{ "episodeId": "SLP575", "speakers": { "stephan": { "name": "Stephan Livera", "role": "host", "tag": "STEPHAN" }, "adam_sullivan": { "name": "Adam Sullivan", "role": "guest", "tag": "ADAM" } }, "segments": [ { "speaker": "stephan", "time": "00:13", "start": 12.61, "text": "Hi everyone, welcome back to Stephan Livera podcast brought to you by swan dot com, the best place to buy Bitcoin. Joining me today is Adam Sullivan, he is the CEO of Core Scientific. Adam, welcome to the show. Thanks for having me on. So Adam, let's start with a little bit about yourself, how you, you know, you got into Bitcoin and maybe a little bit on how you came to be the CEO of Core Scientific." }, { "speaker": "adam_sullivan", "time": "00:33", "start": 33.2, "text": "Yeah, absolutely. So I first got into Bitcoin back in 2016, came at it from a mining perspective. So actually the one of the traders that sat next to me at the fund I was working at left to go start a crypto fund, and, he convinced me to, to start looking at mining 'cause he thought it would fit my skill set Working on some mining stuff and actually joined an investment bank as part of that, as I was looking for investors to build out my mining business. So, started working with publicly traded clients, all non-crypto focused companies back then, right? It was twenty seventeen. I would say every public company was interested in the space, and, it was r- it was a really great introduction to working with public companies. And by the time, you know, twenty nineteen rolled around, we started actually see, you know, the, for the first time, many of the first crypto focused companies. I was really focused on mining at the time. in twenty eighteen, I actually did a tour around the United States, seeing about sixty to seventy sites. You know, back then, five to ten megawatts were big sites, right? And so Public traded company back then focused on mining, worked with them up until, I left the investment bank, but we had one of the largest investment banking practices focused on crypto and mainly Bitcoin mining specifically, and so it was a really exciting time, you know, we took companies from being small, less than five people teams with one site to the really what we see today, which is public companies with multiple mega sites, and really robust, I would say, public markets, strategies. So it was an exciting build-out time, but that actually also brought me to Core Scientific. So back in twenty twenty-three, we were in the middle, we were about five months into a Chapter Eleven process, I'd actually helped take Core Scientific public previously, and advised them on some of their, M&A activity. And so when they were looking for new leadership, I was brought on board back in April of twenty twenty-three, and I've been a part of the company ever since." }, { "speaker": "stephan", "time": "02:37", "start": 157.19, "text": "Great, and yeah, so Yeah, maybe if you could, although I'm, I'm sure some of this is perhaps before your time as CEO, but if you could sort of take us through what happened, I think listeners would probably be interested to hear a little bit about that process of, going through bankruptcy." }, { "speaker": "adam_sullivan", "time": "02:55", "start": 175.42, "text": "Yeah, so let's take a step back and go back to twenty twenty-two. So twenty twenty-two notable crypto winter, obviously a lot of failures throughout the, the course of twenty twenty-two. you know, Core Scientific was probably highlighted by the fact that, you know, we decided to put a significant amount of Bitcoin on balance sheet while taking on a significant amount of short-term amortizing debt. Now, you have to think about your balance sheet strategy if you're gonna hold the same amount of Bitcoin on balance sheet, you can't have short term, you know, short dated debt. That in a volatile business, you have to be able to service that debt on a US dollar basis. And so, you know, really that was really one of the main struggles. It actually wasn't a large portion of our debt that put the company into Chapter 11. It was actually a very s-small portion of the debt that amortized over a very short period of time. And so really the balance, balance sheet strategy is what's necessary to run a Bitcoin mining business, right? You can see it with some of the other pubcos, who have been able to put a significant amount of Bitcoin on balance sheet. It's also 'cause they're pairing it with matching their US dollar, US dollar denominated liabilities, with cash on balance sheet as well. but the Chapter 11 process, you know, those are difficult to go through, they're difficult for any type of company. Luckily, we have a, a very strong asset base, we have a very strong team that stuck with us throughout the course of the process And we did a lot of firsts in the, Chapter 11 world. We paid off our financing through the, through, through the course of the bankruptcy process, which is very unusual. we were a solvent debtor case and actually one of the most successful solvent debtor cases in history, meaning the recovery to equity holders is one of the highest that has ever been achieved in a Chapter 11 process. So, you know, the team really came together. We focused on a few very important parts of the business that we could control throughout the course of the Chapter Eleven process, you know, mainly controlling efficiency of our machines, controlling the uptime, and really preparing for the emergence process, which is, you know, you've seen we mine more Bitcoin than many of our publicly traded peers who have more exa hash online, and it's mainly because we took the time to refocus, reorganize the company, and come out a much stronger business, even though, you know, we're getting- Hammered kind of on all sides by, you know, every decision you make in the Chapter 11 process, you need approval of five different committees, and, each committee has, you know, ten to twenty con- constituents, so, it's a challenging process to go through, but we made it out on the other side and we're, we're performing very well now." }, { "speaker": "stephan", "time": "05:30", "start": 329.7, "text": "interesting. Yeah, and you mentioned around, a high level of, recovery. Is that also partly driven just because twenty twenty-three was a bit of a bull, like kind of a resurgence year for Bitcoin as well, like holding Bitcoin on the balance sheet was what enabled some of that, or was it other factors coming into it?" }, { "speaker": "adam_sullivan", "time": "05:45", "start": 344.9, "text": "So the interesting part is we actually had to set the valuation about five months before we emerged from Chapter 11 So it was still a very high recovery, even though we set it back really, I believe it was back in either August or September timeframe, and we emerged in January of this year. So, you know, part of it was a, a little bit of the run up in the price of Bitcoin definitely played a role in that. but also the fact that we were continuing to mine more Bitcoin per exa hash over the course of that time period, which allowed us to show to the courts, to all the committees, you know, we're producing a significant amount of free cash flow and it was really interesting, right? Like we paid well in excess of a hundred million dollars in bankruptcy fees over the course of twenty twenty-three. And we were paid for all of those. We paid down over forty million in our dip financing, which is the financing you get when you go into a Chapter 11 process, and we were able to put additional cash on balance sheet. So as a company, we produced a