{ "episodeId": "SLP525", "speakers": { "stephan": { "name": "Stephan Livera", "role": "host", "tag": "STEPHAN" }, "stephan_livera": { "name": "Stephan Livera", "role": "guest", "tag": "STEPHAN" } }, "segments": [ { "speaker": "stephan", "time": "00:10", "start": 9.83, "text": "Hi everyone, welcome to the Stephan Livera podcast, a show about Bitcoin and Austrian economics, brought to you by Swann dot com. Today we're gonna be getting into Bitcoin mining and Bitcoin's block size scarcity, and joining me today is my friend, he's the CEO of Bearfort Mining and obviously is doing a lot of, work in the Bitcoin mining world. Bob, welcome to the show. Hey, great to see you, Stephan. So, Bob, let's talk a little bit about Bitcoin mining. let's hear a little bit of your background story. I know you came in, was it like twenty seventeen, eighteen or so, and you got into the mining game from there, but you previously had a career as a technology entrepreneur as well." }, { "speaker": "stephan_livera", "time": "00:47", "start": 46.7, "text": "Yeah, yeah. So my career is really founded on the personal computer industry. So, because it's so long, I won't bore everybody with the whole story, but it goes back to the late '70s, actually starting coding in the late '70s. That led to a degree in computer engineering. it led in the mid '80s, to be joining a company called Zenith, which At the time was one of the early personal computer clone companies, so trying to clone the IBM, early PCs, and I was fortunate enough to be On a team that was designing what I consider to be the world's first laptop, and, we brought that to market. Then I left there, did a startup also designing laptops. We were purchased by Gateway, company called Gateway, which was a top five personal computer company. So I joined them just, a little bit before their IPO, was with them, helped- Help take them public, then, became the chief technical officer there, and so led for about fifteen years, led, product development across notebooks and servers and desktops and, even we did plasma TVs and cameras. So it was a real exciting time, obviously. This would have been in the nineties into the early two thousands. And then, as we'll fast forward, in twenty seventeen, I got a phone call from an ex-Gateway person I had left in two thousand 2004. So I hadn't talked to this person for a long time, and they said, \"Hey Bob, could you design some Ethereum mining equipment for me, Ethereum mining servers?\" So At the time, I was thinking about it like a computer guy, and of course, said, \"Sure, I can design the computers for you,\" and did that. And that led, though, to me, after fulfilling that initial order, it led to me trying to sell them to other people who primarily said, \"Hey, I'm interested, but only if you'll host them for me.\" And that kind of pushed me into the mining business or the hosting business, and I saw they were making a lot of money, so we started to take the profits into mining. for ourselves. And then about a year in, when I had a chance to sit back and breathe, I started looking at what Ethereum really was And saw some flaws technically, and while I don't have the, the chops that you have, I do have a background in economics as well. I have a degree in economics, and, you know, I just-- and, and I, and I'd found Austrian economics around two thousand two as well, beyond my, my formal education, I had also, found it in two thousand one, two thousand two. And so it just didn't add up. It didn't add up technically, it didn't add up governance-wise, it didn't add up monetarily, monetarily. But Bitcoin did, and so the company pivoted and, really adopted Bitcoin, and, you know, here we are today." }, { "speaker": "stephan", "time": "03:47", "start": 226.89, "text": "Yeah. And I know you've been, obviously commentating on, Bitcoin mining as an industry, and recently you've been, raising the alarm about the Bitcoin, block size scarcity, right? I think that's an interesting one. Now, this is something I think longtime Bitcoiners have been talking about. I recall mentioning it even in some, some of the first, you know, here we are, episode, you know, five hundred and twenty-five, but in my first hundred episodes, when this kind of topic came up, I would-- it would, you know, People like Andreas Antonopoulos and others talking about this idea that every time you hit the chain, in the future, you might need to be very judicious about how often you do that, and it might be more like lightning channel open and close sort of, conversations as opposed to just, you know, in the early days of Bitcoin where people just would transact on chain and not really think about the fee or not really worry about the size of the coins that they were spending, so can you spell out for us a little bit of your thoughts on the scarcity of block space?" }, { "speaker": "stephan_livera", "time": "04:47", "start": 287.43, "text": "Yeah. Well, I guess we'll start mathematically. So if you look at the way Bitcoin is constructed, on an annual basis, there are about fifty-three thousand five hundred blocks. So given that we have a finite capacity just from the fact that there's only that many blocks, it's further defined by the size of the blocks, which Is four million weight units. That's probably beyond what most people want to know. But if you look at block space, what you'll find is that really for the last eight months, every single block has been a hundred percent full. Like there is no space in any of these blocks, and if you look at the average number of transactions in those blocks, you'll see the number's twenty-seven hundred. So If you take that and say, \"Well, the average block has twenty-seven hundred transactions, and we have fifty-three thousand blocks,\" you can do the math and you'll see a number somewhere just north of one hundred forty million. Now, it's my belief, and, and, and I'm sure you could comment on this too, Stephan, that people can be a little sloppy in the way that they do transactions because it's kind of free you know, if I have to send money to you and I have to send money to a second person, I, I might do that as two different transactions instead of maybe just doing one and sending money to both. So I think we could get to the way where Where maybe we can see more on average like four thousand, but there's a finite, there's a finite limit to that, that's the main point, and it, I believe that limit is about two hundred million And, in fact, I l-often like to use the word resolutions, like base layer res-layer resolutions, instead of base layer transactions, because, I mean, it's, it's all a bit of semantics, but, you know, if, if I'm doing UTXO consolidation, for instance, I'm not really thinking about that as a transaction, that's more of a- Like I said, a, a resolution with the ledger and kind of tidying things up. But regardless, that two hundred million sets a limit Right? And I think we all have to think about that. Now, if, if there are two hundred million transactions available for the whole world, we'll start with there's eight billion people in the world So if two percent of the people or two and a half percent of the people wanted-- we're, we're Bitcoiners, right? That means they could each do-- they can do one per year. So, and by the way, that's excluding the fact that there are three hundred and thirty million companies in the world, like formal, legally formed companies in the world. So, they could also all absorb it. So there's this certain reality that, you know, I appreciate that a lot of those that came before me were echoing it in the early days, but I haven't seen much about it recently, and it's part of why I've been Just trying to speak up about this and bring, I think probably to the people from maybe my class of twenty seventeen up through the current classes to say, \"Hey, this is-- it's not a problem, by the way. This is the way the, the--\" Bitcoin is architected, and it's actually a positive thing. It solves the problem of network security, it, it incense L2 and L3, developments. I think all those things are, are very, very good One of the other things I'll say is, I think most people are probably aware of the Bitcoin subsidy. So when, when a block reward is generated to the miners, right? There's two components to it, the subsidy, which is the new issuance of Bitcoin, right now six and a quarter, and then the fees. And I think most people think of the subsidy only relative to the miners, but I think that's a bit of a misnomer or a, a bit of a miscalculation because it's really a subsidy to all of us. And I, I think what was really happening was The subsidy was there to encourage the early users to say, \"Hey, here is this secure ledger, a-a-a-and now the world's, I think, most secure ledger, the most secure network in the world, the only repository of truth available in the world.