to energy, and then also like, you're exposed to ASIC prices, you know, fluctuations as well, which have a high beta to Bitcoin. So as a miner, you're like, \"Holy cow, there's all this There's really no way to hedge out difficulty or transaction fees or Bitcoin price all in one package. And, and HashPrice, you know, the way we view it through our index encapsulates all those risk exposures, and that's the instrument that we went to market with." }, { "speaker": "stephan", "time": "11:15", "start": 675.05, "text": "Yeah, I think that's a great answer because in summary, the previous options related only to hedging out the price, when really that's only one component of what a miner is, is dealing with, right? And so there are multiple components there, and as you said But historically, it seems that Bitcoin miners would just yolo it and basically ride the volatility, and that requires, you know, a real iron stomach, let's say. And, maybe that's not going to be as feasible for miners who need to seek financing or who are trying to professionalize or maybe you just don't have the iron stomach, right? Like, because even if you personally have an iron stomach, you know, do all your employees have an iron stomach? Do all your- Or, you know, and all of those other aspects, it just, I guess, it gets very difficult to manage. so let's break it down a little bit for people, 'cause we wanna keep it accessible for people. what is hash price? What goes into hash price?" }, { "speaker": "matthew_williams", "time": "12:15", "start": 734.69, "text": "Yeah, so touched on a bit, but, there's four main components that go into hash price. obviously, Bitcoin price is, is the number one, transaction fees, which have been very relevant lately with the introduction of ordinals and the BRC tokens. And then difficulty, obviously, so actually, I can bring them down one by one. I'll start with the simplest one, the block subsidy. So what, what are your rewards for mining, right? And obviously, we all know every four years, those are cut in half, which, which is super important to hash price, and we have one coming up next year in April. difficulty, obviously, the more people in the network, the harder it is for you to mine. So as more people are mining, difficulty goes up and it becomes harder and harder as a miner. Transaction fees They're actually the opposite, right? Like the higher transaction fees, the more revenue that you're getting from a miner, and those will become more and more important as the halving schedule continues, and then Bitcoin price. So those are the four components, and there's a lot of math that goes into spitting out a value, but hash price, at a high level, you can think of as the expected value of one petahash of hash rate per day. So for example, today it sits roughly around seventy-three dollars, so you can expect one petahash per day at seventy-three dollars." }, { "speaker": "stephan", "time": "13:30", "start": 810.04, "text": "Gotcha. And just to give context for people, let's say of the latest line of, let's say Antminer or Whatsminer, how many machines makes up one petahash? Just like roughly. Are we talking like ten machines or five machines?" }, { "speaker": "matthew_williams", "time": "13:44", "start": 824.07, "text": "Yeah. At a very simple level, let's say you have an S19 and it's a hundred terahash, right? So ten of those would get you one petahash. Yeah." }, { "speaker": "stephan", "time": "13:50", "start": 830.49, "text": "Gotcha. Okay. So that's kind of the, the scale we're working with here. So even if you are a home miner or a About a petahash, and this is where you could get started thinking about, or at least that's, yeah, I mean, we'll, we'll get into that. Yeah, I mean, yeah," }, { "speaker": "matthew_williams", "time": "14:08", "start": 847.57, "text": "yeah, for us, the smallest increment that you can hedge is one petahash, and so that, that's probably-- Okay. You know, we used to think in terms of terahash, and I think there's still a fair amount of people that still talk in terahash, in which I think is kind of like more of a retail, mindset, which We started, you know, we opted to petahash in terms of minimum increments." }, { "speaker": "stephan", "time": "14:35", "start": 874.74, "text": "Yeah, I see. And so then, I'm just curious as well, like if you could offer any comment in terms of the, the cycles of hash price, like would we expect hash price to fall over time, like just because the block subsidy is halving and just, you know, if you're expecting, you know, a, a, a general downwards trend with, you know, increasing efficiency, increasing difficulty, I guess, o-obviously, as you mentioned, there's all these factors That go into it, right? The price could, it depends on if the price just goes like crazy, well then it can trend up. But I guess barring a massive price increase, you would mostly expect it to come down over time, is that right or how would you look at it?" }, { "speaker": "matthew_williams", "time": "15:13", "start": 912.89, "text": "Yeah, yeah, a hundred percent. People kind of look, there's two terms that you would say, you know, in the shorter term, say zero to twelve months, it kind of tr- it trades in backwardization to your point, so prices go down. But there's so many things working against hash price" }, { "speaker": "matthew_williams", "time": "15:30", "start": 930.1, "text": "Network