significant amount of free cash flow, and we were able to show, you know, truly how good of a, of a business we were. And it's hard because you go into a process like this Bankruptcy judges aren't familiar with, with Bitcoin mining. They're not familiar with Bitcoin. You know, you, they don't know what you're doing as a company, and, you know, they're reading headlines about, you know, crypto companies are going down. Like we went, we filed, you know, kind of in the same time period when all of the major bankruptcies were occurring, whether it be FTX, whether it be Three Arrows, all of those things. So you kinda get lumped into a, I would say, a pretty negative circle when in fact, you know, With the wrong capital structure." }, { "speaker": "stephan", "time": "07:29", "start": 449.17, "text": "Interesting, yeah, okay. and I, I guess one other thing in terms of-- Well, I guess a couple other questions I have in terms of how things went down. Now, again, I understand this is before your time as CEO, but I'm curious that at that time it was seen that there was no need to have like hedge exposures for things like cash flow or market or foreign exchange risks. Do you have any idea as to why that was? Was that just the prevailing thinking at the time, or was there some reason for that?" }, { "speaker": "adam_sullivan", "time": "07:59", "start": 479.15, "text": "Yeah, I mean, twenty twenty-one was a crazy time period for public companies. You know, you look back at that period and people were putting out major growth targets. It was a growth at all costs type narrative, right? I mean, public investors were valuing companies off of proposed xHash targets. Regardless of whether they could be paid for, regardless of the amount of dilution that would need to be incurred, all of those things weren't, weren't positive in the long term outlook of Bitcoin mining businesses. As a Bitcoin mining business, you know, you have to be much more thoughtful about how you operate the company. You operate very similar to how a commodities business operates. You have an input commodity, you have power, and you have an output commodity of Bitcoin. And so managing that input and output risk is something that commodity companies do every single day. Now, the problem is Is back in twenty twenty-one, twenty twenty-two, there weren't hedge products like we're seeing today. A number of different hedge products come out that are very attractive. We're also seeing much more liquid options markets on Bitcoin. So all these things are huge net positives for operating Bitcoin mining businesses. Now, how does it-- how do we take from what happened in twenty twenty-two and port it over to twenty twenty-four so we don't make the same mistakes? I mean, you're absolutely right. It's the opportunities that are involved with hedging forward production, hedging the- The power side of your business. Both of those are very important components if you wanna have a Bitcoin mining business that can actually last ten, twenty, thirty years, 'cause if you just think about it in a very short- Very short time period, like kind of the mindset was back in twenty twenty-one, you're gonna fall into the same trap that most of the companies fell into back then. And so that's really what we're focused on now is how do we continue to evolve the business from the perspective of including hedge products, including, you know, doing much deeper dives in the power side to ensure that things like happened in twenty twenty-two, like the invasion, when Russia invaded Ukraine, natural gas spiked and put power prices up a hundred percent or two hundred percent in many different locations in the United States. You know, that alone could hinder a Bitcoin mining business significantly, especially now that we're in a post-hab environment? Where hash price is much lower. So, you know, there's a number of variables that managing those much more actively is required to run a successful Bitcoin mining business" }, { "speaker": "stephan", "time": "10:19", "start": 619.22, "text": "Yeah. So we could almost say, the, the industry has evolved since, you know, the three years ago, let's say, and, I guess there, as you said, there was this growth at all costs, and that was a very much a prevailing narrative, especially a lot amongst large, you know, public mining companies. I think There was also a concern for, you know, from the kind of Bitcoin ideological perspective of we want it to be decentralized, we want it to be-- we don't want it to just kind of be all these, to be overly centralized into You know, large public companies, we want there to be a kind of a good mix of, you know, different entity types, I guess. I guess at that time, that kind of aggressive bidding Arguably pushed out a lot of smaller players as well, didn't it?" }, { "speaker": "adam_sullivan", "time": "11:06", "start": 665.57, "text": "It's really hard to know. So if you look at publicly traded mining companies as a percentage of the total Bitcoin x hash, we've actually dropped from around thirty percent over the last two years to around twenty percent and actually have dipped below that. So you take the companies with the best access to capital markets and the best access to equity capital, and we've grown slower than the Bitcoin network. So there have been a number of l-ar-- a number of other players that have come into Bitcoin and have actually been able to grow faster than publicly traded mining companies. And when you look at the growth targets, you have to say, okay, if Bitcoin mining company-- public Bitcoin mining companies in the United States are growing this quickly, someone else is growing even faster. And so I, I think what you really have to do is take a look back at, you know, public Bitcoin mining companies are mainly folks in the United States, and you have to kind of look back at the history of Bitcoin mining in the United States and port that over to the rest of the world. So initially, when people moved, started mining in the United States, you were mainly locating in geographies where it was, there was manufacturing that had left that county, that state And there was power available. Bitcoin always seeks out low cost, abundant power. That is the nature of the Bitcoin mining network. And so initially it was attracted to those locations, much smaller locations, some were bigger. Then as it evolved, Bitcoin mining companies started to seek out large sites specifically for Bitcoin mining where there was that low cost, abundant power. But now what we're seeing is, you know, those are getting edged out. There's not many locations left. You're competing against large data center companies that are also competing for very similar power structures and quantities of power. And so what you're seeing now is the hunt for smaller locations amongst Bitcoin mining companies. And it's gonna be the advantages of being able to scale a large number of sites, not a single site with a large number of megawatts, but can you scale efficiently with a large number of- number of sites with a smaller megawatt footprint. And so that's what you're seeing across the United States now is really that shift to these smaller sites, and that's what you're seeing at a, you know, you're kind of seeing the early innings of this now across the world, where you saw the initial move into manufacturing sites, and now you're talking about many new, many new countries being added to the mix. You know, Paraguay is one of them, where it's now they, they know where large amounts of low-cost, abundant power are, and so companies are beginning