\" And use it. The subsidy is there to say, you know, use it. But in my opinion, we're at the end of that era. That, you know, we're, we're seeing the effects of it, right? We're seeing, like, right now, literally, we're seeing fees skyrocket again, and they really haven't gone down like materially. the, the mempool's been absolutely stuffed for eight months. So I think there's just this realization because so much of, I think the way a lot of people perceive Bitcoin and the way they communicate about Bitcoin Things like not your keys, not your Bitcoin. I believe those things, please don't, take that as me saying maybe something, sacrilegious, but everybody can't do that. It's just not mathematically possible." }, { "speaker": "stephan", "time": "10:07", "start": 606.79, "text": "Right, yeah, and certainly this is, something I've been also trying to help make sure people are aware about this idea, but as you say, it's a challenging thing to explain for people, and it might also be fair to say that some of these considerations can get automated away, and some of these things will sort of be, you know, the, the, the very technically talented protocol and application developers will work on solutions. But perhaps for those of us here today, you know, if you're listening in twenty twenty-three, there's a decent chance you might need to think about it manually and do some manual management of these things. And the, the other challenge of this is there's always been so many moving parts here. So as an example, like you correctly note, the subsidy is dropping a lot, but at the same time, the price is going up. So that can sort of help counteract a little bit in terms of the subsidy going down if the price more than doubles at least once every- Four years, well then at least from a fiat purchasing power perspective, the miners are still getting that same amount in subsidy in, in fiat, you know, terms, right? Yeah. Yeah. And then the other aspect of it is there is always a trade-off with this, because as you rightly point out There's a scalability aspect of this, but there's also the privacy element to this, because as an example, if a person does say, \"Okay, I'm gonna start consolidating my UTXOs,\" there's also a privacy trade-off to that, and I think historically There were users who just saw it like, \"Well, it's cheap now, I'm just gonna use, you know, these more privacy-preserving techniques,\" but they aren't as scalable in terms of on-chain use, right? And then the other aspect to add into that is, as you say, there's about, you know, let's, let's call it two hundred million, you know, resolutions on the base layer or transactions in terms of on-chain transactions. But each transaction can include batching as well, and so that's another element that can con- kind of confuse things also. But, you know, at the end of the day, like kind of, at the end of the day, you kind of crunch all of that out, you sort of come up with a number in terms of what size the UTXOs should be if you're trying to manage it at a reasonable level, right? So for new listeners, UTXO means unspent transaction output. Think of it like a little hunk of gold that your Bitcoin wallet is managing, right? That it It holds the private keys for those coins and it's managing the private keys and it's, you are spending those coins by sort of pulling together those notes, just like if you're making, you know, an eight dollar payment, you might pull out a five dollar note and three one dollar notes out of your wallet, in the same way your Bitcoin wallet is managing those UTXOs. So Bob, from your perspective, what kind of UTXO sizes do you think makes sense? Is it like a million sat or what are you thinking?" }, { "speaker": "stephan_livera", "time": "12:57", "start": 776.61, "text": "Yeah, yeah, that's kind of the number I've I think people have to work toward it. S-some people may, I think in the short term, a few hundred thousand is okay, but don't look at that as a resting place. I think that long term, a-about a million is, is a good number and more if you can. I mean, I would, I would say the bigger the better for the most part. And the people I worry about, by the way, I worry about people. I'm a big fan of Swan, I know they're, they're, they're a big supporter of you as well, and you're part of the Swan team. But I look at, let's, I know people, for instance, who let's say- DCA five dollars a day. And those are people that I say, you know, be careful, 'cause if you're, if you're taking five dollars a day and every few days you're pulling that into cold storage, you might have a problem. It would be a good idea for you to just take some time and go look and see what you have, because if you have a full Bitcoin in your head, or you, you, you possess a full Bitcoin, a hundred million sats, but it's broken up into ten thousand pieces, it's kind of like having, a Dollars in pennies. Like, you're not gonna, you're not gonna get a million dollars of value out of those million dollars of pennies, because you're gonna have to pay to transport it, you're gonna have to pay for somebody to count it, you're gonna go through all these things, and you're not gonna end up with that. And so, in this, in simple terms, I think that that's a good analogy as well to just think about that, like, if-- but if you get it together, 'cause if you have, if you have all hundred-dollar bills So get it into those kind of," }, { "speaker": "stephan", "time": "14:37", "start": 877.47, "text": "those kind of larger denominations, let's say. yeah. And so one thing that I know, for example, with Swan, one thing we do is we have thresholds when you withdraw. So as an example, oh, that's good. I have set up when I automatically withdraw out of Swan, I set my threshold to one million sats. So whenever the balance gets over one million, that's when it's automatically withdrawing. So that's something that Swan is doing, and other, you know, companies can be doing similar things. Things like that, but I think, like to your point, yeah, this is one of those things where today or in the early days of Bitcoin, you might need to manually think about it, but potentially in the future, I could imagine some of these things could maybe be automated or maybe the software will sort of present you an option. As an example, let's say your Bitcoin wallet in the future, maybe a few years down the line, after a few people run into this problem, it might say, \"Hey Bob, actually, we've got a little bit of a, an issue here. You've You want to do a consolidation transaction, and it'll, it might present you the option for you to then sign or to approve and say, \"Yes, Bitcoin wallet, you know, approve this or do this consolidation for me so that I have, a more advantageous- set of denominations for my UTXOs on my