hash rate just continues to climb at a pretty fast rate. You know, the price of Bitcoin being relatively flat, means that it'll continue to go down. If you did see like another twenty seventeen, twenty twenty run in Bitcoin, where, you know, it went up three X or four X, you'd see a big uptick in Bitcoin price. But over time, yes, you're gonna see a slow grind, not to zero, because there, there's what they call a theoretical floor, right? At some point, it becomes unprofitable and machines get unplugged. Or you could have like a macro event like the China ban that would have like an immediate impact to, to network hash rate. So there's a lot of things, and then, you know, you have cyclical things like curtailment in Texas or, you know, weather patterns that affect it, but those are all short term. So to answer your question, yeah, o-over the long term, you-- if you look at a chart, it's a slow downward-sloping, hash price." }, { "speaker": "stephan", "time": "16:23", "start": 983.26, "text": "Yeah, I see. But, yeah, as you, as you said, crazy outlier events" }, { "speaker": "stephan", "time": "16:30", "start": 990.0, "text": "Seventeen bull run and the price goes ten x, then all of a sudden, like it's now super profitable to be mining, you know, in that, in that scenario when the price is pumping and, or, or in the inscriptions and audinals case, there's so much more transaction fees. Now, it remains to be seen whether that's a fad or whether it's gonna last, you know, how much is it really gonna add? Let's see. But, I think though, just to, I guess, a-offer some context around what hash price is and how" }, { "speaker": "stephan", "time": "17:00", "start": 1020.34, "text": "In terms of, you know, new miners being, more efficient than before, I guess we would say the efficiency gains are slowing down, right? Like we're hitting a marginal returns kind of, or diminishing marginal returns in terms of new machines, right? Whereas in the early years of Bitcoin, a new mining technology, ASIC mining technology could massively be better than before, which would pump the difficulty, which would in turn, turn, take hash, hash price down, right? So, I guess there's all these things to think about, but the broad trend is gonna be Lightly down in hash price, I guess." }, { "speaker": "matthew_williams", "time": "17:32", "start": 1052.44, "text": "Yeah, no, it's true though, but like, I mean, if you look at it from as, let's say you look at it as a derivative instrument, like, you know, like the hash price, forwards that we have, it becomes super interesting when you have events like, you know, what happened in May with Ordinals and BRC twenty, when you saw a huge spike in hash price or the China ban that we referenced or, you know, plays on efficiency, if there's a new, you know, new machines These all have ripple effects on hash price and make it a, a more tradable instrument. And so, you know, like you, you mentioned before, like who are, who are the buyers and sellers? And obviously the miners are sellers of this. And it's a question we get asked quite a bit is, you know, who, who are the natural buyers? 'Cause if you'd only have people using this to hedge, you're gonna have all sorts of sell-side pressure and that kind of an unstable market. But the truth is, like, you, you have people that, you know Price would be a natural buyer of this, and that could be a hosting facility that's curtailing its miners, it could be cloud miners, it could be, it could be miners themselves, it could be people that, you know, are buying ASICs but don't have hosting and want that temporary exposure. like there's a number of use cases, it's not, like, I wouldn't say it's analogous to corn or gold or, or energies, because there's more natural buyers than that. ours is a bit unique in that there's not a ton of natural buyers. Which makes the, typically these markets trade a bit as a discount to spot, and that the reason is like you get market makers or you get hedge funds that come in, they're expecting, you know, for them to take on these positions, they're expecting like a yield or, or a discount to spot to be advantageous. And so as a miner, you kind of have to factor that in as part of your hedging strategy." }, { "speaker": "stephan", "time": "19:23", "start": 1162.98, "text": "yeah, interesting. But yeah, interesting you mentioned some use cases. Like I remember people talking about mining, you know, years and years ago when people would Say, hey, it's like such a big deal that when I order these miners, it even if it takes two weeks for them to arrive from around the world, that's a big loss for me because I'm, you know, meanwhile, you know, there's all these other miners who are plugging in machines all around the world and I'm losing out, and maybe this is an example where that miner today can actually lay off some of that by, you know, getting exposure to the hash price in that meantime for the two weeks while they're waiting for delivery or the one month or whatever." }, { "speaker": "matthew_williams", "time": "19:58", "start": 1197.58, "text": "Yeah. On the buy side of this, and, and, and a lot of it, I think, is just what I mentioned, like you, you might be waiting out ASIC prices to get lower, or you might have the ASICs and looking for hosting, but you have investors-- well, not everyone, but a lot of times you have share-shareholders you have to appease, and if you're worried about a run, this can protect you on the upside, so you can still participate in the upside run on a hash price as a hedge. It, you know, it's-- and sometimes just miners that or we see it a lot more recently, we've made a push into the institutional side, so we see hedge funds that were like, \"Alright, we wanna get exposure to this, but we don't wanna buy the equipment or deal with the hosting or deal with curtailment. It's, it's a synthetic exposure to the, to the space.