On The Brink with Castle Island - Amanda Fabiano (Galaxy Digital) on the North American Mining Ecosystem (EP.174)

Episode Date: February 3, 2021

Amanda Fabiano, the Head of Mining at Galaxy Digital joins the show. In this episode we discuss: Amanda's path to finding her passion in the mining sector Her role in leading Fidelity's mining initiatives Her views on the Bitcoin mining value chain and the categories that are most compelling Thoughts on the future of off-grid mining in the USA To learn more follow Amanda on Twitter or visit www.galaxydigital.io

Today on the podcast, I sat down with my friend and former colleague Amanda Fabiano, the head of mining at Galaxy Digital. Prior to Galaxy, Amanda was with Fidelity Investments where she worked in the Center for Applied Technology, and she also led the firm's mining initiatives. Mining is an area that's been endlessly fascinating to me over the years, and Amanda is one of the foremost experts on this topic. In this episode, we discussed the landscape for Bitcoin mining in North America. We talk about the initiatives that Galaxy is leading in the space, and we also talk about the future for off-grid, mining in the U.S. This was a fun episode. I do think you'll enjoy it. So without further ado, here's my conversation with Amanda Fabiano. Brought down by bad mortgage investments, Lehman,

which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more of Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called the Bitcoin. All right, so I'm very excited to have Amanda Fabiano on the podcast.

Amanda, thank you so much for joining the pod. Hey, Matt, thanks for having me. It's been a long time coming. We work together at Fidelity. So we share some common DNA in this industry. And you've moved on to really exciting things over at Galaxy. So I'm psyched to talk about it and it's like to talk about mining. So why don't we just start off and maybe you could just give a little bit of personal background,

how you came to be interested, excited in crypto and what your journey was. Yeah, sounds good. So I actually went to undergrad for sociology with a concentration in criminal justice. So I'm pretty far off from where I thought it was going to be in life. But I guess mining can get weird. So maybe all those criminal profiling classes came in handy after all. I never wanted to go to college. But I felt like I didn't know what I was interested in.

I came from a middle class, Boston family, and there wasn't really much of an option for me. My mother just said I'm going to college. So during school, I thought I wanted to be a criminal psychologist, so I naturally ended up at fidelity. Yeah, yeah. Well, it worked out of fidelity. Talk a little bit about your role at fidelity, how it evolved over time and how you came to start working on some of the crypto stuff. Yeah, Matt, you were a big part of my role at fidelity.

So I started working specifically on the crypto stuff at fidelity in early 2017, focusing primarily on education. And so Fidelity offers internal clubs to teach their whole employee base about specific areas of interest. And the clubs are resources for, like, globally Fidelity employees. And so I've been working on the Behavioral Economics Club, the Design Thinking Club, but they needed someone with experience, like building clubs to work on the Bitcoin Club. So I was voluntled that that was going to be my next project. When I started, I was really lost. I had no idea what this whole Bitcoin thing was. But I doubled down. and really just tried my best to learn this whole ecosystem.

And Fidelity really has a great support group. So you are really helpful in helping me distinguish between the signal and the noise of what was out there. 2017 was a crazy year. So I was able to get up to speed relatively quickly. And I don't think that anyone knows everything about Bitcoin. So I'm not saying that that's what happened. I have like a long way to learn.

But it was cool to share what I was learning back with all of Fidelity investments. And that's basically what I did through the club. That was an awesome club. someone's going to have to write a book about the early days at Fidelity. Some of the talent that came in to do presentations and some of the R&D experiments that were being run. It was just an awesome place to work. Yeah, I would even say the talent that came out of Fidelity.

We have basically a whole little Fidelity Mafia on the outside now. It's great. There's so many talented folks that were in and around that and still are. I mean, I think one of the, as I think back to my time at Fidelity, it's really crazy that we stayed the course and really that senior leadership, allowed the R&D groups to stay the course during 2015, 16, and 17. We were trying to figure out is Bitcoin a payments technology? What is private blockchains?

What the hell are these things? Is there any reason to care? And there were just troths of disillusionment that were pretty long there. And so I feel really fortunate that I went through that and that management was willing to continue to invest in that R&D. I thought it was amazing. Yeah, I think it's a great place to start a career in Bitcoin. And I think you get a lot of support from the top down.

So it's pretty special. I think sometimes it's really easy to operate in this vacuum of the crypto world. But starting as Fidelity where you basically have to zoom out and think about just like financial services as a whole and how this Bitcoin world fits into that. It was an interesting way to start because you always have this institutional lens with everything that you approach. Yeah, definitely. Maybe talk a little bit about mining.

So that was something that was a very early experiment at Fidelity. How did you come to be involved in that? what got you interested and where did you take that? So Fidelity had been mining Bitcoin since 2013, 2014 area, not area, timeline. And it was a small setup in one of their offices. And that basically just sat there. And then in 2017, under Katie Chase's leadership, we decided to look back into mining. So mining at that point, and it still is to some extent, had been like super opaque.

