TFTC: A Bitcoin Podcast - #246: The Intelligent Bitcoin Miner, mining profitability models, and hashrate derivatives with Karim Helmy

Episode Date: April 28, 2021

Join Marty as he sits down with Karim Helmy from Galaxy Digital to discuss: - The Intelligent Bitcoin Miner Pt. II - Modeling future price and profitability - Helping miners make better business decisions - The ASIC crunch - Future research topics - much more Follow Karim on Twitter Check out The Intelligent Bitcoin Miner Pt. II Shoutout to this week's sponsors. Cash App. Start #stackingsats today. Use the promo code: "stackingsats" to receive $10 and contribute $10 to OWLS Lacrosse when you download the app. Lend at Hodl Hodl is a new non-custodial bitcoin backed lending platform, that allows peer to peer lending and borrowing between users, globally, anonymously & on your own terms. Create you offers & set your own terms on lend.hodlhodl.com Compass Mining. Compass wants to democratize bitcoins hashrate and give everyone the ability to strengthen the network while mining bitcoin profitably. Thanks to Compass, it’s never been easier to mine bitcoin. Check them out at compassmining.io Braiins. Braiins are leaders in the mining industry; running Slush Pool, creating firmware to make miners more profitable (Braiins OS+), and building out Stratum V2 to help further decentralize mining and make Bitcoin more robust. Check out their mining profitability calculator.

What's up, freaks? It's your boy, Marty Bent, here to introduce this episode of Tales from the Crypt. I sat back down with Kareem Helmy, now at Galaxy Digital, on their research team. Him and Alex Thorne, two-man show there. Looking for help if you're a researcher, you can reach out to him. He shills it plenty in this episode, but I brought him on because he wrote a piece with Leo Zhang and Jack Kohler from the Nietzsche research team last week called the intelligent bitcoin miner part two in which they put forth a model that miners could use to to help plan out operations based on future potential price movements and hash rate movements really interesting model we talk about more things beyond that i think

you guys are really going to like it brought to you by good friends at the motherfucking cash app the cash app is here to help you stack sats stack sats and sats sell sats if you so please and you can receive sats too we're saying sats sats sats sats sats sats because sats are the standard gotta defeat that unit bias it's strong out there freaks there's 100 million sats in one bitcoin you don't have to buy a whole bitcoin you don't have to buy a fraction of a bitcoin you can buy whole sats we're changing it we're changing it all right sats sats cash app helps you stack sats you can dca in the sets you can buy daily weekly bi-weekly uh i see the cash boost is making its way back into the app you get sats back when you go use your boost card

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create your offers and set your own terms at lend.hodlhodl.com that's lend.hodlhodl.com this rip was also brought to you by good friends at compass mining compass mining is attempting attempting they're trying they're making uh the the path from going from zero to mining at a hosted facility with competitive electricity cost easy for the end user all right So you go to compassmining.io, that's C-O-M-P-A-S-S-M-I-N-I-N-G, C-O-M-P-A-S-S-M-I-N-I-N-G, I think I added two I-N's in there earlier, whatever, compassmining.io, you go to the site, you pick your mining model, you buy your miner, Compass acquires that for you, you also pick your hosting facility, again, competitive rates, very transparent, you see your rate, you pick your miner, you buy your miner, Compass acquires the miner for you, it sends it to that hosting facility plugs it in and it starts streaming sats to a wallet of your choice beautiful thing trying to make it easy they're trying to blow it up they're trying to get more individuals in the mining game really cool product go check it out at compassmining.io

last but not least this rip was brought to you by our good friends at brains edward evenson the cheese monster's coming for you it's coming for you So, but seriously, Brains is an incredible team. They've been helping Bitcoin. They've been putting Bitcoin first for years now. They were the first pool ever in Bitcoin, Slush Pool, or the team behind Slush Pool, as you freaks may know, in 2017 when they noticed that Bitmain had their AMP lead firmware in their AMP miners, which was giving Bitmain the ability to brick