coins." }, { "speaker": "stephan_livera", "time": "15:53", "start": 953.03, "text": "Yeah, that's absolutely true, and I think that's why, you know, Bitcoin's an exciting place to be because there's so much virgin territory for people to have creative ideas and come up with these kind of services. I do wanna say, 'cause, you know, I'm a miner too, that- I do worry about small miners having the same problem, 'cause it's effectively the same as DCAing, right? So if you have, if you have an S9 in your garage or, and, you know, you've got You've got, as you just the same as you said with, with Swan, if you have a very low threshold amount that you're pulling the money out of the pool from, you can run into exactly that same problem. So just, you know Be careful out there." }, { "speaker": "stephan", "time": "16:33", "start": 993.18, "text": "Right. And so I guess the unfortunate part of this is it does tend to push people into custodial for smaller values. And, you know, maybe that's just gonna have to be, you know, it's not what we want to, you know, it's not, there's the world we want, and then there's the world that we think is likely. And I think it's, it's gonna be a situation like that where there will be users who are dealing with smaller amounts and they may have to go custodial because they, they simply, it simply won't be I think on the bright side, I think there-- it is fair to say that there may be further innovation and advancement coming, and that's where maybe some of these soft fork ideas, things like, you know, we've spoken about online, things like CTV, APO, and various other ideas that may help With sort of getting more efficiency and getting more for less, and so maybe some of these ideas will help expand the set of people who can truly s- fully self-custody, but there may be a certain bunch, a certain group of users who just can't self-custody if they're not able to hold enough coins to justify the cost." }, { "speaker": "stephan_livera", "time": "17:41", "start": 1061.27, "text": "Yeah, I, I, I com- I completely agree with that. In the end, though, there is gonna be some threshold, and that's just, you know, we-- you can play with the math and we can- We can make these protocol changes, we can make these services changes, but unless we mess with block size, which I don't think we're going to do, or block time, by the way, I've talked about that a little bit too, you know, those are really only two variables that could Change that by massive orders of magnitude. And so if we think about a world where five percent, ten percent, twenty percent of the world is living in a Bitcoin economy, then this problem is real, for sure. Because one of the interesting things is, as I mentioned before, the mempool, for those of you who aren't familiar with it, it's basically a, a, a, the pending transaction pool, right? So how many transactions are waiting to get processed? It's primarily vacillated over the la- last eight months between maybe a hundred thousand and five hundred thousand transactions. it dipped below a little bit, a few times, but really it's so So, and every block is full. Therefore, demand for block space is already at a point where it's saturated. Now, the time preference of a lot of these people hasn't caused any panic, right? So a lot of people have transactions that they're not panicked about and they can wait for. But remember, we've achieved this level With only about fifty million addresses that hold any level of Bitcoin. And even if we said each of those was associated with one person, which isn't true, but even if we did, we're talking about fifty million Addresses against eight billion people, and it's already caused backlog, massive backlog in the mempool and every block being full. So I'm just kind of reiterating that this is real, and yes, I, I, I have a lot of belief and the faith and ingenuity of The people working out in the ecosystem, but the issue or the situation isn't gonna radically change. W- you know, one interesting thing too, Stephan, just people might find this interesting, is that We talked about fees themselves, and, and, I, I had a project with, one of my team members, and we went in and we, we went all the way back to the genesis block, and we had created about thirty different fields of data that we wanted to extract about the blocks, everything from You know, block time, number of transactions, and, you know, kind of our own little glass node sort of thing. There were certain things we couldn't get from there that we wanted to get, so we created our own. And through that analysis, one of the things I started to do was, for instance, I looked at fees. And if we go back to the genesis block and we average per block what the average number of fees for per block is, it's point three three five. Now, if you average just the last six months, it's point three three five, like it's exactly the same number the last six months that it is all time. I thought, I found that fascinating. But to the point you talked about before, in the genesis block or, or the first block, yeah, the first block, there was a fifty thousand or fifty Bitcoin subsidy, and let's say an average of point three three five. So, so we had a tiny little- That'd be point six percent of the early day, reward was that, but now point three three five of the cur- a current one puts us at like five or six percent, and I think-- and then when we hit, assuming even at the minimum we hit the next one, well, what does that mean? That means now we're up over ten percent of the reward is fees, and personally, I think it's gonna skyrocket from there. You know, we'll, we'll see. But I, I found it very interesting that it didn't, that it, it hasn't moved as measured in Bitcoin, as you said, and measured in fiat, it's through the roof up." }, { "speaker": "stephan", "time": "21:47", "start": 1306.93, "text": "Right. Yeah. and I recall in some of the earlier days, I think in those days There were different rules and things, so I recall in earlier days, some transactions just had like a set, you know, ten thousand sats or five thousand sats, I think there was something like that. And also in earlier days, there used to be kind of older school, old school rules, like it was almost like, it seemed like a, you were tipping the miners, you know, it was almost like that. And there was, there were rules that preference older coins, you know, it, it's evolved over time in terms of how things have worked," }, { "speaker": "stephan", "time": "22:25", "start": 1344.73, "text": "but Are going to rise. That's just, that is the dynamic, right? And I find it funny because every now and again, as I'm sure you've seen over the years, you'll see people sort of talk about, \"Oh, you know, the security budget, the quote-unquote security budget, which is this argument that, oh, no, there won't be enough fees to sustain the system.\" And I've- You know, cons- quite consistently said, \"No, I think it's gonna be the other way around. It'll be a question of access. There'll be f- the fees will be so high that not everybody can access on-chain, not your keys, not your coins.