You really had no idea what was going on. But it is one of the most important parts of Bitcoin since it like, it's, like, it's, is the foundation of the network. So we said, hey, let's look more into this. We purchased machines from all the different manufacturers, looked into facilities both within the walls of Fidelity and externally. And it was just a great way to learn mining because we had this whole approach of like learn by doing. And then also trying to do things like buy these ASIC machines and prepay to some random Chinese company, like through Fidelity's procurement was a whole experience in itself. So that was fun. You probably gave a heart attack to a lot of procurement.

and risk people during the course of your time there. Yeah, it became even more fun when we started to do things on Zoom so you could see their face. It was just like the call of the quiet, right? You saw like their face be like, what are you talking about? That was always a fun moment for me. That's funny. One of the big events, I'd say that maybe there were a couple of big events that got it on the radar that Fidelity was doing mining. One was Abby's speech at Consensus.

The other one was a big event that you put on the mining summit. And a lot of people still talk about that. So you're going to have to do a version 2.0 here. But what was the kind of catalyst and the reason why you wanted to put that event out there and have fidelity be at the forefront of the mining industry? So Yuri and I, Yuri was my partner on the mining project. And we were really sick of everyone talking about how mining was ruining the world with its energy consumption.

And so the mining summit was our way of sharing back some of what we learned through our process of getting mining set up and just really change the misconceptions of what mining is. And so like energy, why mining energy consumption, it generally is not a bad thing. So energy use in itself is not a bad thing. I think where people get a little tied up or tripped up is just this misconception that we're going to run out of energy. So in 2019, this is a shocking thing that I found this morning. The U.S. energy production exceeded the U.S. energy consumption on an annual basis for the

first time since 1957. And then also in 2019, the Sichuan region of China, abandoned 9.2 billion kilowatts hour of hydroelectricity. So there's a ton of excess energy that just doesn't get used, but we don't think about it that way, I think normally. And I, you know, I feel for the idea of like if we were able to only use fossil fuels for all of our energy uses, yeah, you could think that energy was finite, that there was this like stopping ground of the energy production. But there is a downward trend in the coal production in the U.S. and an upward trend are renewables. And so each of those buckets, renewable and coal account for about 11% of energy

usage in 2019. So then if we know that there's this excess energy that exists in the world and it goes wasted, I think the idea of Bitcoin mining comes down to a matter of entitlement like Nick had mentioned in his article, the last word on Bitcoin mining energy consumption. And unfortunately, it doesn't seem like it is the last word at this point. It comes down to the question is the future of money, like what is the future of money and should it be entitled to use this energy? Yeah, I mean, from that perspective, I mean, I guess let's get right into this around this mining is wasteful because that's, I'd say the unn nuanced kind of amateur way to see cryptocurrency mining, particularly Bitcoin mining is just melting down the earth or something.

I'd be curious the way that you answer that and maybe you've already kind of given me a glimpse into that. You must get this question a lot. But I guess the first thing that I like to point out is, you know, it's wasteful compared to what. And this happens to be the cost to create an open source money that is censorship resistant, not controlled by a third party. And if there's another way to do that, then there would probably be another way to do that. But there just hasn't been. And not to mention the fact that the cost to run a central money system is also pretty exorbitant,

but it doesn't manifest itself in the same way. I mean, there are buildings, there are trucks, there are wars waged. So it would be curious to your reaction to that. It's just my answer is always, well, compared to what? It's wasteful compared to what? Totally. And I think that the issue is that Bitcoin mining is almost transparent to a flaw. You can audit it at any time.

You can look and see exactly how much energy is being used at any point in time. But if we compare that to something that is a larger industry like steel. So steel is literally in everything, right? It's in the buildings that we operate in, the cars that we drive, the trains that we take to work. The steel industry is world energy consumption is $20,000. and gigawatts. Wow. That's massive.

And what's Bitcoin? 10. 10. Okay. Wow. That's crazy. And so I think that it's just, it comes back down to like, who's entitled to use the energy.

And I guess I just always go back to like, well, who decides that? Yeah. One of the most interesting things I'd say about the mining space right now has been this idea that entrepreneurs are seeing this as a global energy auction essentially or a global money auction might be the way, a better way to put it, that if you can compete to mine Bitcoin at lower cost of production, you can have a chance at a lottery of winning free money every 10 minutes. So if you can find a way to be the most efficient. And so what that's actually doing is driving just a lot of kind of off-grid mining and renewables. Do you see this

continuing? Is this like a narrative that we should be talking about more is just how Bitcoin is promoting more renewables and Bitcoin is promoting more energy efficiency? Yeah, for sure. So I look back at the Cambridge Center for Alternative Finance Research earlier this year that they put out. And 76% of miners use renewable energy and part of their mix. And the 39% of miners used total energy consumption was all renewables. And so in my eyes, like, Bitcoin mining companies focusing specifically on renewable energy are scalable long term. So mining companies that focus on, you know, that run on fossil fuels, I don't think in