individual miners remotely, the Brains team stepped in and said no. No! Users need better firmware so they built Brains OS Plus which is firmware offered by the Brains team that

individuals can download on their miners to stack more sats. It helps them stack more sats to get more sats for your hash with Brains OS Plus. so they verified also on top of that in 2018 a year later they verified the s9s could run about 13 more officially with asic boost but the feature wasn't public so they put it in the firmware they developed brains os again it's a custom auto tuning firmware to give miners more control over their asics that currently supports s9s s17s and t17s and what's miners coming soon when what when

what's minor ed crack that whip that's what i envision ed evanson evenson excuse me evenson i i just imagine that's his day in the czech republic and the brain cells just what's minor get it out there they're also working on open source to shit initiatives uh they're leading strata v2 development alongside matt caroll and square crypto this is a decentralized mining pool which allows individual miners to construct block templates and add their own transactions to a beautiful thing it's already implemented on slush pool and included in brains os plus firmware they also push out a lot of content for bitcoiners um oh oh we got new stuff in the in the in the ad

read stuff that i missed i'll get to this i know brains team i know you're listening to daniel i'm sorry i'm just seeing this in the google doc we have here yeah it's got the new farm management too they teamed up with uh yeah we talked about this a couple reads ago daniel i'm sorry i'm just seeing this i wish you would have picked main telegram but yeah go check it out brains incredible products incredible team open source stuff always staying true to bitcoin it's a beautiful thing you love to see it brains b-r-a-i-i-n-s.com b-r-a-i-i-n-s.com if you want to go check out their new farm manager go to b-r-a-i-i-n-s.com slash os slash plus slash manager or you can just go to brains.com and click the brains os plus manager in the top menu

check it out something dude they launched a couple weeks ago enjoy this rip cream really good dude really smart dude pushing the mining industry forward you've had a dynamic where money's become freer than free if you talk about a fed just gone nuts all all the central banks going nuts so it's all acting like safe haven i believe that in a world where central bankers are tripping over themselves to devalue their currency bitcoin wins in the world of fiat currencies bitcoin is the victor i mean that's part of the bull case for bitcoin if you're not paying attention you probably should be what is up freaks welcome back to tales from the crypt it's your boy marty bent here

back in the jersey office back in my father-in-law's bedroom ready to talk bitcoin mining particularly the intelligent bitcoin miner part two sitting down with kareem helmy now on the galaxy galaxy digital research team what's going on dude hey marty how's it going good man first time we we met on this podcast you were working with coin metrics you've recently made the move to galaxy working uh with the legendary alex thorne on the research team there how's it feel to be back in new york working for galaxy and what sort of was the impetus for your move from from coinmetrics to galaxy yeah i mean it's definitely super good to be back and it's good to be back on the show it's been what like a year now so um yeah uh long long overdue but um uh yeah

i mean so i joined galaxy because alex reached out um and you know we uh he kind of laid out the the vision to me um we're going to be building the best research team in the industry uh and you know i was down with it um so i joined as the first hire recently and um you know like alex is the man so it's it's i'm pretty i'm pretty stoked to be out here i'm pretty stoked to be um at galaxy and and really just all around optimistic yeah i think uh he's actually going to be a bit uh your boss is gonna be a bit angry at you because we're trying to coordinate an episode between the two of us ourselves but uh i reached out last week uh yourself leo zhong jack kohler of the research team dropped part two of the intelligent bitcoin miner series and i just thought it was an

incredible piece basically detailing how you guys are building out models that could potentially be leveraged by miners to help forecast profitability and revenues based off different price and hash rate scenarios uh taking minor hardware the price you paid for that hardware and electricity costs into consideration so uh how'd you team up with leo and jack to do this uh because you did you contribute to part one or no no uh part one was all all those guys um but yeah leo and i have been friends for a little bit um and you know we've been you know looking for an excuse to work together so with my background and data um his and mining you know we we just thought this was this was a really good way to pair up and kind of figure something out together

