On The Brink with Castle Island - Anders Larson (U.S. Bitcoin Corp) on strategic miner decision making (EP.270)

Episode Date: December 20, 2021

Anders Larson, head of strategic finance at U.S. Bitcoin Corp, joins us to talk about how miners make decisions and allocate capital. In this episode:  The Wharton class of 2018 Are Bitcoin miners clogging up the chip supply chain? Why Bitcoin miners are 'tier 2' customers at foundries The scale of US BTC operations in terms of hashrate Why US BTC has been so quiet historically How US BTC targets renewable energy Which renewables are easiest to find Is there any truth to the story of Bitcoin improving the economics of renewables? Why ASIC depreciation is slowing, and how that affects the viability of different energy sources The relationship between Bitcoin's carbon intensity and ASIC depreciation period Can ASICs last for 5 years? How does US BTC think about uptime on their units? Why lower uptime means that you have cheaper power due to demand response How US BTC thinks about hashrate growth and why they are more conservative than their competitors Why Chinese hashrate is not completely eliminated The state of affairs in Kazakhstan How Anders thinks about political risk in mining How policy logic informs selective mining bans and mining subsidies How Anders sees miners vertically integrating with energy firms How Anders thinks about proposed state bitcoin mining bans in places like NY Why mining bans in the West are often counterproductive The relationship between energy consumption and civilizational progress How Anders thinks about the energy cost debate Whether the CBECI hashrate distribution estimates are reliable Why the US having a large share of hashrate isn't something to be concerned about How mining could become a states rights issue Does US BTC project fee growth in their models? Sponsor notes: Compass Mining is the world's first and largest online marketplace for bitcoin mining hardware, hosting, and ASIC reselling. Start mining your own bitcoin by visiting compassmining.io This episode supported by Public.com. Start investing with as little as $1 and get a free slice of stock up to $50 when you join Public.com today. Visit public.com/onthebrink to download the app and sign up.

Hello and welcome back to On the Brink. I'm Nick Carter. This is the mining mini-series. This episode is brought to you by Compass Mining and Public.com. More on them later in the episode. Today is December 20th. Hope you're all enjoying your holidays. Hope you managed to take this week off. If not, let's dive into some mining topics. I'm sitting down with Anders Larson, the head of strategic finance at US Bitcoin Corp, which is a large Bitcoin. coin miner, which hitherto has not done a lot of PR, not very well known. So this is a very illuminating episode. Anders has an encyclopedic knowledge of mining and as one of the key decision makers for a large mining firm is able to speak in a very detailed way about how these companies make decisions. We cover a lot in this episode. Asic depreciation, how they target

renewable energy, how they think about uptime on the units, the political risk in mining, whether Chinese hash rate has been eliminated or not, what the effect of future Bitcoin bans might be. This is a very detailed and informative episode, yet another in the mini-series. Let's dive right into it. 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 into 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 a Bitcoin. Bitcoin. Hello and welcome back to On the Brink. This is the mining mini series.

or perhaps we should call it the macro series. Wait, what's the opposite of mini? The mining large series. Because it's actually just never going to end. We're going to do the mini series forever. Today I have a very eminent guess. Andres Larsson, head of strategic finance at USBTC. Is that right, the Bitcoin miner?

That is correct, yep. I was getting the name wrong before. And also an investor at Cavalry Asset Management, which makes investments in a number of things, including Bitcoin startups. So, Anders, welcome. And why don't you tell us a little bit about yourself and how you got to now? Yeah, yeah. Well, thanks for having me on, Nick. So a little bit about myself, you know, got into the space broadly in undergrad, I guess a bit over half a decade.

I guess a bit over half a decade ago now, really came out of all the game theory research I'd been doing previously at the end of high school in the beginning of college. So continued learning in the space that way. From a professional standpoint, I went to traditional byside firms where I covered semiconductors

and then anything crypto-related at those shops. Started a tiger cub called Matrix and then more recently moved to cavalry, which as you mentioned, is a traditional hedge fund, but we have an entity now Cavary Crypto, which I manage, which makes investments primarily in the Bitcoin space, but we keep an open mind to anything in the area. We are investors in USBT, and as you mentioned, it's a little bit funny how I'm almost working

two jobs, but I was essentially lent out to USBTC, which is, again, one of our roles so we're investors via the Calvary Crypto Fund. But I was lent out to sort of help scale and think about investments and growth decisions as we rapidly scale the operations. You're a busy man. You also had, you're part of a very eminent Wharton class of 2018, if I'm not mistaken, which has several crypto luminaries. Yeah.