the long term they'll be competitive, specifically in the U.S. region. So we know that we have a new administration coming in. We know that it's not a secret that they have on their agenda to reduce the fossil fuel usage. And I just think that one way this could play out is seeing some type of tax that goes on to companies that use fossil fuel energy, not just for Bitcoin mining, but just in general. But if we play out that scenario for fun, a Bitcoin miner that is using coal, they get this added tax onto their operation. They're not as competitive in comparison to Bitcoin miners using renewable energy sources. And at the end of the day, Bitcoin mining is a zero-sum game. So you're competing with everyone

else on the network to be the lowest cost provider. And if you're not, the game's over for you. Yeah, it's really interesting. Well, I want to get into a lot more detail on kind of what that landscape looks like and talk about some of the leading companies. But maybe to set that up, you've taken a new role at Galaxy. You're overseeing great many things in the mining industry. So tell us a little bit about what that role is and what Galaxy is up to in the space. Yeah, it was weird to leave like the confines of the fidelity walls, but it's exciting. So Galaxy, to me, was really appealing because it had touchpoints in mining. It didn't have a formalized group. So right now, Galaxy has groups focused on trading, investment banking, asset management,

principal investment. And my group is able to plug into all of these different groups and build these premium products for miners. So we're at the beginning phases of working all that out. I just started here in October. But we've gotten a lot done. so far. What was really important to me was to talk to miners and really just understand what their financial needs were. Like, what do they want? What's missing? Where can we help? What can I build to make them be more financially stable with their money? And so my main goal at Galaxy is really to create these minor focused products and projects that will help the long-term sustainability of mining in North America. And so when I think about like what's considered success in mining,

that's always changing. And so it always requires this constant monitoring of the ecosystem. and just really being engaged, like talking to miners, even mining ourselves is also something that we've set up. So we do that for a couple of reasons. It's one, it's a damn good time to be a Bitcoin miner. But it also is important for us to understand the needs of miners to be able to build financial products and leverage the whole breadth of what Galaxy has to offer. Yeah, that's fascinating.

I mean, I guess if you look at this through the lens of other industries, agriculture, or actual, like, mining, non-criminal. crypto mining. There's a swath. Yeah, it's a small little industry. There's just a swath of financial services that exist around allowing producers to hedge and take financial positions and things like offload risk. And I guess what you're kind of hinting at is that's just really nascent right now in our industry. It is. Yeah. And I think people have been working on it. It's just not there yet. And I'd love to be able to help get it there. Yeah. Well, you tweeted out something that I want to kind of dig into and really talk about some of the categories that are interesting.

A lot of listeners of the podcast will be familiar with mining, but maybe not the different components of the stack. You've kind of laid out the North American Bitcoin mining landscape. We'll put the link in the show notes. But I'd love to maybe just take a tour through the different categories and get your perspective on some of them. This tweet actually made some people upset, which I didn't intend to do. But it's not a comprehensive list of every single company that exists in each one of these buckets. It's just as I had been like exploring mining, I just started to bucket things to make more sense of it and like where people sat. So not a comprehensive math for all the people that were upset, but more of a way that I started to bucket it myself. So we have,

you know, a few different versions of these charts because I think it's difficult to say that like one group is doing one thing. And so if we start, with like the ASIC supply chain, we have ASIC manufacturers and sellers. There are not any North American based ASIC manufacturers on this map. I tried to only put people on there that were actually selling to North American miners. So you have like FitBMain, MicroBT, in a silicon, Canon, and eBay. Also in the ASIC supply chain group, I added in sellers. These are people that are selling secondary hardware. So there's the ASIC manufacturers that are selling primary hardware, and then there's people that sell on the secondary market, which has,

been really fascinating to watch over the course of the last, like, a couple months with Bitcoin price going up. A lot of the sellers have like either a website or they're on telegram. So on like Saturday mornings, I just scroll through telegram chats and think about like how ridiculous the prices of Bitcoin miners have been. One in particular, the S9, which was basically dead, right, after the happening. It was being sold for like 20 bucks in May. Now I saw one last week for $499. So that's just a race, driven by the price of Bitcoin going up. Supply and demands, right? Yeah, that's crazy.

Which is pretty incredible. So I think that the ASIC supply chain, the manufacturing pricing, the seller pricing is something that's super interesting, but it's not something that is science yet. I want to talk a little bit about that. Talk about these ASIC manufacturers. How do their businesses run? How are they building these ASICs?

I think there's a novice perspective to look at this industry and say, all right, if I want to get into mining, I'm just going to fire up a mining operation and go out and buy a bunch of basics, but it's not that simple. So maybe talk a little bit about how they run and how the fobs come into play here. Yeah, sure. So hardware is really interesting because there's multiple different steps to it. And the hybrid manufacturers depend a ton on the foundries, which is there's two in the world like TSM and Samsung that primarily make machines for BitMane and micro-BT. And those boundaries, like the ASIC manufacturers are super dependent on those boundaries for everything. They have to prepay for their space at the foundry. They're only given X amount of space.