to move But soon they're gonna have to distribute out much more widely, be much more reliant on what I would say is esoteric opportunities at a much smaller scale And that's gonna help push the distribution of mining to a larger number of players, because these opportunities are edged out in the United States. There's not that many locations left, and so you're gonna have to look globally, and that's gonna bring a number of new counterparties into the mix, and I think that's actually gonna push the distribution of Bitcoin mining to a larger number of players managing much smaller facilities." }, { "speaker": "stephan", "time": "14:13", "start": 852.92, "text": "Interesting. So if I could summarize then, would it be fair to say it's like there's low-hanging fruit and some of the low-hanging fruit has been picked and now people have to sort of go further, higher up the tree, and that's where the smaller sites, This point that you're making." }, { "speaker": "adam_sullivan", "time": "14:29", "start": 869.06, "text": "Yeah, that's exactly right. That's exactly right." }, { "speaker": "stephan", "time": "14:33", "start": 872.56, "text": "Interesting. Yeah. Okay. And, so let's talk a little bit about, the, the capital structure point you were talking about, because this is another point that, I think for years there's been, this kind of idea, have people have said, \"Oh, Bitcoin mining is gonna mesh with energy.\" And another way, and maybe that's also true, but maybe another way to think of it is also, it's about The capital, people wanna go closer to where they can get cheap cost of capital because you need, you need, you know, cheap energy, you need efficient, you know, mining rigs and mining machines, and also capital. And so I think, the-if you could maybe elaborate on- The capital structure point, why does that matter? What, what is it gonna look like as we go into the future?" }, { "speaker": "adam_sullivan", "time": "15:19", "start": 918.85, "text": "Yeah, capital structures are gonna continue to evolve in this business, and I think what you're gonna start seeing is actually capital structures paired up with longer term hedges on the Bitcoin side. So whether that be Bitcoin-denominated debt, because it's much easier to forecast out what potential difficulty looks like on a go-forward basis, because you generally know what the manufacturing schedules are for some of the larger manufacturers, and so you can generally kind of forecast where network hash is gonna go. We have some idea about where efficiency is gonna go over time, and so if you can cut, if you can center around for Bitcoin production over a two or three-year time horizon, that actually pro- Provides much greater visibility to a debt holder who knows how much Bitcoin they're going to receive and can hedge whatever parts of that debt instrument they want to accordingly. Now, if you can't match those up, the next step is you have to say if it's gonna be US dollar, US dollar denominated debt, it has to be long enough dated where you can go through multiple cycles that Bitcoin goes through, it feels like every single year, in order to be able to maintain liquidity and have enough, I would say, flexibility around the financial covenants where any downturn in Bitcoin? Allows you to actually produce, you know, go in, make countercyclical investments into Bitcoin mining, whether that be machines, whether that be infrastructure, at points in time when that infrastructure is much cheaper, those machines are much cheaper, to actually perform even better during the next bull cycle. And so those are the opportunities that you have to look for in a capital structure. You know, for instance, coming out of our Chapter 11 process, we had much longer dated debt. They also put in a significant amount of optionality into our capital structure so that all of our debt goes away if we perform I would say moderately well, right? And so that allows us the opportunity where if Bitcoin performs well, we essentially become a debt-free company. And so that's something that also should be thought through when you're structuring a Bitcoin mining business is having the flexibility to have a longer dated capital structure, but at the same time, build an optionality into that capital structure so that if Bitcoin performs well, you can be a debt-free company, and that's something that your equity holders will appreciate as well because they're- They're willing to say, \"Yeah, at a higher price, for example, yeah, we'll give up thirty percent of the company if Bitcoin goes to a hundred thousand dollars, we're willing to give up thirty percent of the company at that val-- at a much higher valuation, because it was worthwhile to make that bet today.\" Because we are a leveraged play on Bitcoin essentially, 'cause w-what we say is we're gonna take in the equivalent of one Bitcoin worth of value today, and we're gonna produce a multiple on that over the course of the next one, two, five years. And so that's really how you have to think about capital structures, is time and optionality. If you have both, it actually provides for really an optimal capital structure for Bitcoin miners." }, { "speaker": "stephan", "time": "18:21", "start": 1101.23, "text": "So one other question I have, now we say this now, rates are, you know, higher, but if, let's say, rates were to come down over the next few years, would that change this calculus? Because then you would sort of have this option now of, okay, debt is cheaper now. Is that gonna then change? Obviously, you're now, you're at least More willing to consider using debt as part of the structure. Would that, would that change your" }, { "speaker": "adam_sullivan", "time": "18:46", "start": 1125.7, "text": "view? Yeah, I mean, cheap debt is, is defi- would definitely be intriguing. You're seeing it with a lot of the convertible notes that, for instance, MicroStrategy's putting out. You know, they're getting very, very cheap debt on their convertible notes, because investors believe that Bitcoin will go higher in the future and that they'll be able to service all, all of their debt that they currently have in their balance sheet. Now, when you look at our capital structure, whether it be high single digits or, or very low double digits, you know, that is for today for our, I would say our, our investment grade and the volatility in Bitcoin, I would say that's, that's about where rates should be. Now, if rates come down I would say, unless we're getting significant term on that debt, I would say debt isn't necessarily the best capital structure period for Bitcoin miners, right? Like Servicing US dollar denominated debt is always a challenge for Bitcoin miners, regardless of the environment. It's something where you need to have a significant amount of time to withstand volatility, and if interest rates do come down and you're, you're willing, and you can actually get term on that debt, then yeah, it's definitely a more interesting opportunity. but even going back to twenty twenty-one, you know, the interest rates were very low and many miners still struggle to pay off their US dollar denominated- liabilities. And so that is also something you have to keep in mind, is that you always have to be hedging accordingly and putting enough cash on balance sheet to be able to withstand the long term volatility of Bitcoin." }, { "speaker": "stephan", "time": "20:20", "start": 1219.87, "text": "Back to the show in a moment. This show brought to you by CoinKites dot com, the creators of the best Bitcoin hardware security devices, such as the Coldcard Mark IV and the new Coldcard Q. Now, we use Bitcoin hardware security devices to keep our keys offline, our private keys offline. 