Among your colleagues there, Yassine, right, if I'm not wrong. Yep. The famous Yacine and Derek Sue. Derek Shoo. He's also, who's been on this podcast. if I'm not misremembering. So that was a good year. It was.

Derek was actually my college roommate and teammate as well. So I certainly know him very well. Awesome. So we're here to talk about mining primarily and how USBTC makes decisions. I think, you know, that's kind of, there's not that much discussion around how miners decide whether to take risk on or off, how they think about allocation. And that's what I'd like to get into. Also, USBDC has hitherto been relatively unknown.

So I think it would be good generally to get your perspective. Now, before we start, you said you covered semis. What do you make of all this chatter about Bitcoin miners clogging up the semiconductor supply chain and, you know, depriving, you know, young Johnny of his Christmas presence and his motorized fidget spinner or whatever it is the kids get these days. Yeah, no, I've seen those reports and all that stuff. I mean, from Bitcoin mining specifically, I mean, it's simply not true. All these ASIC manufacturers are Tier 2 customers. They'll never be able to bid out people like Apple, Qualcomm, anybody else who wants wafer allocation from the TSM.

the Samsung's this mix of the world. So they just, they won't get the allocation ahead of them no matter what they want to pay for it. So it's just simply not true. Bitcoin is not clogging up the supply chains. There are a lot of other issues that are clogging it up. COVID transformation, supply chain issues, all those things. Bitcoin mining is, is certainly not the culprit. So what makes a buyer a tier one or tier two client?

I mean, Bitcoin is certainly a large, you know, like the Bitcoin mining manufacturers bit main. They're large firms. I mean, billions of dollars worth of orders. What makes them second tier? Reliability of the orders. So people like Apple, even in downturns, like are always ordering, right? Invidia, broadcom, Paulcom.

These are the stuff like Volkswagen, things that go into your cars, like the essentials. Bitcoin, they still see TSM. And rightly so, especially after the last bear market, as a very volatile industry, that orders can stop pretty quickly and almost like completely freeze. And so they've seen that happen before where Bitmin had to cancel a bunch of orders. They weren't happy about that. Now you have to pay cash up front due to that history. But it really comes to the reliability of the revenue stream.

And so these other tech giants and things that we use all the time have priority. So does that mean effectively the Bitcoin miners just get cabins. when it's available and then when it's not there just shunt it out and and don't really get allocation They it's certainly there's certainly some of that dynamic I mean they can get some reserved allocation But it's not that notable as a percentage of the you know chips coming off the line But yeah if it's a really high demand season like the end of last year or the beginning of last year They were really out of luck for getting any upsides in allocations so that that's that is generally the dynamic yeah gotcha well certainly a different story from what we hear in the

press about it now in terms of usbTC what has kept the firm so low profile to date i mean i think a lot of folks even smart about mining would have a hard time uh identifying you guys so what what explains that well one it's a relatively newer firm uh it was incorporated technically at the end of 2020 so um although the founder and CEO has been in the mining space for five years now, at least. He helped with riot build out their platform. And it's also intentional. There's no need for press. We don't have really customers. Our customers are our investors. Our investors know us very well. They know our sites well. They know the team well. So up until this point, there was really no reason to start putting a more public face on it.

And what can you tell us about the scale of your operations both now and sort of in 12 months time? Absolutely. So today we have around one exahash online. And we plan on scaling that to nearly 10 ex a hash by the end of 2022. So really rapid expansion. We have a good footprint and roadmap as to how we're going to do that. I can't get too specific on the energy sites that we're looking at just due to competitive reasoning. but that is sort of the growth trajectory that we're forecasting and planning for.

It's exciting, but it's a lot of work. Right. And do you guys have like a specific, you know, mandate or angle, you know, like this, there's some miners that will describe themselves as like, we are the 100% renewable miners or we only mine with curtailed or energy or, you know, we use stranded natural gas. or do you or are you just accepting all sort of energy types? Yeah, we're certainly ESG focused. We're America focused or North America focus.

We will look at Canada as well at this point. And when I say ESG focused, we try to be almost all renewable, if possible. We will touch natural gas and worst case, we'll do offsets for that natural gas. But as of today, the majority of our energy from our sites is renewable. and we plan to continue and actually expand the percentage of renewables in our portfolio. And we'll be part of some councils that will give some data on that in the coming months. Well, I think I can guess which council that may be. That's not too many to choose from.