The most interesting thing is as new nodes come out, they have to come up with new chip designs. And the chip design might not work. And they don't know until the dye is cut. So there was a rumor that Bitmain had lost like $60 million last year. And I think we could deduce that it was heavily related to R&D for creating new ASIC machines. So the ASIC machine company pre-Pays the foundry. They have to wait on the foundry for space. They have to wait on the foundry for like when it's going to be assembled. And all of that gets trickled down to the N client.

So like as an N client, I say like, hey, I want to buy machines. And it's like right now that's actually a whole other story because the machine supply crunches ridiculous. But in the normal world, I would have to reach out to them. they would give me like a PO and like it would be three to four months from then until I would get the machine at my facility. Like I said, like it all just is dependent on the foundry and that's how long it takes to create these machines. Talk a little bit about the foundries. I mean, the foundries have non-crypto businesses that are just much bigger, which I suspect is why they're

saying you only get access to X amount of capacity and we need it prepaid. They just don't see crypto's a big thing. Do you envision that that will change? And I guess I'm curious your perspective on will we see Bitcoin mining companies try to build foundries? Is that realistic? Oh, man. That would be amazing. But so if we think about the foundry level, there's only, I think it's like two companies in the world that make the machines for the foundries. And according to TSMC's like 2019 report, there's only like five companies in the world that make silicon for the machines for the foundry. So it's a really concentrated area. But it's not just like you said for Bitcoin mining. If you see out like Apple uses TSM, Qualcomm. There's all these large companies they're using these

boundaries for all of the things that we are using right in our everyday life, your iPhone, your computer, et cetera. And minors are just part of that. I was just really surprised to see at the beginning of last year, TSM had come out with saying that they were putting out a smaller node and that Bitman was one of the seven clients that they would allow to like run on the node. So I think that maybe it might be getting a little bit better. But then you flash forward to, to now, and all the manufacturers are sold out basically all of 2021. So I don't know actually how good it's getting for us. And the manufacturer sellout is just because I think that there's this perfect storm

of things happening in mining. You have the price of Bitcoin going to moon. Everyone loves Bitcoin mining when the price is high, which is the worst time, in my opinion, to get into Bitcoin. You want to get in a bear market. You have large companies, like all of the public companies buying that supply of the machines over the course of the year. And then you have other big companies coming in with large balance sheets that are able to

buy a lot in bulk. So I guess talk a little bit about how these ASIC manufacturers interface with mining pools and then maybe as we move downstream and how you see the market moving into kind of the facilities and prop mining and so forth. So I think that I separate out the ASIC supply chain in its own from pools, but there's like Bitmain who owns BTC.com and antpool. So I think that's the only one that has a connection between those two little worlds. The pools that I've listed here are just all North American-based pools.

And so these are companies that have just like North American pools. And one thing that has been popping up lately is this idea of like a KYC pool in North America. Yeah. Talk a little bit about what that is for those maybe who haven't heard about that. Yeah. So on the surface, the idea of a KYC pool could really provide comfort to the institutional investors who may be concerned about potential regulatory. backlash against mining in general. But this development, it has like the potential to undermine

fungibility in Bitcoin and also enable this like censorship and like the censorship resistant network. Generally like even if a mining pool approves only like a certain set of transactions in a block, they're still appending that block to Bitcoin's blockchain, which is global, it's unodited. So it's one of those things where like I just wonder like how as people start to learn more about pools and what they can do if it's something that will be useful to them. Putting on like an institutional hat, I could see how you would want to be involved in a pool where you know everybody else that's involved in it. There's pools out there already that are compliant with like the OFAC restrictions.

So slash pool, for example, they don't mine with OFAC addresses. This is something that has been talked about a lot in the industry around. Let's say that you're paying a fee, you know, an outbound fee and it gets processed by a minor that's in a sanctioned regime. Do you think we're kind of past that as being a key regulatory concern? I mean, it's probabilistic on whether or not that block would be mined by someone in a regime that we're not friendly with. And you don't have any basis for making that payment. So is it really kind of necessary in your opinion? No. Yeah. All right. I think we're on the same page. No. And like I just think like Matt, even just like thinking about our background, right, like where we came

from if you tell someone that there's a KYC pool, it sounds very appealing. But when you dig in a little bit deeper and you're like, well, I don't know if this actually makes sense for like how Bitcoin works. Yeah. Isn't it just like a private blockchain? It's just like a private blockchain doesn't make any sense. Yeah. I know that that's your favorite topic. Yeah. Well, that's interesting. Hopefully that doesn't gain too much steam here. But maybe as we move into kind of like the facilities, this is a category that I find very interesting because it's evolving really quickly. So talk about the categories within this bucket and what these companies are trying to do. Yeah. So I bucketed into four different categories when I think of mining facilities.