\" And I think it's gonna be, you know, and I think this is aligned with what you're saying as well. I think that is the more likely situation, assuming Bitcoin doesn't somehow, you know, fail and go to zero, if Bitcoin, you know, continues on the trajectory that it's on You know, even in the twenty thirties or mid twenty thirties, I think we'll be-- the fees will be much, much higher, and people will simply have to find ways to batch and to deal with that in some clever way. And that may be Lightning, that may be multi-party channels, that may be coin pools, there may be different ways of doing that, or of course, exchanges and broker services who do batching on their side. But fundamentally, the, the fees are gonna go up. Yeah." }, { "speaker": "stephan_livera", "time": "23:37", "start": 1417.17, "text": "You know, it's, it's funny when, when people talk the public miners always get a lot of attention, I'm a private miner, but I spend a lot of time doing modeling, and whenever I'm doing a pro forma or examining a future site I always go back to the historical norms, you know, so that, that's part of why I, I've done such extensive analysis and I have that figure available for you. So that's basically what I use in any of my future performance stuff. But I think when we look at miner revenue, interestingly, it is the big wild card that even a lot of the analysts that I see following, like public mining stocks, don't really talk about enough Because here's, I was just playing with some numbers today, you might find this interesting. So next year, I think everybody knows, the halving's coming, right? And it just so happens that it'll be at the end of April So what that essentially means is we're gonna have four months of the year where the subsidy is gonna be six point two five, and we're gonna have eight months of the year that's three point one two five. And so if you average all that out, what you find out is the average subsidy next year per block is four. Comes out to four point o seven, I think was the number that I came up with. So if you go-- if you remember earlier, I said there's fifty-three thousand five hundred blocks. So that tells us that next year there's gonna be about two hundred and fourteen thousand new issuances of Bitcoin. Now We know that, we don't know the price, right? But we know that that number is the case. What we don't know are the fees. So, you know, what I do is I've, I've run that number and then said it's point three three five. But I can certainly argue a case for reasonable probability where it exceeds one. Now, if it exceeds one, you know, that could be forty or fifty thousand more Bitcoin coming back through the miners, right? Because we know that's not new issuance, but There's a lot of liquidity. Right. Just because there'll be so much" }, { "speaker": "stephan", "time": "25:39", "start": 1539.3, "text": "more fees," }, { "speaker": "stephan_livera", "time": "25:40", "start": 1540.3, "text": "right? Yeah, yeah, because of the fees. So, you know, obviously, if, if that happens, it has a tremendous impact on the mining community because the cost basis of the mining community doesn't change even if the fees are zero, right? So we, we're gonna spend the same amount of money operating our companies no matter what. So those fees go straight to the bottom line. They are a hundred percent profit for the miners." }, { "speaker": "stephan", "time": "26:07", "start": 1566.87, "text": "The lead sponsor of this show is Swann dot com. Over at Swann dot com or using the Swann Bitcoin apps available for Apple or Android, you can buy Bitcoin and also learn about Bitcoin. And as we talk about in this episode, Swann makes it easy for you to withdraw your Bitcoin using free automated withdrawals, and there are thresholds that you can set in place. So for example, even if you set up a daily automated buying plan, you can withdraw either on a weekly basis or once your threshold Hits one million satoshis, or you can even set a higher threshold if you wish. Now, Swan makes it really easy for a range of people to stack zats. Whether you are an individual, whether you are a high net worth individual, whether you are a business, or you are an advisor, there's all kinds of ways that Swan can help you. So make sure you go and check out the website, find out more at swan dot com slash livera to get a free ten dollars of Bitcoin when you start stacking with Swan. Now, as we say in this space, it's not your CoinKite dot com make the best hardware that you need to help secure your Bitcoin in self custody. So they have a range of devices such as the TapSigner or the Coldcard and the upcoming Q one device. Now, they're all easy devices to use and you can use them with a range of software wallets such as Specter Desktop, Sparrow or Nunchuk. And now, when you buy these devices, you can generate your own Bitcoin private key and generate a Bitcoin address, and that's what you go and use to withdraw. Your coins. Now, CoinKite products have a range of security features. So, for example, with the Coldcard, you can use it in airgapped mode, meaning you don't have to directly plug your Coldcard into a computer to use it. You can use it with a microSD card or even using NFC if you choose. There's a range of features, and you will find you actually learn more about Bitcoin in the process of learning to use Coldcard products. There's a range of products available, and don't forget, you can also get a metal seed plate to back up your- twelve or twenty-four words. Go and find out more at coinkite dot com. Use code Livera for a discount on your cold cards. And now back to the show with Bob. Right. And so that'll be interesting to see because that may herald a new era where there just are a lot more fees, and then that might become part of a miner's projections and calculations going forward. So that's kind of an interesting dynamic also. So I guess let's sort of, kind of summarize the thoughts on the Bitcoin fees and the UTXO stuff before we get- get into the mining. So I guess, I guess we could maybe close this section by saying, look, if you have, coins, make sure you check your wallets and actually look at the UTXOs that you have. And As a guideline, think about consolidating, but know there's a privacy trade-off with this too, but think about consolidating such that you have denominations bigger than one million satoshis, and that way you'll be safer in the case of high fee scenarios. So I guess that's kind of the, the key, you know, take-home message for people. And potentially, if you're interested in day-to-day transacting, well, maybe you need to start thinking about Lightning. That's probably the main, takeaways, right? Would, would anything else you wanna add there or something" }, { "speaker": "stephan_livera", "time": "29:18", "start": 1757.56, "text": "Acquiring your Bitcoin in the future, have-- make sure that if you're dca'ing with Swan or you're mining or whatever, you know, don't fix the problem and then keep going. Like, you know, make, make sure that, make sure you have thresholds in" }, { "speaker": "stephan", "time": "29:31", "start": 1770.91, "text": "place, yeah. The" }, { "speaker": "stephan_livera", "time": "29:32", "start": 1771.55, "text": "thresholds is really the big thing, whether you're a miner or whether you're, you're dca'ing, you know, keep those thresholds and learn Lightning. I know I, I don't, you advocate it better than anybody in the world, I believe, but," }, { "speaker": "stephan", "time": "29:48", "start": 1787.54, "text": "One, Zeus is out there, you know, Breeze is out there. So there's, you know, there's lightning, wallets out there. I think, Phoenix is a great easy one to use. It's, you know, you write down twelve words, it's, you don't really have to think too hard about it, you just, you know, receive and spend, and that's non-custodial. So that's a great one, but, you know, then we'll see what happens out there. I know there's So let's talk a little bit about Bitcoin mining. I know this is something you're obviously, you're doing this, this is your, you know, your day job now, but you're also, you're also writing and speaking about this. So I think an interesting place to start is, you've actually written a little bit about the different classifications of miners, right? You've spoken about rabbits, horses, and elephants. Do you mind, spelling out a little bit about these different classifications of miner? Sure." }, { "speaker": "stephan_livera", "time": "30:44", "start": 1844.5, "text": "In the mining world, I think we can divide mining sites into three categories, and