\"" }, { "speaker": "stephan", "time": "20:46", "start": 1245.65, "text": "yeah, that's also interesting as well, 'cause that's another dynamic. I'm curious if you have something to offer on that as well, just or in, insight, because the way I've seen it is typically," }, { "speaker": "stephan", "time": "21:00", "start": 1260.0, "text": "Have to turn off or get wrecked in some way, sell their miners to somebody else, and then typically what you've seen is if there's been a big bull run, it's almost like the price is running up faster than the new, than miners can plug in machines, right? And so there's, there would be this funny dynamic in the cycle, right? Because Bitcoin has these big cycles, I'm not saying it's every four years, but just the, the kind of herd mentality, people running in and then they're running out. So there, there will be times where hash price is in" }, { "speaker": "matthew_williams", "time": "21:30", "start": 1290.2, "text": "Yeah, oh, a hundred percent. I mean, HashPrice has a high, very high beta to Bitcoin, obviously, 'cause it's the main component that goes in there, and then ASICs ha- also have a very high beta to Bitcoin, right? So as, as Bitcoin's running, so are ASIC prices. And so, you know, like, all of these kind of play into the fact that you, you need instruments to kind of help you manage those exposures." }, { "speaker": "stephan", "time": "21:55", "start": 1314.52, "text": "Back to the show in a moment. For those of you in or near Europe, think about Plan B Lugano. It's coming up October 20th and 21st. So this forum or a conference is going to host amazing speakers, people like Nick Szabo, and I hear he's going to be having an awesome original contribution related to some of his earlier work about social scalability. There'll be awesome speakers like Adam Back, Paolo from Bitfinex, Prince Philip, Jocko Mazzuchelli, Mike Peterson from Bitcoin Beach, and so many more. And remember, with Lugano Lugano, there's actual real world Bitcoin and Lightning adoption. You can spend Lightning at hundreds of merchants around town, whether they are bars, restaurants, cafes, clothes stores, watch stores, barbershops, hairdressers, and so many more. So this is a fantastic experience if you want to actually live on Bitcoin and Lightning. So go and check it out. It's Plan B Forum October 20th and 21st. You can find the website at planb.lugano.ch, and I'm looking forward to seeing you there. Now, when it comes to Bitcoin transactions, I always use mempool dot space before I send an on-chain transaction, because I can use mempool dot space to help me target the fee whether I am interested to get that transaction through at high priority or medium priority or perhaps low priority if I'm feeling cheap. Mempool dot space is a comprehensive Bitcoin explorer that covers this ecosystem from the mempool to the blockchain to second layer networks like the Lightning Network, and with mempool dot space you can host it yourself, it's free and open source software, and they have also announced The transaction accelerator program, which is coming out soon, so keep an eye out for more information on this. But otherwise, in the meantime, go and check it out over at mempool dot space. And now back to the show. Gotcha. Okay. So let's talk a little bit about the specifics of it then. So the hash price delivery, sorry, the hash price derivative. Can you just spell out some of the details? Like as an example, what does non-deliverable mean?" }, { "speaker": "matthew_williams", "time": "23:49", "start": 1428.52, "text": "Yeah, so it's, it's not a very sexy word, I guess I'll say. That's Started just calling them hash price forwards. But to answer your question, a non-deliverable forward, or it's, it's also called an NDF, is basically a cash settled instrument. So there's two types of forwards, generally speaking. There's a, a physically delivered instrument, and, and in this, context, it would be basically hash rate would be the physical delivery, so you would actually physically point your hash rate somewhere and deliver, you know, via that mechanism. a-and, and there are examples of that in, in terms of the- Derivatives world, like that our friends at Blockgreen have an example where, you know, someone can put Bitcoin up and, and get hash rate from a miner, and a miner delivers, and that's a physical delivery. Ours is cash settled. So when we, the reason we chose this, we wanted to do something different than had already been done in the space. We wanted to remove some complexities around curtailment and, and delivery and uptime and all that kind of stuff. And then also, going back to my time at CME, when we launched the Bitcoin futures, We started off with an index, so it was a spot index, and we, we let that, we put that out there for a couple months, let people digest it, and then we built a derivative around that index. And there's lots of examples in the financial world around that. So when I got to Luxor, I was like, \"Oh, cool, we, we already have a hash price index. It's already widely referenced out in the space. Let's just do the same thing.