There's hosting. So people who might mine on their own behalf, but they really, the majority of what they do is host for other clients. So what I do at Galaxy, we don't own our own facility, right? We like send it to a hosting facility, have a contract with them, and they take care of all of it. That's like how I think of hosting facilities. And then you have prop miners. Prop miners are people, who mine basically on their own behalf. So you have here, like, they own their own facility. So Greenwich, for example, grid, they both own their own facilities. Then within the prop mining bucket, I added in the publicly listed companies, because that's a little bit different. It is still prop mining, but it's kind of like they're in their own subcategory within prop mining. And then lastly,

we have the off-grid miners, so people that are using off-grid solutions to mine Bitcoin. And so the two areas that I've been really interested in lately have been publicly listed companies, it's been crazy to be a publicly listed Bitcoin mining company. And then just also in general, the off-grade mining solutions are really interesting to learn more about. So within these kind of categories of prop mining and publicly listed companies, am I right in understanding that a kind of a core competency has to be on the sourcing side? So they need to make sure that they're always at the front of the line getting new machines from the Bitmans and no silicons of the world. Yeah. So I think that there's procurement has become an ongoing issue for sure. And then you also have like these

companies being able to buy directly from the manufacturer in that seller bucket. But it's not only just the machines. It's like being able to have the competence to build out the infrastructure. So mining is really just like the physical world of Bitcoin. So you have to have the capability to build out a data center, to understand mining, to understand networking, and to keep it all running. So it's really cool, everything that they can do. On that sourcing piece, how do you stay at the top of the line and make sure that you're staying up with the refresh cycles. And what are those refreshed cycles in terms of how the hardware is evolving? So I would say that hardware can last about four years now. It really is dependent on the current

market conditions. So like I said before, like S-9s were considered basically dead because of the market conditions after the halving. But now like you should plug in an S-9 for a high cost of electricity and you're still profitable. So I think that they all have to be like relatively on top of when they're going to have a refresh in their cycle. I've seen it done a couple of ways where people are refreshing all at once or people are like doing it in batches, which I think seems a little bit more manageable. Yeah, that makes sense. I'm just fascinated by kind of how these businesses are run.

And we've talked to a lot of entrepreneurs and some on the podcast actually. What's your take on how these entrepreneurs and these companies are just managing their FX exposure? So are they kind of naturally long Bitcoin, this like a levered play on the underlying or are they managing to a U.S. dollar balance sheet? How do they think about it? So remember how I said that I started interviewing miners when I came to Galaxy? That was one of my questions because I was like, what are you doing? Are you selling your Bitcoin all the time? Are you holding it? And of like the 10 different people from like a lot of different categories

and mining that I interviewed, they all had a different strategy. There was daily liquidation. There was hold as much as we can, only sell what we need to for operations. I think there's some people that can use cash for operations instead of using the Bitcoin that they mine. So I don't think that there's one specific strategy that works. I think it really is dependent on your setup and how you operate. And what about other types of assets? I know you can't mine Ethereum with these machines, but do you have a view on whether or not there are players that are Bitcoin only versus expanding into other types of assets? It seems like some of them will do like HPC computing. That seems to be like something that a couple people have talked about with me.

It's not the same setup for a Bitcoin mine. Like HBC computing requires things like redundancy power, etc. Like Bitcoin mining is just like a chicken coop with four walls. And you're just like, I need low cost of electricity. And granted, there's like, it's much more advanced than that. I don't want to like diminish what miners have done or built. But I just think that there, it just makes more sense to use A6 and mine Bitcoin when you have super low electricity.

And so to get like caught up and doing other things, I don't know, I might have like blinders on, but it doesn't seem like it makes the most sense. She's spending so much money on these basic machines to begin with. Like, that's the only thing they're doing. You have to be committed. Yeah, there's kind of singular purpose. Yeah. It's not like a GPU facility where you could do rendering with the GPUs and you're making tradeoffs.

Yeah. And like I listen to Brian from Cor Weave on your podcast and he does that. And I think it's really cool. But that's, it's just like a different business model than Bitcoin mining. One of the topics that I'm fascinated with is this off-grade mining. And we've had Chase from Crusoe on the podcast. So maybe just define what's going on here in this category and what are some of the more exciting developments.

It's kind of interesting because I saw it pop up with upstream data. I think first where Steve was making these boxes for oil and gas guys who had the stranded energy. He was capturing it and mining Bitcoin with it. And it's fascinating because you can see how much energy is like off-grade miners are capable of using. It's like you can go to a website and you could see like here's how much like energy is being used or how much like methane is being flared.

And these companies have figured out a way to monetize that. I think that's really cool. The thing that I think is difficult with that versus large mining facilities is it seems like there's more upkeep. So if you have like four different of these boxes and like four different locations and they're far apart from each other, it's not like you have two people going into like one facility because they're in remote areas. I don't think that they think it's that big of a deal. I mean, what's the logical conclusion to this? So we're going to start to see Bitcoin mining equipment at the bottom of like Niagara Falls here. Is this?