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With the efficiency comments as well, so you were talking about this idea of, you know, planning out ideally if you can have long dated debt and understanding where Bitcoin mining Machine efficiency is at today, and obviously you have to make some kind of estimate about where the future is going to be, and of course, how much new hash rate is gonna hit the network and come online. I'm curious if you're, if you are, you know, looking at-- Well, I'm sure you are. But do you have any thoughts on where things are going, like with the new three-nanometer chips that have been announced by some of the different, competitors there?" }, { "speaker": "adam_sullivan", "time": "23:02", "start": 1381.81, "text": "Yeah, I mean, efficiency we know is gonna come down in twenty twenty-five. That twenty twenty-five, I think, narrative around Bitcoin mining is gonna be the democratization of hash rate. So what I mean by that is there's gonna be new manufacturers entering the market and bringing three-nanometer chips to the broader Bitcoin mining space in a way that's not just Bitmain and not just MicroBT. And so you're gonna see the larger, I would say, you're gonna see larger Bitcoin miners begin to explore what other options are in the market. So you're already seeing it today with the nine Announcements around, whether it be Marathon and Ordine or any of the other announcements, you know, Block just announced their three nanometer chip as well. And I think all of this is very bullish for Bitcoin miners, but what you're actually going to see is the bifurcation of strategies between different manufacturers. So you're gonna see, you know, the traditional manufacturers, they price on an ROI basis, so they take a point in time and they say, \"We price our machines based on what we believe an ROI is on this machine over a 12- twelve to fourteen month time period. Now, some of these new manufacturers are saying they're gonna approach this from a cost plus basis, much more similar to how the traditional, technology is sold in the market today, whether that be servers, whether that be GPUs, et cetera. And so what you're gonna see is you're actually gonna see s-different cycles amongst manufacturers in a way that we didn't see these in the past. We saw cycles for Bitcoin miners who were able to make very large investments during bull markets because they were able to raise a significant amount of equity capital, but now you're gonna see it on the other side as well, where cost-plus folks during a bear cycle are gonna be overpriced in the market, but the ROI players are gonna be able to price much more competitively. And on the converse If we go into a bull cycle, all these cost-plus folks like Block, for example, are gonna be able to be extremely competitive and be able to grab a significant amount of market share. And so I think that's really the most interesting narrative that we're gonna see going into twenty twenty-eight and the next halfing is how these different manufacturers alter their strategies to be able to be competitive through different types of cycles." }, { "speaker": "stephan", "time": "25:16", "start": 1515.78, "text": "And, as you pointed out as well, that, there's more, there's more Bitcoin mining manufacturers who are entering the chat per se, that the, there's new players coming where, I guess historically it has been very much a Bitmain or MicroBT sort of dominated industry, so- Do you, do you see any strong, you know, strong competitors coming? Do you see that as they're, they're gonna be more, they're going to be more viable and it won't be as much of a one or two horse race?" }, { "speaker": "adam_sullivan", "time": "25:46", "start": 1545.73, "text": "I mean, the people that have come into the market-- I've been following this since, you know, twenty seventeen in terms of new manufacturers coming to market. Now we've seen plenty of failures throughout that time. You know, nearly everyone has failed over the last seven years in terms of trying to bring a competitive machine to Bitmain. We've seen MicroBT even struggle to capture market share against Bitmain I mean, now we're, what we're seeing are very adept ASIC designers and design teams that have been successful in dozens of tape outs for other products coming to Bitcoin mining because They can actually do it from a scale perspective, they have the relationships, and they can raise the capital, because investors have watched them be successful across multiple other types of design. And so that's something that I think is most interesting is now these companies, these new manufacturers, are well capitalized. You take a team like Chain Reaction, for example, you know, multiple extraordinarily successful tapouts and exits. And so that's something that the market believes in them, large investors believe in them, and believe that they'll be able to make a, a competitive- competitive chip to what Bitmain's able to produce. Now, Bitmain is the eight hundred pound gorilla in the room, they're very hard to catch up to. They have the expertise, they have the relationships, they have I mean, they've really almost never missed in terms of bringing the most efficient machine to the market before any other manufacturer. But you take someone like Block, for example, who has significant ASIC design team, significant capital, and are a much larger business than Bitmain is, and if they're dedicating the resources to be competitive on this side and are dedicated to the long term vision of building a machine, even if, let's say, that they have one or two missteps along the way Well, then Block over the next ten years is gonna be able to grab a significant amount of market share because they have the team, because they have the capital, and if they're able to execute During bull markets, they'll capture more market share, I think, than most people expect them to be able to capture, because if they're priced at a significant discount to what Bitmain is, for public mining companies or any other mining company across the globe, if they look at the ROI and say, \"Well, it's...\" Ten months on a block machine, but it's eighteen months on a Bitmain machine right now, you're gonna be very hard pressed to find someone that's just willing to jump to Bitmain at a time when ROIs might be much, much cheaper on a different manufacturer's machine." }, { "speaker": "stephan", "time": "28:13", "start": 1692.78, "text": "Do you have any anticipation for how, like, again, it's hard to predict, none of us has a crystal ball, of course, but if, if we sort of see another bull cycle and we see the hash price go, you know, go crazy like it did? Do, do you see a similar thing happening again, that, you know, that same kind of dynamic could happen, and then it's more the scarcity is being able to actually get mining machines at that point? Do, do you see that kind of thing as a possibility for this, you know, few years?" }, { "speaker": "adam_sullivan", "time": "28:41", "start": 1720.53, "text": "Yeah, it's absolutely a possibility. I mean, we're an interesting part in the cycle. Infrastructure is extremely constrained, so you're watching other public mining companies acquire facilities that have five, six cent power. I consider those really bull market sites where they're very viable in bull markets. You know, the other part is what we've seen amongst machine pricing is anything that's not the newest generation machine nearly got cut in half post halving in terms of its pricing on a, on a, dollars per tera hash basis. Now those machines are extremely competitive and the efficiency isn't far off from the newest S21 that's out there today. And so watching the dynamics, it's extremely interesting. If you don't own your infrastructure, you're gonna have a very hard time aggregating infrastructure over the coming years. And I think that's gonna be, one of the main narratives if, if you control your infrastructure, if you have all of it today under your control, you're in a much stronger position because acquiring machines right now is a much easier thesis than trying to say, \"Well, we're gonna buy five hundred megawatts or a, or a gigawatt of power and bring all of it in.