\" And so we built these non-deliverable forwards, meaning they're cash settled to our index. So Forward is, is, is basically a derivation of an underlying, right? And so in this case, the underlying is the spot index, which is the hash price index. And so a non-deliverable forward basically settles to that instrument, is the simplest way of looking at" }, { "speaker": "stephan", "time": "25:38", "start": 1537.61, "text": "it. Yeah, gotcha. Yeah. And so in terms of, you know, let's say someone's listening now and they're a miner and they, they want exposure to this, is it like they call you up or is there, is it like all on a website or can you walk through the process? Like, let's" }, { "speaker": "stephan", "time": "25:54", "start": 1554.08, "text": "He's got one petahash and he wants to, you know, sell an NDF. What's the process look like?" }, { "speaker": "matthew_williams", "time": "26:00", "start": 1560.02, "text": "Yeah, so you can reach me pretty much any way you want. You can reach me on Twitter, you can reach me on Telegram, email, on our website, and we have a team that kind of handles these kind of requests. But essentially, let's say you're, you know, miner ABC and you wanna hedge out, you would call us, we'll kind of walk you through the dynamics of the instrument. There are some, some onboarding steps that are Of, you know, as I mentioned before, regulated by the CFTC, we treat this as a commodity, and so we have to kind of follow some regulatory steps. So our onboarding package consists of what's called ISDA documents, that stands for International Swaps and Derivatives Association, and basically it's a series of documents that govern how you and I would trade together. You sign off on those documents, we onboard you on the team, probably do KYC, depending on the size of the miner, and then, and then we onboard you to our- platform. And then essentially, the way we do it now, i-if you're interested in seeing where the markets are at, like where the price discovery is, we, we operate channels on Telegram or on Slack or, or a variety of other venues, and we basically post markets every morning and then throughout the day. So we give you updates based off where the underlies trading, and we have market makers that quote, and so basically if you're a miner, you go through the onboarding process with us, every day we send you messages saying, you know, here's where the price- Prices are and where you can hedge, and then you have the option of trading different durations. So if you wanna hedge out for one month, two months, all the way out to six months, we can facilitate that. And then we-- so we kinda operate the marketplace. So we sit in the middle, we match buyers and sellers. And so if a miner comes in and says, \"I wanna sell, say, ten petahash,\" we show 'em the market, and then we go to the, the rest of the participants and say, \"We got someone, you know, looking to That's essentially how it goes." }, { "speaker": "stephan", "time": "27:56", "start": 1675.5, "text": "Gotcha. And then in terms of pricing, is that just like on the website or is that more in the Telegram channels that you will say, okay, this is the pric-- this is the going rate today?" }, { "speaker": "matthew_williams", "time": "28:04", "start": 1683.53, "text": "Yeah, so w-w-we officially launched in January, so we're still going through a bit of an evolution. right now, the price discovery, the, you know, the prices that you ask for the, the order book is typically done through Telegram. but we are-- we have a front end platform that we, we built out and" }, { "speaker": "matthew_williams", "time": "28:24", "start": 1704.16, "text": "process to that or, would be put in the order book in the UI probably later this summer, within the next couple months." }, { "speaker": "stephan", "time": "28:31", "start": 1710.98, "text": "And speaking of the size of this market, so as you said, the bottom end is one petahash, what's, what's the top end? What are the limits that we're playing with here?" }, { "speaker": "matthew_williams", "time": "28:39", "start": 1718.71, "text": "Yeah, I mean, to be honest, like we're talking anywhere from, you know, miners that have ten petahash to miners that have, you know, public miners that are in the exa hash conversation. right now, you know We can comfortably handle liquidity in a couple of exa hash, and I would say by the end of the, end of this quarter, we'll be in the several exa hash. So, yeah, so it's everywhere and in between. our typical trades could be, we could do three peta hash one day, and we could go up to an exa hash the next day." }, { "speaker": "stephan", "time": "29:11", "start": 1751.09, "text": "Yeah, right. Okay, cool. And so in terms of, I guess for some miners, they might be thinking, how much should they be laying off, right, as an example? Because as you said Totally lay off everything, because then he's giving up all his upside. Yeah. So what, what do they-- what's like a typical strategy, or does it really vary how much they wanna, how much they wanna sort of hedge out, hedge, hedge out, right?" }, { "speaker": "matthew_williams", "time": "29:36", "start": 1775.93, "text": "Yeah, no, it