And when you say renewable, I mean, do you mean, you know, nuclear, hydro, wind, solar. You named them. You named them. Yeah. I'm assuming it's easier to find Hydro than it is the other names on that list. That's correct. Yeah, Hydro has been easier to find to date. The other names, I believe we're going to have some success. And we have some plans to have success there, but certainly you're correct. Hydro has been easier to find. So with regards to Win and Solar, I mean, we've done a few episodes, in fact, within this very same miniseries talking about how, miners can exploit wind and solar, which might be curtailed and actually maintain a sufficient uptime to mine profitably, right? And in particular, the Lancium episode explored three

distinct models for mining using relatively decarbonized sources of energy inputs, even if they're intermittent. You know, and this is like a big source of pushback I hear from environmentalists, which is, oh, it's kind of a self-own because, you know, they're basically admitting that wind and solar can never really work for the grid at scale. But either way, they say, oh, wind and solar are two intermittent, so it doesn't work for Bitcoin miners because they have a big opportunity cost. What are your thoughts on this? I mean, do you believe the wind and solar can work for Bitcoin mining?

I do believe it can. And I think that, you know, we're actively looking at where we could maybe fit in there. Obviously, you have to do the economic analysis of how. much downtime you're going to have as a miner. But what I also view, which I think might be bolder and where this industry is going to head is that this industry is going to continue to vertically integrate, as well as horizontally integrate. There's just too many chefs in the kitchen right now, frankly.

People of different operational excellence. And what we're going to see, in my opinion, is actually potentially the build-out of actually new farms and stuff that actually oversupplies in the grid. Cheapens energy for everybody. But let's say at night when people aren't using as much, instead of paying people literally to use the energy to heat their homes, you just turn on the Bitcoin miners. And one facet that allows that to actually continue to look better and better on the economic side is that due to the slowing of Moore's Law, and part of the reason I was so excited about

this investment in being here, you can now depreciate miners over a longer period of time because the increases from new generations is radically decreasing, which means that actually the cap x costs are lengthened, which means economically, yeah, we can be, downtime maybe a little less if the energy costs is really nice. Right. So, and I think this is such a critical point. We actually spent a whole episode with Galaxy talking about depreciation periods, which is, which is so, so interesting, the lengthening of the cycle here.

So what your point is, historically, mining used to be a function of racing to get to new hardware, hardware, hardware, hardware, as fast as possible. plugging it in. Today, as ASIC generations are produced less frequently and your new hardware goes to obsolete more slowly, you have a longer time horizon and you care more about your electricity costs as opposed to just rushing to get the new hardware. Is that the idea? I think in the longer term, absolutely correct. I think right now just given the rapid increase in Bitcoin price, the lack of miners being able to come online due to supply chain shortages, because again, they can't get any, they could, they would have if they could get anything from Apple

so that, but Johnny's getting his Christmas gift, like you said. So they can't. So right now, we actually have, it's kind of a mix, but you have to put your long-term hat on as an operator, where at the end of the day, we know cycles can go viciously up and viciously down, and electricity costs is what's going to make it so whether you have to turn off or turn on. But right now, we have a mix of a race for both, frankly. And obviously all the China ban, then a little bit from Kazakhstan is sort of what wobbled back. on their full ban. There's a race to United States and other energy sources.

So it's sort of a race on all fronts right now. And it's especially just because it's so profitable. Right. Yeah. I mean, your minor margins are enormously wide right now. So there's definitely a convergence that still needs to happen. What you are suggesting, though, is that there's a relationship between the carbon intensity of the Bitcoin Network and the depreciation cycles, like the length of time you

would depreciate your machines over. Is that a fair thing to say? There is certainly a correlation there. And it really goes to the fact that if you can depreciate these machines over four years instead of two, and it's not just some accounting gimmick, these things actually will probably be useful for four to five. I would actually push it. I think you can do five years, but we do four. You can start to look more at this intermittent energy sources.

You can look at more downtime. And obviously you want to be mining as much as you can, but you can actually look at economic models and partnerships going forward. So yes, there is a correlation there. And when you build your models, you're not assuming we're requiring 100% uptime on your units. It depends. And our current facilities, we typically do. There's a little bit of a downtime because you know there always is downtime. And we like to, you know, under promise and over-deliver to our investors.