\" That infrastructure online, if you think about the supply chain constraints, we compete directly with the traditional data center industry for equipment. And there's no larger narrative. If you pull up in Bloomberg, Wall Street Journal, Reuters, any, any publication, they're all talking about the supply chain constraints for traditional data centers to bring things online. And so I think that's gonna be the big narrative over the next kind of eighteen to twenty-four months is, do you control your infrastructure? And if you do, is it actually low cost to be able to survive through a bear market? And then the people that do control their infrastructure, the narrative for them is, how much xHash can you acquire? During what I would consider really a countercyclical time period, you know, we have hash price sitting at about five cents today, and so can you acquire enough machines so that you can be there for the next bull market where ExaHash can't catch up to Bitcoin price, because Bitcoin miners play for a very short time period where Bitcoin price outpaces hash rate growth? That's what we try to survive for, right? Because during that time period, we make outsized returns. Now, we have to be able to survive the three to four months that happen every single year where Bitcoin price is falling, but network hash is growing. And so you have to build a business that is, you know, bear market, I would say, fortified, but also be in a position where during those bear markets, you can make the necessary investments to be prepared for the next bull cycle, where machine pricing goes exponential over a very short period of time, and you-- if you don't have the infrastructure to plug in, you're not gonna be able to bring that infrastructure online during that short period of time where Bitcoin price would be outpacing hash rate growth." }, { "speaker": "stephan", "time": "31:35", "start": 1894.53, "text": "Interesting, as you said that, during the bear cycle, there was this incredible opportunity if you were, you know, if you were around, that you could buy up these machines, right? The Bitcoin mining machines at a great discount, but The thing is, you had to survive to be there at the time and have the capital and have the, you know, the structure, to your earlier point, to be able to execute that. And that's just at the machine level. Then, as you mentioned, there's also the rack space scarcity or the, you know, having data centers. And I presume now there's also, as you mentioned, there's a lot of competition on the, data center side, the AI side. I, I believe I did see, a news article on Core Scientific on the My side as well. So if you could explain a little bit on, how you're balancing being a Bitcoin mining company but also doing AI." }, { "speaker": "adam_sullivan", "time": "32:26", "start": 1946.09, "text": "Yeah. So if you look back to the roots of our company, we started by seeking out low cost, abundant power. Now Much of what we were using as a criteria for locating sites was a much more traditional data center approach, and given that we were the first institutional Bitcoin miner in the United States We had to take, we had to figure out what the design was going to be for our facilities. So what our team did, given we were a traditional data center team, we essentially took the traditional data center model and said, \"How do we strip this back and make it suitable for Bitcoin mining?\" Now, as this company has evolved, we've moved from being a hosting company for Bitcoin miners to being one of the largest self-mining companies in the United States and largest owner of infrastructure for Bitcoin mining. And really the next evolution is, how do we continue to ensure that we're maximizing the value of the assets that we own today? And so we're looking at this broader narrative shift, and the our, our, we believe was our kind of esoteric thesis back in twenty twenty-three, which is we're gonna see this shift to smaller locations for Bitcoin mining as some of these larger power opportunities begin to get edged out in the market. And so what we're looking at for some of our existing sites is the conversion of certain facilities to HPC applications. Now, that doesn't mean we're not committed Bitcoin mining, we'll continue to be able to grow our Bitcoin mining footprint, given our software stack, given our team, given our site selection team, because what we wanna do is make sure that we have a sustainable Bitcoin mining business, not just for the next having, but the having after. And to do that, you have to say, what is the power, what is the power cost at that location, and what are the structures that will allow for you to actually operate machines profitably at the next having? And so for us, we're looking at certain sites that we own and say, \"These have been amazing sites for seven years, but four years or eight years from now, do we believe they'll be competitive for Bitcoin mining?\" And so what we're looking at today are certain types of HPC contracts that'll have long-term steady cash flows that'll actually improve the stability of our company, hopefully bring down our cost of capital, and actually make us even more competitive on the Bitcoin mine side Because if you have a large stable business paired with a Bitcoin mining business, it allows you to be much more flexible, and we have covenants today that restrict us from holding more than ten days' worth of Bitcoin production on our balance sheet. We believe through the execution of these HPC contracts, we'll be able to drive enough shareholder value, and I talked about optionality earlier, to actually trigger the certain options that are embedded in our capital structure To pay down our debt, to actually be able to put Bitcoin back in our balance sheet, because we do believe that there's a necessary component of your balance sheet that should be dedicated to Bitcoin. And so we believe pairing HPC with the Bitcoin mining business will add greater stability and actually add a significant amount of value, not only in the short term, but also in the long term to our shareholders who can say, \"Well, at the very least, they're gonna be able to produce a significant amount of cash flow during bear markets given the HPC business, which will allow them to make countercyclical investments back into Bitcoin mining at a time when other companies struggle to raise capital.