That would be awesome. How far can this go? I do think that this is like the beginning of the energy industry starting to get into Bitcoin mining. I think that 2021 will see a lot of traditional energy groups raising their hand and being like, hey, like I might want to start doing this, but I just don't really know where to go. So I think that that will be like a trend that we start to see this year because it makes total sense. Like as an energy producer, if you have excess. energy, well, what do you do with it? Yeah, it's free, really subsidy for something you were already

running. I think that's a pretty good layout of some of the companies in that category. What about the financial products? I mean, none of this stuff works without just having the ability to do derivatives and lending and actually having equity investors to begin with. So talk about a little bit about how you're seeing that space. Yeah, so the derivative space, I think it still needs a lot of work. Actually, I think all of the financial product space needs a lot of work for miners. Yeah. I think there's like this concept of like there might be a seller, but who's a buyer if you're selling things like cash rates? And so I think that the industry still needs to mature a little bit to see that coming. So I guess more to come on that bucket in itself.

But for the lending and investor bucket, when I think about lending, these companies do a lot of minor finance lending. So we call it MyFi at Galaxy just because it's like a fun play on DFI. And so that is basically like you buy the machines. I'll give you money for them and you pay me interest because the machines cost a lot of money up front. And I think some of the companies get into like infrastructure development or infrastructure backing too. And then generally like just investors in companies, I think that that's a bucket that's more like infrastructure. So for example, like CMT, I think they invest in Caruso. I'm not really sure.

But yeah, we'll see. Sorry, Colleen if that was a secret. But yeah, so you saw a square come out with saying like, hey, we want to invest in mining companies and we're dedicating like 10 million dollars to that. We're definitely open to investing in mining companies. coin shares has done some investing into mining and then obviously like foundry has been a behemoth of mining investing yeah this derivatives bucket is really interesting because if you look at the history of the mining industry the companies just turn over so much or have turned over so much and my perception I'd be curious to get yours is that a lot of it is just these people are just getting blown out on the

risk side and they get on the wrong side of it and they're not able to offload some of that risk during the course of their normal operations they didn't have that yeah so all of the people people that are like getting in now that are like starting at the beginning of a bull cycle and they're like buying machines for a large like much more than they would have last year and the economics look really good those might be the ones that could use derivatives in like a year from now but it's just like who's going to buy on the other side of that and that's the part that I think still needs a lot of development I mean all of the companies that are getting in now I guess like my goal is to buy all the machines that they can't keep in a year from now yeah so is that how you think it'll work is

that there's kind of a bust and then there's a lot of cheap machines available? Yeah, I hope so for my own personal good. But in general, I think that the ecosystem is totally different than where it was in 2017. So I think that it's a little bit more mature. So you see people making more mature plays and like all the public companies, like I said, buying machines throughout the whole year. I think that maybe in 2017, one, a lot of them didn't exist. And then two, they probably didn't have the upfront capital to do that because you are

paying upfront to the mining manufacturing. How do you think about the other side of that market? I mean, we've had Tim Kelly from Biduda on talking a little bit about the sophistication and how that's evolving in terms of who would be the other side of that trade. Are you seeing more kind of family offices and institutional investors looking at some of these is just maybe a lower cost way to acquire versus spot? Is that kind of what you'd have to believe to be on the other side there? Yeah. So I guess I don't really ever touch that other side. I kind of stick with like building the products and then making sure I'm building the right product and mining Bitcoin on my own. I think there's been an uptick from asset management

group and like asking questions about mining, but I'm not convinced that they would like be really interested in purchasing at this point. I think there's still a lot of education that needs to happen to get them comfortable. Yeah. Well, that makes a lot of sense. And then maybe talk a little bit about some of the work that some of the larger investor groups like Square and others are doing in the space. Yeah. So Square is looking to invest as like an ESG play. So investing in companies. I'm investing in companies that, and this was part of what they said in their announcement, like green companies that are looking at mining that are green companies, I guess. That's the best way to say it. I think that it's really cool that they're starting to back mining because of all of the work

that they're doing generally just in Bitcoin. They're backing devs, right? They're giving grants out. They have the whole square crypto. I mean, I buy Bitcoin on Square. Basically every time I see anything happened in the market, which is daily now. And so like I think that they're like a really cool company to come into it. It's like a huge thing. signal to the industry that there's just this massive company that wants to start backing miners, which I hope will start to encourage other companies to start investing in mining. Yeah, let's talk about that. So what is your view on sort of the investor basis?

I mean, venture funds haven't been super active, I'd say necessarily. I mean, you point out some that have CMT, Galaxy, obviously. But who is investing in some of these companies that we've just kind of walked through? and why don't you think, I guess, venture funds have been as active? Yeah, so, and I think you're way better suited to answer this than I am that. And I know that I've sent you a lot of mining companies that you've said absolutely not to. So, you know, I think that fundamentally Bitcoin mining is not a VC play, because mining requires this constant inflow of capital for machine purchases and hardware refresh.