absolutely varies based off of, you know, what their mindset is, what their strategy is, what their, their hodl position is. you know, typically they don't wanna hedge out anything, right? But like we've learned a lot of, we've learned a lot of lessons in the" }, { "speaker": "matthew_williams", "time": "29:54", "start": 1794.36, "text": "And hash price revenue is variable, right? So I think the people that are, are still solvent and are, you know, trying to refine their strategies are spending a lot of time hiring the expertise to do what we're offering. And so to answer your question, like, I typically, you know, I, I think the best way of looking at it personally is you start with what your operating expense ratio is, you know, and like if that's thirty percent or is it sixty percent or is it higher, like you start there as your baseline and work your way up and down. So like I wouldn't ever advise somebody, unless I wouldn't, I typically wouldn't advise someone to say hedge out a hundred percent, because, you know, people do wanna participate in the upside, and like if your goal is just to manage your operating expense, that doesn't make any sense. And so, you know, you start there and kinda work, like I said, work your way up or down. And so I think we see people probably in the thirty to sixty percent of their overall fleet is the typical area that people are hedging out." }, { "speaker": "stephan", "time": "30:51", "start": 1851.22, "text": "Now," }, { "speaker": "matthew_williams", "time": "30:52", "start": 1851.84, "text": "there are people that it's a pure cash business, and they're just, you know, they're just converting, to Bitcoin, and like they don't need to hedge out at all, they're just going straight, you know, from, they're converting Bitcoin to cash, I should say. but sometimes like they wanna let it ride too, so like this is an opportunity for them to have, you know, have some sort of a hodl strategy as well. We like to say that like hedging enables hodling." }, { "speaker": "stephan", "time": "31:14", "start": 1873.91, "text": "Gotcha, yeah. I mean, at the end Right? And, like, you can get wrecked if the cycle moves against you, obviously. And so, yeah, I think it's a, it's a mindset," }, { "speaker": "matthew_williams", "time": "31:27", "start": 1887.36, "text": "right? Like hedging, it, it's never sexy. Like if, if you're at the bottom of hash price, you're worried that you're locking in unprofitability, and if it's running, you're worried you're gonna, you're gonna miss out on the rest of the run, right? But like you have to kind of treat it as a, as a, as a business and, and lock" }, { "speaker": "matthew_williams", "time": "31:51", "start": 1911.0, "text": "You know, to me, it's just like it's, it's a cost of doing business and it's a cost of remaining solvent in the long run." }, { "speaker": "stephan", "time": "31:57", "start": 1917.26, "text": "Yeah, for sure. And so in terms of who needs to do this, like we've been talking about, who needs to do this obviously, but who specifically needs to do this? Maybe in some cases, if it's a financing reason or maybe they are-- Obviously, if you're a public miner, maybe there's a certain standard of risk management that's required of you and therefore your shareholders, you know, they will expect you to do this kind of thing. So could you just elaborate a little bit on who really needs to do this stuff and for who it's maybe it's an option?" }, { "speaker": "matthew_williams", "time": "32:28", "start": 1947.62, "text": "Yeah, no. So the people that need-- and you touched on it a bit, like- We talk about this quite a bit, the space is starved for capital, right? It's really hard for existing miners or new miners to get financing, in any capacity, and that's due to the lessons that we learned over the last eighteen months. and part of that was bad actors on the lending side, and part of that was bad actors on the mining side, but the truth is, is it's very hard to get access to capital these days. And but as we talk to, to mining companies and also financiers, if you have a hedging strategy in place you know, either through, via your, your energy costs or your Bitcoin treasury or your revenue through us, you're far more likely to get financing, like far, far. And it's-- there's tangents to this in the oil and gas space. You know, i-if you're in the oil and gas space and you're trying to increase operations, you absolutely have to have this hedging strategy in place and to show that you're hedging production already. I think the same thing is gonna be relevant in this space, and you're seeing it more and more. And so, yeah, to answer your question, anybody trying to get new capital, but like also people that are already stable and are trying to plan for the future, it's, it's super relevant. Now," }, { "speaker": "stephan", "time": "33:43", "start": 2022.98, "text": "who" }, { "speaker": "matthew_williams", "time": "33:43", "start": 2023.22, "text": "doesn't? I mean, it's people that already have, you know, really good treasury management, really good balance sheets. I would still suggest they do it, but like they're less likely to need it, than, than people that are trying to grow." }, { "speaker": "stephan", "time": "33:57", "start": 2036.96, "text": "Gotcha. And they could maybe do a smaller percentage, yeah, because they've already got a big treasury to kind