But we do for our current sites actually have almost 100%. We do demand response. and other programs, but essentially we assume roughly 100% for our current facilities. These types of partnerships would be very different. Sean Connell of Atlantium has been on this campaign to explain how if you are active in the spot markets, you, a grid like Texas, for instance,

your all in price of power is less if you don't assume 100% uptime. So if you take it down from 100 to 95, your power overall is cheaper. A, because the demand response, so, you know, the greatest curtailing for you. First, you know, a small portion of the year. And then also because you're just not buying that last final 5% of energy where it might be the most expensive. That's absolutely correct. He's absolutely correct. But all of that said, right now, you're mostly trying to keep the money.

on as much as possible. Yeah. And I think it's fair. You said 95%. Like we again, we do incorporate some downtime. And it's roughly in that like that single digit number. Because it does do the demand response. You curtail you don't need to buy the energy if it's super expensive for some reason that day. I mean, that's part of demand response. But yes, correct. So when you are doing your analysis about future hashtag growth, because that's one of the things you sort of have to anticipate and project. I mean, it turns into a game of, of course, looking at how many units have been ordered and what the foundries are doing, whether the manufacturers are getting allocation, how many units they can reasonably deliver. But then there's also just political

risk, right? I mean, you now are trying to estimate is a major jurisdiction going to crack down on minor. So how much weight do you give to the political risk in your assessments? For our base model and whatnot, we would have footnotes for it, but it's very hard to predict. And political course is huge. And what we have is, we're actually, we look at our public competitors who would publish this, and we actually have more conservative, and by conservative, I mean more aggressive ramp-ups in the hash rate. Essentially, especially in the short period of getting all that Chinese hash power back online in an aggressive time frame, as well as well as new miners being produced online as well.

We'd like to get, it's a more conservative modeling. And when it comes to though, like, you know, is New York going to do something, is Massachusetts going to do something like state by state, that's really, really difficult to predict. So the way we model is based off what we think historically, these ASIC manufacturers can tape out in the longer out years, and the short-term and aggressive ramp up from miners that were kicked out of countries. It's you have to put your finger up in the air and feel the wind, but you know, we do the best we can.

And, you know, since we've been modeling, we haven't been too far off. I've actually been pretty proud of how we've been able to model it out. So did you anticipate the kind of V-shaped Tash V-V-Rew recovery, which we saw, which has been very aggressive? Yes. And you attribute that to, you know, miners successfully moving their units. out of China and into new domiciles, or do you believe that some of these Chinese farms have actually come back online covertly? I don't think all of China's actually shut down.

I do think that they've made even more aggressive stances of trying to track IP addresses, so they're not backing down on their ban. It seems they're actually getting even more aggressive. I think that some of the older units that were in China, they probably won't even ship them out of the country and just leave them in the dustbin. but yes, the majority has been successful in trying to shift that out of the country. I think Kazakhstan was a huge net gainer. The United States is obviously a huge net gainer, but I think they were successful in getting

a lot of those online. And then to fill the gap on the V-shaped, there are new units coming too, right? The AC manufacturer producing. So it's a mix of both, but absolutely China's been able to get some units back online overseas to the Chinese miners. This episode is brought to you by Compass Mining. Compass Mining is the world's first and largest online marketplace for Bitcoin mining hardware hosting and ASIC reselling. Bitcoin mining is only getting bigger and so is Compass mining. Compass is adding

280 megawatts worth of hosting capacity next year with more to come. That's over six times Compass's current hosting capacity, meaning more people can mine Bitcoin. With Compass anyone can mine Bitcoin. Start mining your own Bitcoin by visiting compass mining.companing.com. today. Getting started investing, whether it's public equity or digital assets, is pretty tricky these days. On public.com, you can start small with fractions of shares, invest in what you believe with any amount, exchange ideas with a community of like-minded investors. I've been using public.com for a little while now. The thing I like about it is the social function and the investment focused discussions on the platform. They also offer public equity as well as a number of digital

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See public.com slash disclosures, not investment advice. Just in the last couple of weeks, we've seen Kazakhstan messaging, basically hostile policy against Bitcoin miners. According to Cambridge, stand was somewhere in the realm of 15% of the network. What do you make of that? I mean, is this kind of a thing, a situation where wherever the Bitcoin miners flow to, then they run into political troubles in the new jurisdiction? It depends. So Collison certainly signaled that and then they backed off a bit because at first it was like a really hard cap. It was like a hundred

megawatts for the entire country. I mean, that's nothing, right? Yeah, yeah. It was a large percent you're right it was like 15 percent or 20 percent of the network that would have been a de facto ban if they put that through and then what they said was only licensed operators like people with the right licenses um love to see how they acquire those licenses but um and look this is all this is a function of also that we are in a bit of a global energy crunch right now um yeah natural gas prices have been soaring for the most part. Coal has been soaring. And so Cazistan also had to deal with, you know, these guys were firing up a lot of coal plants. And so I don't think it was really an environmental thing for Cazinstein. I think it was more that coal price was going up dramatically. And they

need to make sure that their citizens got, you know, their heating and everything done instead of these new Chinese miners coming in and taking it. But I think they're going to strike a healthy balance there in the longer term. So I'm kind of developing this idea that whenever Bitcoin mining does have a tangible net effect on energy prices to the effect of disadvantage, you know, disadvantaging households and things like that, that's where you start to see bands. And then elsewhere, you would hope and expect that policymakers that see Bitcoin having a favorable effect on the grid, which is certainly the case in some places. where they're buying energy that is uneconomical, you would see it tolerated. Is that kind of the way you think about it where basically there's this permanent veneer of political risk for operations that are genuinely congesting the grid?