as you said, I, I call them rabbits and horses and elephants. And we'll start with the elephants. You might know them as the mega miners. The big pub co's, there are a few private mega miners too, but those are elephants, and they're big and powerful. They're easy to see, you know, you know that they're out there. They have a couple other attributes though, they, they are, they are, slow to grow. It takes a long time for them to come up. I'll also say they're easy to hunt. So if you, if you had some ill will, we could maybe go into this a little later, and you were looking for, for them, you, you can find the elephants very easily. Now, on the other end of the spectrum, we have the rabbits. The rabbits are the home miners I mentioned, somebody with an S nine in their garage, an accountant that threw an extra S nineteen in his server closet. Those kind of people, and operations are rabbits. Independently, they aren't very powerful, but, and they grow very quickly, they can, they can reproduce quickly, and they can scatter. If you try to hunt the rabbits, you'll never get 'em all. And the moment you start hunting 'em, they're gonna hide in, in places. So they're really important if you think about the overall ecosystem, they're very important because of that Collectively, they can still do some damage. It's not like they're not powerful as a collective, you know? It's just like, you know, you've, you've probably heard of stories of rabbits overtaking a farmer's field, right? You know, any one rabbit's not eating much lettuce, but all the rabbits can eat all the lettuce, right? The horses are in the middle. They are the small to medium size commercial operations. They can come up fairly quickly. They're generally built in a mobile fashion. They're in containers or hash huts. So if they see a better opportunity or they see a threat, they can generally get up and move pretty quickly. They're a little harder to find, it's hard to, it's hard to hunt a wild horse. so so those are the three categories, and then I'll also throw in another term. So, I, I apply it this way, I call it either captive or wild. So every site, regardless of its size, is, size is either captive or wild So a captive site is traditionally gonna be an on-grid operation, and it means that it is dependent on a third party source to provide the power to it And it's, it's a permission system, if we wanna use some Bitcoin terms, it's a permission system. It's not self-sovereign. Now, they'll often protect themselves with PPAs and, and things like that, but they're still exposed and ultimately dependent on the, the, a third party and a permission. Wild miners create their own energy and, and so you could have a wild horse or a captive elephant or a wild rabbit or a captive rabbit And so I think it's a good way of thinking about if, if you're evaluating a company, you're evaluating a site, you know, what, what do you have? So." }, { "speaker": "stephan", "time": "34:10", "start": 2050.18, "text": "Right. Yeah. That's, it's, it's interesting because as you point out, this has implications for the decentralization of the network, right? If you are a public mega miner, obviously it's very public, this is where your site is, this is who your power provider is. Generally speaking, if the state wants to come after you That they can do that quite easily. They can impose taxes, they can impose regulations, but maybe on the, on the bright side for them, they have access to tap big public capital markets, and maybe that's kind of an advantage that they might have. But then, you know, you have different advantages and, disadvantages if you are a horse or if you are a rabbit, whereas maybe if you're a rabbit or a horse, you're more nimble, you can maybe change more easily, and maybe it's easier for you to be a wild rabbit or wild horse. as opposed to a, a captive one. You know, I suppose that-- these are some of the different dynamics. I know you've spoken a bit about a miner's trilema, so maybe this is a good spot to, if you could explain the mining trilema for us?" }, { "speaker": "stephan_livera", "time": "35:12", "start": 2111.62, "text": "Yeah. So when you're gonna put up a new site, three things have to come together for the new site. You need energy, good price, and consistent source of energy. You need mining equipment, primarily talking about the servers, and you need capital. And what I realized after doing this for a while and, and came up with the theory behind the miner's trilemma is that at any point in time, one of those has always been hard. And the moment one that was hard starts to become easy It forces a different one to become hard. So to be successful in mining, you better be good at all three, because you may enter the mining market, let's say in conditions where energy-- let's, let's say you, you have good energy and you're, you've got good sources of mining equipment, but you're terrible at raising money. Well, you're gonna get whammy'd as soon as that thing shifts the other way. And we've seen this play out, by the way, in real time. You know, if we, if we go to the end of twenty twenty-one and early twenty twenty-two, what we had was we had a period of time where capital was just everywhere. You know, and even for me as a-- I'm a, I'm primarily a horse miner, by the way, for those that don't know what we do. But I'm basically a horse class guy. But I had, I had people So almost throwing money at me, I couldn't get the equipment to take the money and get sites up. It wasn't, wasn't available, right? So at that time, that was the problem. And a lot of that was because, by the way, the big public guys Who had gotten a lot of money were able to go in and essentially buy everything, and, and so that forced everything to a gray market and highly- Highly, expensive prices. Now, as soon as we got to the middle of twenty twenty-two though, it started to shift and suddenly the price of the servers came down Slowly, by the way, they didn't, they didn't, they weren't like super fast, they slowly started to come down, but the money dried up. And all of twenty twenty-three, that's the world we've lived in. Even though the price of Bitcoin is up, I don't know what the number is, like a hundred and ten" }, { "speaker": "stephan", "time": "37:34", "start": 2254.4, "text": "percent or something like that, roughly, whatever that" }, { "speaker": "stephan_livera", "time": "37:36", "start": 2256.2, "text": "is, we are paying less today materially For new equipment than we were at in January, materially less. Now, we have seen the bottom, I believe. we, we have seen a slight uptick. So about three or four weeks ago, I think we saw the bottom And we've seen some slight increases in the equipment." }, { "speaker": "stephan", "time": "38:00", "start": 2280.45, "text": "Gotcha. So in other words, the hash price, we've seen the bottom of hash price, and hash price now you're expecting to be in a bull cycle, let's say, you know, as the Bitcoin price bull cycle happens as well." }, { "speaker": "stephan_livera", "time": "38:11", "start": 2290.79, "text": "Right. And I've-- and interestingly, I've seen the capital markets free up So we've, we've actually raised a decent amount of money over the last sixty to ninety days to come into, into new mining projects. I think those are, by the way, gonna be really successful projects. I'm not a big Warren Buffett fan for probably obvious reasons, as a Bitcoiner, he hasn't been kind to us, but he, he is wise and, and, and experienced in some ways, and, you know, he has this phrase, \"Be fearful when others are greedy, and greedy when others are fearful.