Well, that is machine purchases, but for machine refreshes and then also infrastructure buildout. And so there is not like this like, hey, I invested in you and now you can scale indefinitely, which is like what every VC wants is to find that unicorn that can do that. Mining is this like constant requirement to continue investing. And I think that that's why VCs are generally turned off by it. But I mean, you're the VC in the room. So you tell me if I'm wrong. Yeah, this could be fun.

I'll tell you some of my common kind of worries. I'd say my number one overall hesitancy has just been a circle of competence as an early stage financial technology investor and this being a little bit outside of it. What was the weirdest mining company you talked to? There have been so many. I don't know. There's a lot that don't exist anymore. Yep.

There's a lot in like foreign jurisdictions that probably are no longer running. One of the things I guess that's top of mind for me from perspective of VC investor is just this ASIC manufacturer bucket is just really tough to deal with. And so if you're not kind of making the equipment, yourself, then you have this key dependency. And who really knows if you're going to be able to be at the front of the line. And if you do miss one of these refresh cycles, my perception is that you're just really screwed and that you're kind of, you know, if you don't have the latest equipment and you don't have access to it, you can't buy it. You're going to be really challenged.

So I think there's a kind of a choke point there in my perception around ASIC manufacturer. So I don't know how that changes. Like maybe we're not going to start to see more ASIC manufacturers until the foundries start to have more capacity. I'd be curious to your point of view on this. I just think it makes it operationally challenging to procure the miners themselves. Yeah, it definitely is hard. I think that if you think about like refresh cycles, I think it really is dependent on like what your cost of electricity is. So at the beginning of mining, it was that you constantly had to refresh this ASIC machine

to be competitive. And then it kind of switched. And it was like you have to refresh the ASIC machines to be competitive, but you have to have super low cost of electricity. So like when we do, like I said, we're starting to get into minor finance. And when we do that, we have to do like this whole like credit underwriting. What I can offer one person for a MiFi deal is completely dependent on their operation and their availability to be able to actually pay me back.

I don't know. That's like a side note, but it is kind of even difficult to finance these types of groups because there's not one size fits all approach, right, in mining. So yeah, I think that like we went from hardware refreshes to hardware and electricity to now like hardware electricity and also I hope you can get the hardware like best of luck. So it is a really difficult area to invest in. But the thing that kind of drives me crazy is that we have all kinds of people investing in products being built on top of Bitcoin.

Like we have people investing in like things that are being built to the side of Bitcoin, right? Like underneath Bitcoin. But no one, everyone just thinks that someone else will invest in mining. And it always like felt like two ends of the spectrum to me because I'm like, we care so much about Bitcoin that we're investing in it, but we're not investing in mining. Yeah. I think you're kind of hitting on a key.

point around just the capital structure and how these things ought to be financed too, because you don't see a lot of venture funds investing in power plants because the fixed costs are just so high, and that's not the best way for a venture fund to invest early in a power plant that's so capital intensive. You get diluted over time, and it just doesn't work. And so maybe to me, the lending side of this becomes more important and project finance almost to some degree around getting some of these things off the ground. I just feel like venture is better equipped to finance software businesses that can scale with low marginal costs and don't have these huge cap-x issues. Yeah, that makes a lot of sense. One thing that I've been focusing on lately is just publicly traded Bitcoin companies.

So every major publicly traded prop mining Bitcoin company has outperformed the price of Bitcoin over the last 12 months. Yeah. They're getting that levered play right. It seems at the right time. So they're able to access like these public markets and that's how they're able to raise money to buy everything that they need to buy. So maybe mining isn't a VC play, but it's like a public market play. I don't know. Well, I do think that there are good examples in categories that we're emerging. I mean, a lot of these off-grid mining companies are venture-backed and I think that are doing really well. And I do think that there's a software angle here that also gets interesting around mining pools and making these things more efficient.

I mean, there aren't a ton of companies out there doing things yet. But if you believe that this is going to be an enduring category, which I do, you'd have to believe that there will be some kind of picks and shovel software plays as well. Yeah. The interesting thing about the software side of mining is most people just want to build it themselves. It's like even at Galaxy, like we have like our own little like way that we track our own mining machines. And like I wouldn't necessarily pay for someone else to create a service for me if it's just like a simple script of me tracking it myself.

I think that there has been a lot of people who have tried to get into that. And I think that a lot of even just co-locations, they have their own monitoring systems that they provide for their customers as like an added bonus service. Yeah. What's your take on non-Bitcoin assets that can be mined? I mean, one thing that some people are talking about is what would a Gensler SEC look like where token sales are just more difficult to execute upon and the fair launch comes back into vogue. And that would be hard to create, like, the dynamics around Bitcoin. The reason it worked is

because no one really, there wasn't an industry there. And it was allowed to kind of grow from CPU to GPU to FPGA to ASIC. But are there other assets that people are paying attention to? Is this a thing? Yeah. So there's like some pools that are considering in Luxor is one of them. It's a North American base pool. And they do like profit switching off of different coins that can use ASIC machine. And I think it just is dependent on like the end user and what their goal is. is the goal to be profitable or is the goal that you care about the network that you're mining? And so I think that it comes down to like really the end user and what they're willing to do with their own machines.