of k-- tied them over if, if another bear cycle hits, that kind of thing." }, { "speaker": "matthew_williams", "time": "34:05", "start": 2045.31, "text": "Yeah, yeah, exactly. But I mean, I still think regardless of your position, you know, y-you need to have some sort of hedging strategy, and it needs to be dynamic too, right? Like you, you change up your You know, operational goals are, it's never a static, it shouldn't ever be a static strategy." }, { "speaker": "stephan", "time": "34:25", "start": 2064.84, "text": "Yeah. And I guess one other thing, because we've been talking about it in the sense of, oh, if you're looking for financing or maybe for a big public company, but there's also the aspect of, if you have a concern that your energy provider is gonna rug you, well, that's another example where maybe having this might give you a little bit of protection, at least in that one to six month period that you had the NDF on for." }, { "speaker": "matthew_williams", "time": "34:47", "start": 2087.36, "text": "Yeah, I mean, that's Miners, especially now in a post having, are gonna be super sensitive to energy prices. And so if you haven't locked in via PPA or energy derivatives, and you have variable costs for your energy, like you could be in trouble. Like, you know, a move from, you know, five cents, to, to eight cents could be catastrophic for you. So i-if you're at level of profitability in hash price, and you're worried about variability in your electricity, like you absolutely should be hedging. Now, if you're, you know- If you're locked in at three cents for a long time, like you're in a much better situation, and that doesn't apply to you, but that's not the case for most people." }, { "speaker": "stephan", "time": "35:27", "start": 2126.84, "text": "Yeah, interesting. because, that's the other aspect of it, because I think people can be maybe overly optimistic about assumptions that they make right if they've got a spreadsheet and they're punching in numbers and they're saying, \"Oh, I'm getting this energy price for five years,\" and then all of a sudden something changes, maybe something about the grid happens there, or maybe there's a" }, { "speaker": "stephan", "time": "35:50", "start": 2150.26, "text": "Is your customer base around the world, right? Or is it, it's not restricted to the US or anything?" }, { "speaker": "matthew_williams", "time": "35:55", "start": 2154.92, "text": "No, no, we are definitely global in terms of customers. We have people all over the place. but yeah, I mean, you, you make very good points. Like, you, you, you have regional risk. you know, a miner in, in Norway versus a miner in Texas versus a miner in El Salvador has very different--" }, { "speaker": "stephan", "time": "36:11", "start": 2171.37, "text": "Kazakhstan or-- For" }, { "speaker": "matthew_williams", "time": "36:13", "start": 2172.78, "text": "sure. Kazakhstan, Ukraine, Russia. I mean, we don't operate in Russia, just for the record. Definitely not. Any, anybody that's, OFAC country is not on our list. But, but to your point, like, yeah, you, depending on where you are, you, you definitely have different exposures, in terms of risk, a-and your, your hedging strategy will have to be different, you know, relative to that." }, { "speaker": "stephan", "time": "36:36", "start": 2195.67, "text": "Yeah. Okay. Let's get into curtailment. So this is something which has, I guess, become a lot more popular in the recent, let's say, two or three years at least as I understand it. And Grids around the world, and famously in Texas, where part of the argument that bitcoiners and bitcoin miners will say is, \"Hey, like, you can build out your grid further than what you really need because, like, the peak load problem.\" And then the idea is if there's, let's say, wind isn't performing on that day, we-- the bitcoin miners will turn off, and you pay our-- your grid, or, you know, you pay us to turn off. That's part of the case, right? And so can you just elaborate a little bit on that and how that Who's thinking about NDF?" }, { "speaker": "matthew_williams", "time": "37:22", "start": 2242.14, "text": "Yeah, I think it, it might be more relevant to the, the host, you know, if you're treating it as a hosting facility for curtailment, 'cause like if you're looking at, well, first of all, like, to answer the first part of your question, I, I think people that are treating curtailment as such are thinking very smartly, right? So if it's more profitable to sell to the grid than turn on mining machines, like, that's a very interesting use case for Bitcoin in general, but from Or let's say you're hosting a bunch of miners and you, you owe them hash price effectively. If you're curtailing them, you're exposed to a huge run in, you know, if there's a huge run in hash price, you still owe them that value. And so that's a great use case on the long side for us from an NDF perspective, 'cause you can buy the NDF during a per-period of curtailment, and many times you know in advance of when you're gonna curtail, so you buy your NDF and that gives you upside protection. So if you" }, { "speaker": "matthew_williams", "time": "38:20", "start": 2299.9, "text": "On the NDF, and then you can pay out, you know, the difference to, to the miners, and you're fine, like you don't have to worry about it, and you lock in that revenue. from a miner perspective, it really