\"" }, { "speaker": "stephan", "time": "35:51", "start": 2150.85, "text": "Yeah, that's interesting because, it seems that, as most people are aware, Bitcoin mining is just a brutally competitive business, and so people are looking for whatever edge they can find, whether that is using the waste heat as part of how you, you know, as part of how you make the business work. But in this case, it sounds like for some of the large, Bitcoin companies like yourself, it's this HVC aspect that you can maybe have that as like another aspect of the business that is more More, consistent in terms of returns, ideally, such that you are then able to, use that, that consistent return in order to make the requirement, make the required Bitcoin investments, whether that's, you know, rack space or Bitcoin mining machines or other operational, Bitcoin mining costs." }, { "speaker": "adam_sullivan", "time": "36:40", "start": 2200.43, "text": "Yeah, you're absolutely right. If you have a business that's generating, you know, let's call it several hundred million dollars in free cash flow per year, that frees up capital to be able to deploy capital into a separate business that has much greater volatility, but if you're always able to make those countercyclical investments That's gonna present a much different thesis for your company than a traditional Bitcoin mining business where when you go into a bull market, equity capital markets are, are very thin and you have a much harder time raising capital at a low cost of capital, right? Because if you're in a bear market, how lenders are gonna- Price your debt is gonna be very expensive, and so that provides us an opportunity to actually build out an even better Bitcoin mining business by pairing it with a stable, long-term free cash flow generating business" }, { "speaker": "stephan", "time": "37:33", "start": 2252.76, "text": "So how would you compare Core Scientific with some of the other large public Bitcoin miners? What's Core Scientific doing differently?" }, { "speaker": "adam_sullivan", "time": "37:42", "start": 2262.23, "text": "Yeah, I think our secret sauce is in really two areas. It's in our platform, the assets that we've acquired today, and our ability to maximize the value of those assets, and then the team that we've put together to surround those assets to figure out how we actually execute on a long-term vision for this company. So we've been able to bring together I would say the, the main components of a very strong digital infrastructure company. We have our own in-house software team, so we've built all three levels of our software stack. So that's energy management, fleet management, and our own firmware, and we're able to integrate all three components to actually make our data centers, I'll call it, much more smart than other Bitcoin miners are. So we're able to take into account wind speeds, humidity, pressure in our facilities, all of these different- variables to actually optimize the firmware settings on our machines, and we're always setting them to maximize profitability, so they're able to intake different types of power programs that we participate in, and we're able to take in all these weather variables, and we're actually able to say, \"Well, if we actually change the firmware settings on this machine, we can generate, you know, X amount of additional Bitcoin per day above our competitors.\" And so that's something that provides us a significant edge. On the other side of it is our operations team, which comes from the traditional data center world where downtime isn't acceptable. And so that's, they've taken a very, I would say, they've taken a much different view than most Bitcoin miners who, you know, started with, let's say, a five megawatt facility, have grown to, let's say, two hundred or three hundred megawatts today, and they're just figuring out what the major issues are with controlling three hundred megawatts of power, whereas you take our team and our team's run over a gig of data centers in, in the traditional space For some of the largest data center companies in the world. And so you pair all these components together on the operations and technology side, and we have a much more compelling team and ability to execute on our future growth plans than really any other competitor in our space who are trying to just find right team members to keep their machines online. You know, we're, we're, we're, we're very far past that. We're focused on what is the next generation facility like? How do we op-optimize our machines in the future? How do we take chips that might be being designed today and put them on hashboards that are designed specifically on a location-by-location basis to be optimized either for, you know, the hundred days that are sub-zero at our Grand Forks location or the hundred days that are above a hundred degrees at our Cottonwood, Pecos location in Texas? You know, those are much different environments and we have different things to optimize for, but we've done it all around the country in a varying, let's say environmentals, type environment where, you know, we have to control for all these different variables, but we're focused on the future, while most of our competitors are focused on just solving the problems in front of them today." }, { "speaker": "stephan", "time": "40:43", "start": 2442.56, "text": "Back to the show in a moment. The lead sponsor of this show is Swan dot com, and Swan has a mission to onboard millions of people into Bitcoin. I also work at Swan, helping on some educational content for the team. Now, the team have also put out a new version of the Swan Bitcoin application, which is available on Your smartphone, whether it's Apple or Android. Now, this app has a really fast onboarding experience. It's now just a few minutes to go from zero to Bitcoin. 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One other topic that's, you know, really, prominent now amongst Bitcoiners is maybe around the pools and the centralization Concern. so there's been some recent news that, okay, a bunch of pools are pointing their hash rate, and, to, to, to add pool, and that, that, it's not really a very decentralized ecosystem, and that spurred a lot of discussion about things like Stratum v2. Now people debate on how effective that will be, and also, the, the type of mining pool payout, right? Is it an FPPS payout or a PPLNS payout? So I'm curious if you have any, thoughts to share around Bitcoin mining and this broader idea of censorship resistance, that, you know, do you view that as part of what gives Bitcoin its value? Is that something Core Scientific is Looking at." }, { "speaker": "adam_sullivan", "time": "43:43", "start": 2623.14, "text": "It's definitely something we, we look at. you know, understanding Bitcoin mining pools is something that I would say has been a, I would say, it's definitely been in focus more recently. I would say the knowledge around Bitcoin mining pools across the network is, you know, I would say there's a lot more education to be done. you know, folks like Foundry, Luxor, et cetera, you know, they're very collaborative with their teams. they take into account all of our input in terms of when we're voting for certain types of, upgrades to, to Bitcoin. All of these things are really important to have I would say over time, I think Bitcoin mining pools are probably gonna become more decentralized. You know, you've seen folks like Marathon introduce their own pool. I think it's the biggest challenge when we think about it from a public mining perspective is investors today don't understand variability in payouts. And that's probably the biggest risk. You know, you, you can take a pretty good case study, you can take Riot, gosh, it was back, a few years ago, they were operating on a, on a pool, that- That had much greater variability in their payouts. And so this is something where public investors don't necessarily understand this. And so over time, what we've seen is