What's your thoughts on kind of the China FUD story around, hey, all the mining's in China. China controls Bitcoin. Brad Garlinghouse has done a lot to perpetuate that. Oh, yeah. Yeah, that was a fun one. So I don't think that the actual farms are an issue to me. There's been a lot of rumors this year that there are more and more Chinese. miners are looking to find facilities outside of China. And so I always go back to the Cambridge

research and they said like 65% of the mining machines are in China. And then like United States was at like 7%. Russia was at 6. So I don't really worry too much about the facilities. But I do worry about two other things in China. So one is the centralization of mining pools. And the other like we talked about is the centralization of hardware. So we look at like a mining pool chart. There's a few big players and then there's some little players. So if we take like a couple of the big players, for example, like BTC.com and AMP pool, they're both owned my bit main. They're also the only investor in via BTC. There was Karim at Coin Metrics. He found this really cool thing earlier this year and we were suspected that finance pool was actually a white label of BTC.com. And so what

Karim found was that they were even like finance pool was using BTC.com pool addresses. It's now been changed, but they weren't even using like their own pool address. which was kind of fascinating. So I don't know what the relationship between finance and BTC.com is. It's rather unclear, but something seems a little weird there. I just feel like mining pools, there's like a group that are like, it's like very centralized and the majority of it is in China. Are you following and I'd be curious the status of some of the proposals?

I know Matt Corallo had a proposal around addressing some of this minor pool centralization, BetterHash, yeah. So BetterHash has been adopted by Stratum v2, which Sleshpool has been trying to. to push out, which will give like a little bit more ownership to miners that they're able to assemble their own block. We actually have, this is a spoiler alert, but a blog post going out about this in the mid of February. So happy to share that with you once we get it out. And that strikes me as something that would really address a lot of these key concerns, because if the individual miners can take control over governance type decisions, then it doesn't

really matter how set. Yeah. Yeah, I think it will definitely help. And I really liked how I think Macarillo had put that idea out a long time ago, but it made total sense that a pool was the one to pick it up because miners just, they just are making their money. They're not like worried, I don't think. I think maybe now there might be more people that are worried, but at the time, like they were just plugging in their machines and mined in that sweet corn. So we've just done kind of the waterfront view of the different categories and mentioned a couple companies, but I'm curious where you're spending most of your time now. What kind of categories do you find the most compelling? And I'm curious if there's any companies that you're spending a lot

of time looking at as well. I'm a huge fan of Hoddle Ranch. So they're building a one gigawatt facility in West Texas. So I spend a lot of time with Jesse there. I spent a lot of time with Witt Gibbs, who is building Compass, basically like an Airbnb of minors. I think that you know both of them. So I think that both of those areas are really cool. Those are like, I'd say like two that I like a lot. I've also like been just spending a lot of time with generally a lot of minors and seeing what we can build for them that will help them be more successful. So that's been a lot of where my time has been spent. So I think since I started, I've talked to over like 60 companies. Wow. You know, and I'm an introvert. I need to like go to bed like for the whole weekend to recover

from that. We need to have another mining summit. Yeah. That would be really cool for someone else to put on. Yeah, for someone else to do. Yeah. What resources do you find yourself recommending to people that are trying to get up the learning curve on mining? So Luxor's hash rate in there. And is one that I really love. They have a resource page that's dedicated just basically to mining. They also have a way that you can track the rig prices. You can see how much the machine costs over time. Obviously, I've mentioned Cambridge Center for Alternative Finance multiple times. I like salivate over there research a lot. I also really enjoy hash rates weekly mining newsletter. So I think that they are able to keep me updated on what's happening week-to-weekin mining. It's kind of shocking how much actually happens

when you look. I do still point people to Fidelity's Mining Summit. I think it's like a great like initial, hey, here's how like we've mapped out the space. And then I can't come on this pod and not mention Nick. So like his final thoughts on why Bitcoin mining doesn't ruin the world is still like super relevant even now. And then like I said, like we have a technical guru Rachel who will start to publish some blogs. She did one recently on how like miners assemble a block cutter. So it was really good. And so we'll share that like on Twitter when it's ready. That's amazing. Well, you're up to some really fascinating stuff and really leading the way in the mining sector.

Where can we point people to find you on the internet? Where can we send them? So definitely actively trolling on Twitter. I started to join some clubhouse talks. I think that that's been fascinating. I'm not sure how long outlast in the clubhouse world. But yeah, so Twitter, Clubhouse, I'm always around and available to chat about mining. Well, I'm so glad we did this.

This has been a great episode, Amanda. Thanks so much for joining us. Thanks, Matt, for having me. Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island. To listen to all of our podcast episodes, please go to On the Brink dashpodcast.com or just click on the tab in our website. Thanks for listening.