\" And so I just had a, I had a meeting with my team today, and I, one of the things I told them was I said, \"Hey, we're still in the phase, in the trilemma, where the value is there And we need to still be pushing the envelope and looking to expand. But the day will come when, when we're gonna say no, and even when the people, people want to throw money at us Even if we can find the equipment, it's gonna be overvalued and overpriced, and we're not gonna be able to get the ROI we need, so we're, we have to have the discipline to say no." }, { "speaker": "stephan", "time": "39:24", "start": 2363.83, "text": "Yeah, that's really interesting, that you have to actually very consciously be countercyclical, right? Because you have to sort of think, okay, we're in a bear cycle, now's actually the time to be acquiring the mining rigs because now they're cheap, and then usually what happens in the bull cycle is the price of the mining rigs pumps even harder And it ends up being very uneconomical, and this is actually, I, I did a recent episode with Adam Barrack, and part of that is part of the reasoning behind this Blockstream, basic note, but it's an interesting sort of seeing the, the dynamic and how you sort of have to try to ride the cycle, but at the same time, be ready For different scenarios, because, you know, right now the price is pumping, whatever, thirty-six, thirty-seven thousand, whatever it is, and that may-- to some extent may have saved some miners who were otherwise inefficient, and maybe if the price had stayed at twenty thousand, they might have been in trouble. But now with the price pumping, it's almost like some of these miners are getting saved or kind of, quote-unquote, bailed out because of the price rise." }, { "speaker": "stephan_livera", "time": "40:28", "start": 2427.76, "text": "Yeah, I have to say I-- it was a rough ride, by the way. I mean, we, we're, we're not a, a massive operation, and we're primarily self-funded or from private investors, you know? We don't, we don't have debt We, we, I refuse to IPO. I, I don't, I actually believe it would be against the ethos of Bitcoin for me to try to run a public mining company. I b- I believe it creates a friction. And I, and I've, I've been part of, I was a C-suite exec in a public company before, a ten billion dollar public company. I don't think you can do it. I think you eventually are faced with this decision between doing what's right Within the Bitcoin ethos and doing what your shareholders at least perceive to be the best thing, I think you will find yourself in that position. But the point being though that Those public miners that really overextended themselves were hanging by a thread, as you said, and, and because it's public, I, I won't name names, I don't feel Right, yeah. But, I mean, they were hanging by a thread, and the, the having-- every day waking up knowing the halving's a day closer, and if Bitcoin was at twenty-two or something like that, it would have been catastrophic. No, it still could, right? Yeah, it could still go down the way. Yeah, yeah. We can't get down the way. Yeah, yeah. But, but there's-- I'm, I'm sure there's a big sigh of relief. for a lot of them," }, { "speaker": "stephan", "time": "42:01", "start": 2520.51, "text": "I'm sure, yeah. and, it's also a question of is that the right thing for the shareholders? Because maybe it's fair to say for some of the shareholders, they're the ones getting rinsed in a way because they're kind of taking all this risk without maybe understanding the risk that they're signing up for. now, that said, I guess part of the case with the public miners is the idea is that they're kind of like a leveraged bet on Bitcoin, right? The idea is that the shareholder who's buying- Those, maybe they're expecting it to be kind of like a leverage play on Bitcoin, that you, you know, that it pumps harder than Bitcoin price in the bull cycle and then it also dumps harder than Bitcoin price in the bear cycle." }, { "speaker": "stephan_livera", "time": "42:40", "start": 2559.92, "text": "I, I, I think that's the perception. I think it's wrong. For, for many years. Yeah, I'm curious to" }, { "speaker": "stephan", "time": "42:45", "start": 2565.2, "text": "hear why. Yeah." }, { "speaker": "stephan_livera", "time": "42:46", "start": 2566.12, "text": "Yeah. Well, I'll start with something you and I already covered, which is we just said the business of mining Is somewhat anti-cyclical, right? So, so you, you want to be expanding in the bear period and you wanna be-- you wanna hold back in this other period, but I think being public kind of forces you in the other way, that when things look bad People want to hunker down, they want to cut costs, they want to do those things, and then when the growth is coming, when they see the market exploding, I think the market perception is, \"Well, you've got to be throwing a whole bunch of money in this. If you're not expanding during this growth period, then...\" You're gonna lose. So I think there's a, there's a misalignment there. so another reason would be the Bitcoin, the larger Bitcoin companies, I think a lot of people look at what they're hodling and saying, \"Oh, X, X miner has a thousand of these or a thousand of those,\" and, and they get kind of caught up in those things. Those are often highly leveraged Bitcoin. They, I, I, I won't, I won't speak about any of the current major players, but for instance, we look-- if you, if you look at the Core Scientific story, since they went bankrupt, you know, we'll talk about that, what happened with Core Scientific? Core Scientific went public in January of twenty twenty-two They raised two hundred million dollars, eleven months later they were bankrupt, and they had a billion dollars of debt on their balance sheet, so they went from an IPO in January to bankrupt in eleven months. I'm not sure if that's a record or not, but it, it's gotta be pretty close to one, right? and You know what happened was they, they went out and, and started to take on massive amounts of debt to try to capture What they felt was that they were trying to capture all of the, the, the stock of mining equipment. It's actually what caused the trilema to get out of whack And in doing so, they forced, the price of the mining equipment up, but it was all leveraged, right? So, so this billion dollars of debt was leveraged against the inventory and against their, their stash. Well, when the price of Bitcoin started slipping, it just became a negative feedback loop that they, they started to have to sell, sell the Bitcoin to service the debt They couldn't get the machines operating quickly enough. So I guess maybe what I'm saying in, in some ways, is that there's so much more that can go wrong when you invest in a company like that that I think to just think, if you wanna do that, go buy the ETF when it comes out. I guess that's what I'm, what I'm saying, that the mining companies have a lot of wild cards with them and they don't necessarily follow the same cycles as Bitcoin." }, { "speaker": "stephan", "time": "45:56", "start": 2756.01, "text": "Interesting. And so would you- Would you say, as I'm just trying to gauge how, I guess, strong or your sentiment is here, would you say it's possible to run a Bitcoin mining company that, you know, isn't taking on undue risk, or do you think the incentive of the game literally won't allow it?" }, { "speaker": "stephan_livera", "time": "46:16", "start": 2775.87, "text": "Well, as a private company, I think you can, and that's what I think I do. I had people approach me during the last cycle saying, \"Bob, you should take your company public.