And then, you know, others are more secure? I would completely agree with that. I mean, that also follows basic policy logic. What I do hope to see, and I'll take it one step further here, though, is that I do see vision, maybe it's a five-year vision, but this industry will vertically integrate. I think we're going to have more partnerships with the semi-manufacturers. I think we're also going to maybe even build out energy assets themselves, right? So we can actually help robust build up the grid and also build up energy assets, which

net net can help that place. But you're absolutely right. Look, if Bitcoin miners are legitimately congesting electricity networks and the citizens are getting pinched by that, I would put a much higher risk on a tolerable. by the local policymakers. So then your job as an allocator is to, just for purely financial reasons, is to avoid installations that would catch regulatory ire in that way and to slot into the grid in a way that is the least disruptive as possible.

There are certainly some senator's states that I'd rather be mining in than other senator's states. I'm happy to hire those other senders union labor. neighbors bring good jobs to their towns. A lot of these are dilapidated factories. They need good work. We can bring good work to those places. So hopefully, you know, I think mayors, you know, local police officers, local, all the local people love us, right? It's just, it's just true. And so hopefully these senators can realize what we're actually doing on the ground. So New York is probably the state that is agitated against Bitcoin mining the most.

And if I had to guess, I would say, I think it's actually probably likely that during the next legislative session, they've actually pushed through some kind of ban or more onus regulation. New York is, in my estimate, probably the number two state in terms of Bitcoin mining in the U.S. What do you make of that? I mean, a lot of it, I think, is hydro from like the St. Lawrence River in upstate. I mean, I've been to some of these facilities, you know, coin men up there on the river. and, you know, that's not an energy asset, which is even that transmissible down, you know, to the south. I mean, there's just constraints in terms of getting that energy down. And so the miners are gobbling a pretty abundant hydro energy.

To me, like the presence of Bitcoin mining in New York doesn't seem that disruptive. Even if you look at greenage, you know, that's a natural gas plant. They're feeding energy to the grid. That's a plant that wouldn't exist if it were. for Bitcoin and that means the grid can benefit from the existence of that plant. It's pretty good overall. I mean, there's nothing fundamentally wrong with natural gas plants. We need natural gas for the grid to work. That's just a reality. So, you know, do you think that a ban on Bitcoin in New York State, Bitcoin mining, does that increase the carbon intensity of Bitcoin NetNet?

That is a really good question. Net net, yeah, most likely, most likely, yes. I'm not sure I agree with you that they're necessarily going to push through a ban, but it's something that I'm certainly monitoring. Again, I think that if they did, I think these legislators would need to go and explain to the average person and the union laborers and the officers we hire for security, why they're all out of their nice extra jobs. and like the local the local again the local politicians and the locals like us and they're not seeing

any any issues with their electricity costs or anything like that and we participate in demand response we're not interrupting anything there so it wouldn't it wouldn't come based on logic if that ban came yeah i mean the thing that gets me is when i encounter anti-bick point people i honestly feel like i feel like this is the same as the debate against gun control actually because because the opponents tend to be much less informed about the thing that they're debating, you know, whereas the proponents are the enthusiasts and the operators, and so they know about the thing. And it seems similar.

Like, that might be a controversial thing to say. But in the case of Bitcoin mining, the proponents have an encyclopedic knowledge about Bitcoin and a good knowledge about the energy grid because they, are energy consumers a large scale. The detractors tend not to know much about energy, is my experience, frankly. I mean, like, people will get basic things wrong. Like, they assume electricity is never curtailed. Like, oftentimes they won't be aware that curtailed energy is a thing.

Or they assume that energy is infinitely transmissible with no cost, right? And so then they're upset when Bitcoin miners are consuming renewable energy because they say, oh, that could have gone. You know, this renewable energy could have gone to a hungry household to, you know, heat them and power their iPad. But, you know, in many cases, there's transmission constraints. Well, Nick, it goes to, look, even before I joined this full time, I wasn't expert in energy. I've learned a ton since my time at USBTC, right? But it goes to, for example, how do we expect these?