If you can provide greater clarity to the market, investors are much more comfortable. And so I would say that's probably my biggest concern going forward is the education around pools, because there's a significant lack of knowledge amongst most even Bitcoiners on how pools operate, how much control do they actually exert, and over time, I mean, I think the bigger concern in terms of Control over the network is, you know, how much of the network is actually controlled by very few parties. It's not really public Bitcoin miners. If you look at the hash rate, I mean, I would say, you know, there's a number of Private miners that control a very significant amount of hash rate, that is probably more dangerous to the long term health of the Bitcoin network than pool centralization. And so I think that would be my focus over pool centralization, because you're absolutely right, Antpool controls a significant amount of hash rate on the network, but also that hash rate is owned by Maybe one, two, or three parties, whereas you take someone like Foundry, that's distributed amongst, you know, maybe fifty or a hundred different parties. And so much different structure, much different, I would say, incentives in terms of their voting power. And so over the long term, I think it's more about decentralization of hash rate over decentralization of pools." }, { "speaker": "stephan", "time": "46:31", "start": 2791.4, "text": "Interesting. So, I mean, one thing there though, with the, I guess, pools that exist, or at least companies that exist under obviously, you know, government regulation, it's I guess the-- I mean, maybe a concern could be around if, if the state orders people to use a certain kind of pool, and that pool does censorship, then that's not really gonna, you know, move the needle much. And in that case, the private miners are kind of a good thing arguably, because they could at least, if one pool starts to censor, they could at least point their hash rate somewhere else, so I guess that, that's at least one part, that's an education thing, but certainly public miners, we would say are kind of They, they, they are at the, the behest of the state, but maybe there's something, maybe there's another angle there, maybe there's an education angle amongst, you know, lobbying and politicians and the everyday people of, you know, why You know, wipe, you know, this kind of the freedom aspect of Bitcoin. I'm curious if you have any thought on that." }, { "speaker": "adam_sullivan", "time": "47:35", "start": 2854.59, "text": "Yeah, we get asked about this a lot, just related to, you know, do we believe that there should be greater censor- or censorship on the network? Our role as Bitcoin miners are to secure blocks, kind of full stop, right? We don't choose transactions, and from our perspective, if you're willing to pay for block space, you should be included in the block And so whether that be any of the other, I would say, new items that are being brought to Bitcoin today, like ordinals, runes, et cetera, or whether it be transactions, right? We just support the long-term security of the Bitcoin network And whatever you're, you know, that's kind of the beauty of Bitcoin, at least from my perspective, is the ability for any type of data, whether it be transactions or whether that just be raw data, to actually be put on to the Bitcoin blockchain. And so if you're willing to pay for that space, you have a right to that space. And I think that goes counter to a number of other Bitcoin miners that have been much more vocal about, you know, taking out certain transactions that are included in, in Bitcoin blocks. But I think over the long term, I think there probably is gonna be greater regulation from, you know, the, whether it be the US government or other governments, but that's gonna create an opportunity for other Bitcoin miners to actually be much more successful in terms of being able to capture greater fees from counterparties. That certain companies or certain geographic locations don't necessarily wanna include it in their blocks." }, { "speaker": "stephan", "time": "49:04", "start": 2944.04, "text": "Right. So it's a ge-geographic, decentralization point that maybe one state says you can't mine this transaction, but another state- As in nation state, when I say state there, not US state. but yeah, okay. so yeah, and of course, there'll be disagreements around ordinals, inscriptions, runes. You know, some Bitcoiners would view that more kind of like a spammy use case and not really like, but that's kind of getting into the debate of whether it's filtering or censorship. I think it might be also interesting to talk about Fee dynamics as they change over time, right? Because as I'm sure you're well aware, a lot-- in the early days of Bitcoin, it was a lot more subsidy driven, and then over time, that's obviously coming down with every halving, and the system is going to transition more to a fee based system. So I'm curious if you have any thoughts on what does that look like as we transition to a more fee based and arguably uncertain, because you can't predict that." }, { "speaker": "adam_sullivan", "time": "50:04", "start": 3003.64, "text": "The next haven is gonna be You know, big question mark for, for miners if it's not a fee based system, right? Unless there's a massive run up in the price of Bitcoin, fees have to come up in order for many Bitcoin miners to be successful. And I'm not saying the entirety of the network, because over time, as machines be-- become more efficient, that actually requires a lower break even hash price And so over time, it's okay for, I would say, Bitcoin-denominated revenue to come down, but that also means that either Bitcoin price or transaction fees have to increase And so by 2028, we have to see, I would say nearly equal transaction fees to block subsidies in order for many, many miners to be successful. Now maybe the case is that by 2028, we don't need as much xHash on the network. I mean, at this point, we're, we're unbreakable. I think even if 50%, 75% of Bitcoin mining xHash came off the network Bitcoin's still unbreakable at that point. It still would require over a year's worth of all of the production out of the chip manufacturers, gigawatts and gigawatts of power in order to actually break Bitcoin. And someone would have to do that in secret, and we all know for a fact that what we would actually see is them just join the network anyway and push up difficulty, but it's much more profitable to do that than break Bitcoin. And so I think, you know, some of the things that we've seen around the volatility is actually gonna, we're gonna start to see option markets for transaction fees going forward. So you're gonna see people actually hedging out their transaction fee risk, and it's even something that was discussed around the halving, which was, are you willing to take, you know, let's call it X amount of Bitcoin in exchange for paying out whatever Bitcoin you receive out of your transaction fees. And I think that is actually an interesting, I would say, segue into what we're actually gonna see in the future, which is by the time we get to twenty twenty-eight, option markets are gonna be much more liquid on Bitcoin mining products, and we're actually gonna see probably separate products for transaction fees. And our hopes is as Bitcoin miners, that transaction fees continue to move higher over time, and that things that need to move to an L2 move to an L2, and things that wanna be on a one are willing to pay for that block space, and hopefully it's commiserate or a