\" I said no. I had several people approach me, large organizations, names you would know, saying, \"Hey, let us lend you money,\" but of course, it was lend you money at twelve or fourteen percent, and we're gonna, you know, leverage everything you have to do it. And so my answer was no, I am not, I'm not gonna do that. that, that, that's too much risk. It's, I lose too much control. and I, and I think you could, I could kinda smell the greed in that last cycle, you know? And, and, and so just as I said before What I told my team today was, we have to be aware of that, that this could happen again. We can't get caught up. If things start going great, we can't get caught up in it ourselves. We're running a business, we're trying to run a business to be stable in the long term. And as I said, I, I'm at a point in my life, I'm almost sixty years old, where I'm here as much for Bitcoin as I am to make money. And so, in fact, Bitcoin succeeding is a lot more important to me than me making more money. And so, I'm not gonna do something that disrupts- Bitcoin for my gain. As soon as I'm a public company, I, I have literally signed myself to become beholden to my shareholders, and not necessarily what's in the best interest of my shareholders, but what's they perceive to be In their best interest, right? So when you run a public company, you get measured in ninety-day windows. There's nothing more high time preference than that. Right? You, you know, if you know that every ninety days you have to report to the world your financials and a state of your company, and they're expecting good short term news, it's almost always what they want. That puts a tremendous amount of pressure, and there's no way, in my opinion, and again, I've done it, so I, I speak from experience, there's no way it doesn't impact the culture of the company The processes of the company, ultimately even the type of people that you hire, change. So a lot of times public companies start With a founder and a core group of people with a certain value set, but it changes. It, it, it-- the people change and the pressures change, and when you're a public company, you lose control of that. And, and I believe, especially in mining, by the way, I, I believe the way the mining business runs That it forces this almost moral choice that people have to make, and even though there's some great people in those public companies, I believe that They're gonna face some decisions that really test their personal morals and ethics down the road." }, { "speaker": "stephan", "time": "49:28", "start": 2967.97, "text": "Back to the show in a moment. The leading Bitcoin and blockchain visualizer is mempool dot space. I use it every time I'm about to send a Bitcoin on-chain transaction, and I'm sure if you are doing on-chain transactions right now, you're noticing that the inscriptions people have sent the fee market into a frenzy again. So mempool dot space is definitely an essential tool for any hardcore Bitcoin- So mempool.space allows you to view the history of Bitcoin blockchain transactions. You can view the mempool of unconfirmed transactions. They are continually innovating and adding new features and new ways to visualize things. So for example, you can click into transactions and visualize their RBF history, that's the replaced by fee history, so you can see if a transaction has been fee bumped. So that also might be very handy for you if you're doing on-chain transactions. So you can find out more about all of this over at Mempool dot space. And now back to the show with Bob. I see, so it's almost a two-prong thing. One, one angle you're seeing here is around what's good for Bitcoin and the decentralization of the network aspect, and the other aspect is potentially the, let's say, how aggressively that company tries to expand, how aggressively that company tries to show short-term results. so I guess theoretically, like, it would be fair to say that I'm sure there are private companies that went too aggressive and also got wrecked too, right? Of course. Like it's not to say that, you know, only private companies can be conservative enough, but I think maybe that point about the decentralization of the network, maybe that point is Definitely more true to say with private companies than with any p-p-public Bitcoin company, obviously, just by the nature of being public." }, { "speaker": "stephan_livera", "time": "51:10", "start": 3069.93, "text": "Yeah. Yeah, let me, I'll give an example, 'cause I know you cover A-Austrian economics in here too. So, let me give you like a real thing. That happened in my personal computer days. So before Gateway was public, now we were about a billion dollar company, and we were making-- before we went public. We're about a billion dollar company, we're making about a hundred million dollars a year. So very profitable. We were a top ten PC maker in the world at the time. And we were the only non-private company by nineteen ninety two, the only one. So as we approached the end of, especially the, the year, as we approached the end of the calendar year, we would-- but any quarter, we would frequently get phone calls from CPU suppliers from Microsoft, from, DRAM suppliers, hard disk suppliers, and they would say, \"Hey, we're missing our number. We, we need to book some business. So let's say it's, it's December 20th.\" Will you buy the next two months of goods from us at a deep discount? If we have a hundred million dollars in cash in the bank and it's gonna cost us a hundred million, let's say, to buy all that? We didn't care. We said, \"Yes, sir. Where do we sign? Here's the money, send us the goods, 'cause we're gonna rip the next...\" Several months, right? Our, our cost structures are, are gonna be fantastic. As soon as we went public and we got the same phone calls, we couldn't do the same deals. Why couldn't we? Because if we did it, what would happen is someone would look at our balance sheet and they would say, \"Hey, Gateway doesn't have any cash and it has bloated inventory.\" And We didn't have a mechanism by which we could go say, \"Well, it's because Intel or Seagate or some other company was in trouble and so we bailed them out.\" And so what, what ended up happening was as a public company, we had to make deals that were not in the best interest of the company And even in the shareholders, but we had no way to explain to them that that was the case." }, { "speaker": "stephan", "time": "53:33", "start": 3213.37, "text": "So I guess what you're saying is you had a bit more flexibility as a private company, right? Like, I guess bottom line, that's- Yes, that's, that's," }, { "speaker": "stephan_livera", "time": "53:39", "start": 3218.88, "text": "yeah, I'm not trying to say that that mimics exactly into public mining, but what I'm saying is you'll be faced with the same- Types of choices, you know, I'll also say, I, I don't wanna, I don't, maybe we don't wanna spend too much money on public stuff, but I'll say one last thing. When, when we go back to Core, which I believe was a massive travesty, by the way, the, the, the Core scientific blow up, I believe, should be perceived by the industry on the same level as Celsius or Voyager or BlockFi, like the, the damage they did Not just to their shareholders, but to the entire infrastructure. They disrupted price discovery and capital allocation across the entire, mining industry. they forced a lot of Bitcoin to be liquidated that suppressed the price. There was a lot of that going on But I would say a big part of that was historically when companies have gone public, and ag-again, I'll, I'll take my company as an example, we spent about two years preparing to go public Like, you know, we had to reinvent all kinds of, financial processes, manufacturing processes, communication processes. We, we had so much to get in order before we went public. And today what happens in a lot of cases is people IPO through the back door, they use a SPAC or they do some sort of reverse merger, and the companies don't- Get the maturity of the management team, they don't have the maturity in their processes to handle being a public company. It's very hard And so I would just say, you know, maybe in closing, I'm not saying to, to buy or not buy public mining stock or any other