depends on the mining operation, right? Like, what your hosting arrangement is, you know, do you have c-control over the curtailment, are you exposed to curtailment? But, yeah, that's it, it becomes an interesting dynamic too, because from a hedging perspective, if you, let's say you have a You know, you have to start factoring your uptime percentage into that when you figure out how you wanna, how you wanna hedge using your NDF. And so like a lot of it, you know, the whole-- When you think about all this stuff, you know, like what goes into hash price and, you know, like ASIC prices and your operational costs and energy, like the mining space is, it's a tough position to be in. You're, you're constantly gonna have to be on your toes from a hedging perspective." }, { "speaker": "stephan", "time": "39:13", "start": 2352.62, "text": "Gotcha. And so I guess we can think of it like, Yolled it, and then maybe as they got a little more advanced, they would maybe buy puts or sell calls on the Bitcoin price, which only gives you partial hedging, let's say, partial, protection, let's say. And then now we're sort of evolving to this point where miners, or let's say to your point, hosting providers and other interested individuals in the space can just get exposure. Do you see this as like a, a final evolution or is this the final stage? Or is there, is there something else that's coming, you know, beyond this? From a" }, { "speaker": "matthew_williams", "time": "39:50", "start": 2389.76, "text": "Derivative, you mean? Yeah. No, I'd say we're in the-- I mean, if you wanna use a baseball analogy, we're in the first inning. Like, this is, this is early days. Like, if you look at any other mature commodity space that I, you know, like, like agriculture or energy or metals, you know, they've had decades, if not longer, to maybe, you know, could be a hundred years, where they've had hedging instruments evolve. And so you have, you know, like when we were exploring what to go to market Do we go with perps? Like, there's all sorts of things, and from a hash rate perspective, you know, there's not a whole lot. Like, it's growing, like you're seeing new things pop up. You know, you have, you know, I mentioned before, there's a few people doing physical forwards, there's a couple people doing, you know, toke-tokenized hash power, there's, you know, cloud miners, but it's super early days. Like, even from our perspective, we have aspirations to do, you know, other things like options or, wanting us to list our, our f- these as features on an exchange or, you know, there's just, there's a lot of different ways you could go. So to answer your question, I think while I'm a huge believer in our product and we're seeing a lot of growth this year, i- it's just the first and I think there'll be many, and I think there'll be, you know, many more people trying to do similar things to what we're doing, which I think is great. I think it's good for miners to have multiple options on how to Just, you know, there's multiple exchanges, there's multiple options exchanges, there's multiple strategies, structured products, there's soon to be ETFs, it's a constantly evolving space and we're, we're probably- You know, five years behind it, if not more." }, { "speaker": "stephan", "time": "41:36", "start": 2495.65, "text": "Yeah. And so, out of curiosity, could you articulate why NDFs and not something else? Or is it, or did you, or did you say it more like, \"This is the good first step\"?" }, { "speaker": "matthew_williams", "time": "41:46", "start": 2506.48, "text": "Yeah, it's both. I mean, we did months of product research before we even decided to launch what we decided, and like, we started off by, like, \"Alright, what exists already?\" And there's a couple of those physically delivered forwards, but those are, they're complex and, and there's- There's a, you know, huge discount to spot that's implied in these, and it was just kinda wonky. And then we'd seen some like tokenized stuff, and then FTX had done a, a futures product that was quickly delisted. So we just wanted something simple. We wanted something simple where people could understand what the underlying was, being our, our index. We wanted it to be approachable. We wanted to try and make it as low lift and remove as many barriers. But for us, the goal is always to be able to launch multiple products, and to, honestly, to A one-stop shop for miners where you can come in, hedge out your hash rate, expos- or sorry, your hash price exposure, your Bitcoin exposure, your energy, exposure, and, and we're working towards that. I'd say later this year we're gonna start offering, you know, futures on Bitcoin, not, you know, not ones that already exist. We wanna provide these instruments or, or energy derivatives to people. So, yeah, sorry, long-winded answer. We view the NDF as, as the first step, and it'll probably always be our flagship product product, but we wanna launch many other ones." }, { "speaker": "stephan", "time": "43:05", "start": 2585.45, "text": "Yeah, gotcha. And so I guess by creating this market, you're hoping to, in some ways, make it easier for miners to be profitable or to stay alive, let's say, at times when, you know, the weather and the, the industry can be buffeting them from different sides." }, { "speaker": "matthew_williams", "time": "43:23", "start": 2603.04, "text": "Yeah, I mean, to, to, it's, I would look at it a bit differently. We wanna help people remove risk, right? 