commiserate level where we're actually able to continue to operate profitably, and not just with the newest generation machines. I think that's something that many people don't understand in this business, is that We're constantly refreshing our machines to move into the next generation equipment, whether that be every three to five years, and there are certain time periods where under mo- many power cost structures, you're really only viable with some of the newest generation equipment. Now we're not there today at a five cent hash price, but, you know, if we go down to a one cent, two cent hash price for an extended period of time, there are very few miners that would be actually able to withstand that type of move lower. Given cost structures with power contracts, given their existing generation of equipment, all of these things take hundreds, or I would say, tens of billions of dollars to upgrade across the network, and you're just not gonna find the capital to deploy into the network if that actually occurs, right? If we flash down to one cent for an extended period of time, there's not gonna be that amount of capital to actually go in, deploy into new machines, deploy into infrastructure to actually eat up a greater- Percentage of the network." }, { "speaker": "stephan", "time": "53:45", "start": 3224.53, "text": "I see. Yeah, I mean, at that point, I guess it would just be about survival for, for a lot of miners, as opposed to trying to expand their operations." }, { "speaker": "adam_sullivan", "time": "53:52", "start": 3231.67, "text": "Yeah, you're absolutely right." }, { "speaker": "stephan", "time": "53:54", "start": 3233.51, "text": "Yeah, interesting. Okay. So yeah, so we're talking about a bunch of different things, I guess, yeah, the other aspect of course is obviously the price could rise over that next four years, right? Like on average, if the price doubles, now it may not happen forever, right? But i- for the next few cycles, if it doubles At, at least at the fiat price level, then you're, like that, that is another lever, I guess, that, that can, you know, not that you can, not that we can pull that, but that's another, I guess, variable that goes into the Cost calculation." }, { "speaker": "adam_sullivan", "time": "54:26", "start": 3265.56, "text": "Yeah, yeah, I mean that so hash price US dollar denominated, amount that you're receiving per tera hash of exposure that you have. And so a really good way to think about it is, if Bitcoin price goes up, hash price actually goes up alongside of it, holding, network difficulty constant And so if we continue to see Bitcoin price increase, the com- the hash price that we experience will actually increase alongside of it. And for Bitcoin miners, we have relatively fixed hash prices or hash costs, I should say. So our cost to mine is relatively fixed on a cost per- from a cost perspective. and so that means as Bitcoin rises, we have the actual opportunity to actually generate a greater margin, reinvest in equipment, but that actually in the long term brings down hash price. The more hash rate we bring online, actually brings hash price down." }, { "speaker": "stephan", "time": "55:17", "start": 3317.11, "text": "Yeah." }, { "speaker": "adam_sullivan", "time": "55:18", "start": 3317.71, "text": "And so it's kind of the self-regulating network, you know, we all, we always talk about it. Well, if hash price goes low for three months, it can't really stay there, right? Like something has to give, whether that be hash rate coming offline or Bitcoin price increasing. And so we've seen over time hash Price come down, you know, since the beginning of Bitcoin, but that's something that we all expect, and as we migrate into the newest generation equipment with greater efficiency, we actually can make a similar level of gross margin on a lower hash price if we have a more efficient machine. And so we're gonna see this trend go lower over the course of time, and it is actually something that we're all planning for today. And so it's not like, you know, something that is kind of outside of the bounds, but hash price volatilities extraordinarily high, you know, over the past Four years, we probably had, let's call it a fifteen to eighteen cent hash price, average hash price, and today we're sitting around five cents. And so we've definitely seen it come down, but we've also seen spikes where we saw Hash price immediately post halving go up to eighteen cents, and that was with on the lo- that was with the lower block subsidy. So hash price volatility, going back to an earlier point that you brought up Half price volatility is gonna continue, and it's mainly driven by transaction fees, less so by network difficulty." }, { "speaker": "stephan", "time": "56:41", "start": 3401.33, "text": "Yeah, interesting. And as, as you were saying, like around the halving, there was a massive, you know, amount of runs happening, and, you know, that-- there was just a huge, huge- Spike, and I think most people predicted that there would be this spike, the question was, would it sustain? And I think that's what we're sort of seeing now. And y- arguably there is, like, there's still a decent amount of, runes, I would, I would, you know, call it ru- spam or shitcoin scams, but it's, it's there, and I can't stop it, so I, I acknowledge, I accept that. so, yeah, so any closing thoughts for listeners?" }, { "speaker": "adam_sullivan", "time": "57:15", "start": 3435.12, "text": "I think I think the best way to think about it is this network is gonna become continuously decentralized and it's on a site level. I think a lot of people see the news around mega sites going up and think, you know, the entire network's becoming more centralized because two companies are putting up, you know, five hundred megawatts or gigawatt of power. When in fact, over the next three to four years, what we're gonna see is greater decentralization across smaller sites, and that, I think that's actually gonna take away a significant amount of volatility in what we've seen Network ExaHash, because for example, like when Texas, when the Texas grid becomes very expensive, you know, fifteen to twenty percent of the network comes offline. But Bitcoin miners going forward are gonna be focused on more decentralized sites, which are going to, I would say, produce more consistent Bitcoin production. More consistent Bitcoin production is gonna bring down the cost of capital for Bitcoin miners, and what you're gonna see are much more stable Bitcoin mining businesses in twenty twenty-eight than we've seen over the past seven years. in the United States. And so I actually think this is a long-term bullish signal for Bitcoin miners who are gonna be able to say, \"We can withstand extreme volatility in our business, we can withstand lower Bitcoin prices, we can withstand lower hash prices,\" and I think all of this is much, much more bullish than most people realize. Because the Bitcoin network is gonna continue to become more decentralized and miners are gonna, going to continue to ensure the long term security of the network." }, { "speaker": "stephan", "time": "58:51", "start": 3530.88, "text": "Great, well, thank you, Adam, for joining me. Listeners, links will be in the show notes. It's, corescientific dot com. Adam, thank you for joining me on the show today. Thanks so much for having me on. I hope you enjoyed the show. If you did, make sure to give it a thumbs up and share it out there with your family and friends. Check out my website at stephanelivera dot com, and I will see you in the citadels." } ] }