And I hope they do the recent before the past legislation, but it goes to what we were just talking about semiconductors. I mean, do I expect these legislators to know the semiconductor market, know what Bitcoin is and why Bitcoin mining matters? And then the energy markets, honestly, I would hope so, but probably not. I don't think many people really know how the semiconductor supply chain works. And I think that it's sometimes just a political show as well, right? It's easy to go, you know, point your finger at Bitcoin miners and say they're going, they're the reason why global warming is going to kill us all in 30 years. It's like, that's just a ridiculous statement, though.

It's not based on fact. It's based on feelings. I mean, look, if 30 bips of global electricity consumption is what's going to tip us over the edge, I think we have a big problem. You might take more than that to, you know, fix global warming. But, yeah, I mean, the thing I've tried to explain is that if, And, you know, I'd love to, you know, actually verify this for good. If New York state mining is done with significant amounts of hydro,

and if it's done in a generally decarbonized way, which I believe it is, then if you ban it there, you're effectively, you've given a subsidy to mining everywhere else. And that includes mining in Iran and mining in Venezuela and mining in Kazakhstan. you know, higher carbon intensity places. And I think that's another effect of American policymakers banning mining is they banning the cleanest corner of the Bitcoin mining industry. You're correct. I think it's us in Scandinavian countries, right? Arguably the cleanest, maybe Scandinavia's. I don't know if they're slightly cleaner or slightly less clean, but they're in the same ballpark as us American miners. And look, bans are subsidies or

Christmas came early for other miners who aren't part of those jurisdictions. I mean, look at the huge benefit to gross profit margins because of what China did to United States companies. That was, you know, Xi gave us a Christmas, came early for us. Yeah. Yeah. Yeah. And it's funny that it's the, it's precisely the policymakers in the cleanest countries that are agitating against Bitcoin mining. I mean, the supreme irony of Sweden and Norway agitating against it is incredible.

And it is, it is a reality that there is mining in some high carbon intensity places. And those are places that are not going to be persuaded to turn off their Bitcoin mining operations. In some cases, I think they're state sanctioned. Iran is not going to stop mining, nor is Venezuela. And they're certainly not using hydro in those places. You know, it's also goes to there's a line to the debate. Look, we're ESG focused, and we really do believe in renewables. We actually think the pairing is even better in the long run.

But the truth is also goes to the point that some people make is like, why is this? this industry under the ire for energy uses. Like, what about your Christmas lights you put up? Or what about X, Y, Z? And, like, you know, it's an interesting, that's a more philosophical debate. But it's like, why are we even having to have this discussion? Like, what, like, yeah. There's so many energy that use so much more energy.

We also don't reason about energy in this way. And it's like we've conceded this moral high ground of saying, it's like we've already lost by participating in the debate by saying, oh yeah no we really we have to morally justify our consumption of electricity like that's not the way that policy is made it's not like oh let's run through every single way to consume electricity and determine what's moral and what's immoral it's can we produce abundant energy in a way that you know works in terms of GDP growth and civilization and you know hopefully in it's climate change. That's that is the way that it sort of ought to be and sort of historically

has been. And we're in this weird neo-Malthusian world now where we're fighting over every last scrap of electricity without realizing that abundant energy is the key to growth effectively. There is a linear correlation between energy consumption and usage and the progress of civilizations in countries. Maybe it's geometric, not even linear. It's incredibly important. The thing is, look, we're going to have to participate in the debate. We're happy to participate in the debate because also we stand on a very strong ground to participate in the debate. Not only are we not like, you know, like in 99, they were saying, oh, the PCs are coming, you know, burn more coal, like get ready to fire up the coal plants. That was a narrative when the internet was getting started. That was a real

narrative, okay? But not only that, we actually, again, can actually fund out the building of renewable assets and have a really, really nice pairing because it is hard, like you said, there's transmission, a lot of this stuff gets stranded. Where the wind is isn't necessarily where the people are, where the sun is isn't necessarily where the cities are. And there's all these transmission costs, all this CAPX costs. We can help with that if we're allowed to take up a certain amount of load. We essentially subsidize the build out of clean energy and subsidize energy abundance, which will then subsidize other things. It's wonderful. So what do you think it'll take to sort of end or win the debate. I mean, you know, in my view, the proof is in the

pudding. So the more we can demonstrate to people, business models that are economical and use renewables, you know, the better we look. But in some sense, big corners have been talking about this for a while and environmentalists certainly aren't persuaded. So, you know, what does victory look like? It will take time. I mean, frankly, I think it's also because, like, you know, some of the other the people are like they just view Bitcoin as like fake internet money and worthless and they I think they feel for some reason they're able to make that judgment obviously that's not what I view Bitcoin as I want we don't have to get into why I think Bitcoin is the most robust settlement layer ever built or blah blah blah but um you know I think look we're going to continue

to have the debate some people won't be convinced but we will work look people like businesses people like jobs and when when the proofs in the pudding eventually you end the debate and maybe you'll have to get to the point where, you know, there's hyper-bitquinization or something like that, where, you know, Bitcoin just becomes so important that no one's talking about AWS is energy consumption because, like, no one's, you go shut down AWS, your Google Chrome route or actually Google uses their own cloud. But, you know, it won't, it won't work. So no one even debates that anymore. Yeah. The funny thing to me is that, according to my calculations, the gold extraction and refining industry still does use more energy than Bitcoin.