'Cause we can't control-- We, meaning Luxor, we can't control the People around the network or, or the weather. Like these, we just wanna help people be able to mitigate those risks. We wanna be able to provide instruments that give you revenue certainty or, you know, energy certainty or, or Bitcoin price certainty, like so you can operate as a business and have some comfort that you know what your revenue is gonna be, or at least a percentage of it for a given amount of time. And like, you know, you gotta, you gotta remember this space, if you're talking about the mining space, you know, it's only fourteen years old. And even- Even like fourteen is being generous, right? It's probably closer to like seven or nine years old. It's got a lot of maturing to do still, and that's natural, and then we just wanna be part of that maturation process." }, { "speaker": "stephan", "time": "44:14", "start": 2653.74, "text": "Yeah. And just in terms of the Luxa business model around NDFs, is the business model there that, you know, you're making the market, so you take a little bit on each, you know, like, is that basically the business model, or is, is there another business model there with that?" }, { "speaker": "matthew_williams", "time": "44:28", "start": 2667.7, "text": "No, it's as simple" }, { "speaker": "matthew_williams", "time": "44:32", "start": 2672.23, "text": "Be what's called delta neutral, like we don't take risk, we just match buyers and sellers, and then we, we add a spread to the market in order to cover our operational costs, and, you know," }, { "speaker": "stephan", "time": "44:42", "start": 2681.67, "text": "yep," }, { "speaker": "matthew_williams", "time": "44:42", "start": 2682.35, "text": "not gonna lie, we, you know, we wanna make some money with this as well as long as we make it creative." }, { "speaker": "stephan", "time": "44:47", "start": 2686.98, "text": "Yeah. Okay, great. and so you mentioned as well working in a regulator before, so I'm curious, what was it like having to go work with the regulator to, to get this product approved? What was that like?" }, { "speaker": "matthew_williams", "time": "44:59", "start": 2699.27, "text": "Yeah, From scratch. I, I can't even begin to tell you. I, I, I was fortunate in the fact that I got to see this happen a lot at CME, and then I also got to see it from a regulator perspective. But I mean, there's so many things that go into this. Like, there's-- it's dense to understand what regulation is when it comes to launching a product. Like, is it a security? Is it a commodity? And once you get past that, like, what, you know, what kind of designation are you as a marketplace operator? Are you a And then each one of those comes with requirements. And so for me, like having the background and the network that I had just made it exponentially easier. I can't imagine doing this without, you know, having those resources that I had. and even with that, like I wasn't great when this started. Like, this is-- It's insanity, like how much work goes into this, just building it all, building the participants, going through the onboarding, you know, talking with lawyers, talking with regulators. fortunately for us, like- A lot of that, you know, I, I don't wanna knock on wood, but a lot of it's behind us and we can start growing, you know, from here. But, yeah, it's, it's challenging, it's super challenging." }, { "speaker": "stephan", "time": "46:12", "start": 2772.01, "text": "Right. Okay. Well, yeah, look, I think it's an interesting product, and, yeah, I think that's probably the key, prob-- those are probably the key questions. so if you got any closing thoughts for listeners and, where can people find you online?" }, { "speaker": "matthew_williams", "time": "46:26", "start": 2786.04, "text": "Yeah. A thousand Matt Williams in my town alone. you could also go to Luxor dot tech, slash derivatives, and you can locate us there. yeah, reach out to us. We, we love walking people through this product and realize it can be, a bit challenging to understand at first, but like once you're, you're with us, we, we like to, help you out as much as possible. We do a ton of research that we put out too through our blog. we do difficult- We have forecasting, we have premium services through data that help you understand how to trade this instrument. you know, I'm fortunate to get to do, awesome podcasts like yours, Stephen." }, { "speaker": "stephan", "time": "47:13", "start": 2832.88, "text": "Stefan, not Stephen, but yeah, yeah." }, { "speaker": "matthew_williams", "time": "47:15", "start": 2834.74, "text": "Sorry, apologize for" }, { "speaker": "stephan", "time": "47:16", "start": 2835.68, "text": "that. Yeah, yeah, that's right." }, { "speaker": "matthew_williams", "time": "47:17", "start": 2837.32, "text": "Yeah, so reach us any way you can, we'll set up meetings. yeah." }, { "speaker": "stephan", "time": "47:22", "start": 2842.24, "text": "Great. Okay. Yeah, cool. Well, yeah, thanks for joining me, and, I'll put the links in the show notes. Thanks for" }, { "speaker": "matthew_williams", "time": "47:27", "start": 2847.13, "text": "joining me" }, { "speaker": "stephan", "time": "47:30", "start": 2850.13, "text": "Show notes are available at stephanlivera dot com. Thanks, and I'll see you in the citadels." } ] }