stock, but I would highly recommend doing some research on who they are and, and how sophisticated they are, and because it's not, it's not easy, and I'd say on the whole, most of the companies in the Bitcoin world that I've seen go public aren't ready." }, { "speaker": "stephan", "time": "55:48", "start": 3348.19, "text": "Interesting, okay. And so I guess this also has to be traded off with the advantages of being public as well, right? Like you could say maybe certain advantages are there that, you know, they can expand to a certain size or maybe the capital structure advantage But, I mean, certainly I, I can't, disagree that, you know, i-if a company's not ready for, if, if a company's not ready for it, doesn't have the right structure in place, then that could also be bad. And as, as you've mentioned, I think that this is the point that is, I think, hard to dispute is the point about decentralization of, you know, mining. I think that's probably the point that, really, you-- it's hard to argue that. You know, maybe some of the large public companies can also do advocacy of Bitcoin and maybe try to help keep it legal or lower the regulations and taxes. Maybe there's something to that also. Yeah," }, { "speaker": "stephan_livera", "time": "56:43", "start": 3403.18, "text": "I don't, I don't wanna paint them, and I apologize if I've come off as, you know, completely trying to categorize them as evil, because, for instance, a lot of the lobby groups and those sort of groups, the, the, the work from the public miners has been tremendous in supporting the folks going off and fighting for it, and small companies like mine try to help, but the reality is, if I throw them a couple thousand dollars, it's a drop in the bucket, it doesn't mean anything. They have, they have the money to go do those sorts of things. And, and as you said, putting together- You know, to, the capital to go build an elephant, it's almost impossible to do without being public. Now, I don't have an interest in building elephants, I think I think horses are actually a better thing to build, but" }, { "speaker": "stephan", "time": "57:34", "start": 3453.63, "text": "having" }, { "speaker": "stephan_livera", "time": "57:34", "start": 3454.01, "text": "some elephants out there isn't the worst thing in the world for, for Bitcoin, and it's probably good that there are a few people doing it." }, { "speaker": "stephan", "time": "57:42", "start": 3461.93, "text": "Gotcha, yeah. And I think to spell out a few points around the decentralization aspect, I mean, we've touched on it a little bit, but I, I think this is something in one of your articles you do point this out, and I'll put it in the show notes as well for listeners, but you, you spell out this idea of trying to grow Let's say rabbit and horse groups or populations. Do you wanna spell out a little bit about why that would be a good thing?" }, { "speaker": "stephan_livera", "time": "58:06", "start": 3486.04, "text": "Yeah, so my-- all of this thought process for me goes back to the China mining ban. So I started doing some mental exercises because I think as we all know, the China mining ban happened in June-ish of twenty twenty-one. And we lost sixty-ish percent of the hash power, fifty to sixty percent of the hash power, and for the most part, the network and the bi-bitcoin ecosystem as a whole shrugged it off And off we went. And I think for the most part, people said, \"Uh, we gave ourselves a collective pat on the back.\" For our resiliency, right? But I started to say, \"Well, true, I'm really glad, don't get me wrong, but what if it had been a seventy percent drop? What if it had been an eighty percent drop? How big would that drop have had to be?\" For there to be really negative ramifications. And so, more than we'll wanna do here, but I wrote an article called Satoshi's Heel, it's in Bitcoin Magazine, again, for anybody that, that wants to see it. But I, I explore this, and I'll summarize the conclusion here, which is I feel that anytime- The w- if the world dips with more than seventy percent of the hash power in the hands of the elephants, then we start having a real problem. And at eighty five, it's like, you know, warning, red warning lights, and over ninety, then it's like really scary stuff. So we wanna make sure that that doesn't happen. and I, I will also say that I believe we want probably at least thirty percent of the hash power tied to a wild source or be a wild site too. I think that that's important. So if we just think about, you know, what are the Bitcoin attack vectors and how might people come after that? And there's different ways they could do it legislatively, it could be terrorism, by the way. So the, part of the reason I use that nomenclature too, and I talked about being easy to hunt, is I worry about things like Eco terrorism and people coming after the Bitcoin network in a violent way. I'm not predicting it, I'm just saying that those are things that I think we have to look about that are a non-zero possibility. And I believe we are trying as a community to build money for the next thousand years, and so we have to think in those terms, something that is a Point one percent chance, is there a point one percent chance of some sort of terrorist activity on Bitcoin mining sites this year? I mean, maybe that's a reasonable guess, right? But, but if it's a point one percent chance annually and we're trying to build thousand year-" }, { "speaker": "stephan", "time": "01:01:03", "start": 3663.43, "text": "Right. It'll eventually happen." }, { "speaker": "stephan_livera", "time": "01:01:04", "start": 3664.95, "text": "It'll happen, right? So, you know, will there be more government bans? Probably. Will there be things like, the Biden proposal for a thirty percent tax on electricity? Consumption by miners. I mean, that's already happened in Kazakhstan and I think Sweden. So, you know, we have to think this way, I think to be," }, { "speaker": "stephan_livera", "time": "01:01:27", "start": 3687.86, "text": "to be secure, we have to always think this way, we have to think defensively, and so that's what that exercise was. So, you know, how do we fight that? Well, horses and rabbits fight that. You know, if we have a robust ecosystem of horses and rabbits 30% or greater, which we are at now, I'd say we're probably in the, 70% horses and rabbits right now, give or take a few percent. That's about where we are now, but The fear is the elephants are gaining. So I think it's fairly clear that the elephants are gaining. And so that's part of my warning shot is, I'm not worried about today, I'm not worried about two years from now, but I worry about Maybe in the next epoch, in the ne- not, not this halving cycle, but the one after, what happens? 'Cause by the way, that's when the big change will be, right? So if in this epoch, at this halving, we're worried about the elephants, like the elephants are the ones that were exposed, right? And part of that was they didn't do a lot of investment in high efficiency equipment in the last cycle. They didn't invest during the bear very much. But let's say the opposite happens in a future cycle, where we could suddenly find ourselves a, a hiving occurs, and now, boom, you lose half of the horses and rabbits overnight, or virtually overnight. And suddenly find yourself in this condition, and now you get exposed to these" }, { "speaker": "stephan", "time": "01:03:01", "start": 3781.1, "text": "attacks. Right, increased risk of shutdowns or attacks. Yeah. Interesting points. I think it's well worth, people considering those. so we're pretty much out of time now, so let's finish up here. But I'll make sure all the links are in the show notes at stephanlivera.com/slash-five-two-five, so barefootmining.com, and I'll put your, X, link there. And Bob, thank you very much for joining" } ] }