And it's fundamentally high carbon because you can't really decarbonize a gigantic truck carrying ore from the mine. You know, those are physical, industrial processes. And you're literally sifting through a ton of rock to get maybe six grams of gold. you know, that's, that's a good yield, right? So, you know, that's a physical process, which requires diesel, you know, and frankly, all sorts of other horrible compounds to actually extract gold, arsenic, mercury, things like that. But just on an, you know, apples to apples basis, big gold's energy consumption is greater, right?

I think as of right now, I would say it's greater. And so the thing is no one really complains about it. I mean, certainly it doesn't get the attention the Bitcoin mining does. And I think it might be because gold has kind of a 5,000 year track record, which I'll give it credit for. But, you know, it's also a global industry involved in the extraction, creation of this commodity, which allows you to store wealth outside of the state

or the banking system, which is exactly the same as Bitcoin. And yet Bitcoin is singled out in this. way. So I can't quite understand the double standard there. Look, it, you can't understand it because it doesn't make logical sense. Look, gold has a very long history. It's, you can't complain about because no one's going to listen to it. Be like, all right, sure, sure. And eventually I think we get there with with Bitcoin. But, you know, frankly, when I, when I speak or will continue to speak on this subject, I try not to point fingers at other industries and be like, well, look at them. They're worse than us. I feel like it doesn't really convince the environmentalists or people

against it and it kind of it goes against how I think about energy consumption too energy consumption is fundamentally a good thing and yes there are there are ways for it to get cleaner and we should work towards that goal but we actually will help work towards that goal so I try to I generally try to strain from pointing fingers at other industries it's helpful to keep things in perspective but I feel like it's less convincing for a productive like getting getting people over the line to not want to shut you down. So yeah, that's fair. So when you think about the hash rate transition, quote, unquote, I mean, the U.S. has obviously done well. U.S. capital markets are very, you know, they're powering

this growth in U.S. domiciled Bitcoin mining, which is really exciting. It's cool to see, you know, the connection between strong governance and common law, you know, leading to robust. capital markets causing the development of this industry here as opposed to other countries. I think that's just a great vindication of American progress and just American institutions. I think the latest estimate was something around 35% of mining. According to Cambridge, which we can quibble about is U.S. domiciled. Where do you see that going? And also do you think that is a reliable estimate?

I think it is a reliable estimate, at least as far as estimates go. I think that U.S. will continue increasing, especially in the next 12 to 24 months as a percentage of global hash power. One of the things that the U.S. has is states' rights, which is good. So we do have a judicial system that makes it harder for blanket bans. So if you go to a state that's maybe clearly shown that they're favorable and have a positive bend towards this industry and they understand what's going on, what we can do. to help their grid and actually expand energy, the US looks really good.

The US is also one of the most abundant energy markets in the world. We have a ton of energy. A matter of fact, depending on administrations, we shut down and turn on natural gas or drilling or whatnot. There is a huge abundance of energy here in the United States. So between that and our due process and our capital markets, it's almost the perfect formation for Bitcoin miners. I expect that to continue to go up and then it will plateau at some point because other countries

will find people will find cheap energy and do the arbitrage. I fundamentally believe that. Yeah, I'm actually a little surprised that some of the energy or mineral rich states that, you know, derive a lot of their wealth from the export of energy haven't begun mining, at least openly yet. That's kind of what I would expect to see is to, to the, extent their business model is to convert energy into wealth. Why wouldn't they do that through the meaning of Bitcoin mining? One critique I see is these fears about the US having a plurality of mining, which I think are unfounded, but the idea being that it gives the government discretion over Bitcoin itself. And of course you can explain the difference

between the highly centralized Chinese model where one individual makes decisions and then the more federated American model where it's state by state. But what do you make of that critique? Come on, it's like China FUD 2.0, but it's even like weaker because of what you said, we have states rights here in America.

It's not, we don't have the same sort of rule that. And frankly, China, we can, they're not like, they do give their provisional governors, or at least they did for some time, a lot of leeway, which is why mining thrive. But as you can see, the government, they do listen. If Xi speaks, they listen. And that will continue.

And so, look, it's like weaker China foot on this, like, you know, the U.S. too much domiciled here, blah, blah, blah. Right. Yeah. And, you know, I think it's actually going to become a state's rights issue, frankly, is energy policy. And that's why it's so interesting to see Texas embracing Bitcoin money so aggressively because they have their own grid, which is islanded. It's not really connected to the other two. And they have always had an independent streak.

You know, they were an independent nation at one point. And I think we might actually see a bit of attention here emerge between the Biden administration. They might do something regarding Bitcoin mining. And then the states that are benefiting from Bitcoin mining. Absolutely. If the Biden administration steps in and tries to do something, I think you certainly will see that. And I think the states will win any sort of legal proceedings on that.

I hope that the Biden administration has better things to deal with than that. And I don't really trust they're going to do their proper research. But, yeah, I think you will see a riff there if they do try to do that, because that does become a state's rights and independence issue. And I think the states, I would think that would be wildly unconstitutional, but we'll see. When has that ever stopped them? Yeah. I mean, it's not the only wedge issue where the states are budding heads with the government, but it is cool to see the federal system, you know, spring into action. Because we have these wildly disparate cross-state reactions to Bitcoin mining.

On the one hand, you've Florida maybe, but certainly Texas, Kentucky, Wyoming, explicit policies designed to attract miners. And then you have states like most likely California and maybe New York and Massachusetts, they want to sanction and eliminate Bitcoin miners. It is funny. And I also think that we can be nuanced to within some of those states. I would say that, you know, the people in upstate New York probably like the Bitcoin miners there. I think I'm sure that the mayor likes it. I'm sure that so it's like maybe it's the senator sitting in the big city who has no idea where their energy comes from is complaining about it. But the people actually on the ground, I think probably love the presence of Bitcoin miners in their towns.

So the last thing I want to get into is, you know, we've talked about the kind of the supply side dynamics around hash rate. And, you know, the factors that cause that to vary. Now, in terms of the actual subsidy, you know, the pool of revenue that all miners compete for. What kind of assumptions do you make around that? I mean, obviously, we know what the issuance is going to do. We don't strictly know what the fees are going to do. So how do you think about the long-term fee growth? And, you know, because that has to be built into your models. Yeah, we do have some fee growth. It's not that aggressive, to be honest, because that's a really tough one to predict. We can have it back and forth. We're both going to get it

wrong. You know, look, frankly, we are, we're Bitcoin bulls like over a long term. We've got quite a number of years before the next halving. And the ROI right now on the capital that we deploy is incredibly quick, even with assuming aggressive ramp up in hash rate. Obviously, you know, Bitcoin drops to $5,000. The equation changes, but maybe not that much because a lot of miners will then have to shut off and maybe we don't. That's the other factor in this. So, So we have some base builds on transaction fees increasing, but they're not as aggressive. I've seen some really aggressive numbers in presentations. And again, our investors want us to hold the Bitcoin on our balance sheets, which will be done to date.

I believe our investors are going to continue to want us to do that. Our investors are our customers. And so what we do for them is through operational excellence, we arbitrage basically energy into this Bitcoin for them. Right. Do you view Bitcoin mining as a structurally, I know this is a bit of a provocative question. Do you view it as a structurally decaying industry just by virtue of the fact that the halvings occur? No, no, not really. I do think transaction fees will increase. I think that what it's going to look like is more of like a commodity industry, which I think kind of already is if you really know it. But it's very volatile, the underlying commodity. but I think it's going to end up looking like I think aluminum producer probably one of the best examples like everyone besides

Australian I think Canada has to shut off when like the steel producers this is for steel model I'm sorry when steel prices drop and then but these guys have the best energy costs so they can keep producing the steel while anyone else has to shut off then when steel goes up other plants can fire back on and so I think you end up looking like

more of a vertically integrated you know, sort of commodity heavy industry business in the long term. But right now it's such a wild west and there's a long way to go before we get there. Really fascinating discussion, Anders. Thanks again for coming on. It's been great. Best of luck growing the hash rate to 10x a hash. Absolutely.

Thank you, Nick. Thanks for having me on. Oh, I forgot to ask where people can follow your work. Yeah, I just, I guess my Twitter handle will be fine. hardly use Twitter. If people are interested in connecting, maybe I'll use that platform or more as I put out work and feel free to DM me on there. I will respond at some point if there's something of interest that I've spoken about or something that I'm doing, whether at Cavary Crypto or here at USBTC, I'm always happy to have a good time.