uh and i'm pretty stoked it came out pretty good and um yeah looking forward to talking about it a little bit more yeah so let's jump into it like for any of the freaks out there who may not have read uh the piece yet how would you describe it what what were you guys trying to accomplish i think i just tried to give a an overview of it but i think uh like a more granular detail what were you guys looking to accomplish with this yeah absolutely mining is a really complex you know multi-faceted industry there's just a lot of stuff going on and it all interacts with each other in weird ways that you wouldn't necessarily expect uh so what we wanted to build was just like the minimum viable tool to model mining uh from the perspective of a miner

who wants to make decisions uh and how to on how to operate their um their machines when to turn things on and off things like that we wanted to model that from a global perspective uh kind of by piecing together all of the interactions that individual miners are doing and then we wanted to give the user the ability to um you know play with the variables themselves you know we made a lot of assumptions in this process and we wanted to make the user able to adjust that um so we built out this model um that lets you see how your mining operation would do under you know a variety of different conditions um based on like agent-based modeling uh and we wrote an article about it and we open sourced everything so that was the really cool thing open sourcing the models uh which i

think is just uh incredibly generous of you this is something uh it seems that a lot more people are getting into mining at the industrial scale or at least attempting to particularly energy producers as they figure out that their excess energy can be can be used to mine bitcoin in a profitable way uh so throwing these models out for the market is actually probably going to be very beneficial for for people trying to make the case internally at these companies of and um part of making that case presenting the potential profit that could be made and so let's talk about like the agent-based modeling i really like that you you tied in conway's game of life to this and uh i guess we could jump into like why this particular type of modeling

uh in for the bitcoin mining industry and its potential profitability and how accurate may be in practice thanks man yeah leo's a bonafide poet um so the conway's game of life like that was that was all him uh i thought it was really elegant um but so agent-based modeling for kind of anyone in the room um is a type of simulation where you base uh the results on the interactions between a bunch of different agents uh and those agents make decisions based on you know their environmental circumstances and it's typically more or less deterministic so in our case we have some element of randomness which is just like how we generate prices and how we generate the fee distribution but then from then on everything that happens is just a series of

decision making events that's entirely deterministic uh and then we kind of get the aggregate network conditions so the aggregate network hash rate uh and you know like as a result individual minor profitability all of that is just built by you know creating the whole from the sum of its parts and yeah so you guys lay it out here like uh basically trying to lay out the conditions that would uh define whether or not a particular miner has to turn off their their machines to remain profitable so they're not mining unprofitably uh the types of machines and so how did you guys acquire the data particularly about the uh specific models and how profitable they may be at any given point in time so we uh collected data from a few different sources so um

you know with um with price data with fee data stuff like that we we got that all from coin metrics uh you know i'm kind of a pro with the api now having worked there for a little bit uh and then you know we got uh the rig price data from our friends over at a hash rate index um and from general mining research uh you know they were they were gracious enough to share some of their data with us as well um and then everything else like honestly leo just put in a ton of legwork like talking to people to kind of get some best guess estimates on some of the variables so things like shut off times um uh and a couple of the other a couple of the other variables was just like like look we are guessing and we are acknowledging that we're guessing and

that's a big part of why we open sourced it and just let people play with the tool themselves because if you know more than we do like like please use this model and please share the results with everyone else too yeah that's again like the fact that you guys open source this is incredible so like if you are a miner and you want to leverage this open source model like how how would they do so like what are they putting in like are they just putting in their actual cost and then running these models with different hash rate and price simulations running forward and do you think that would like provide like an actual like tangible and actionable uh like modeling for for like a business yeah um so we tried to make it as easy to use as possible right like it models under a

few different circumstances kind of with what we had as like our our you know like our base case like bearish bullish uh volatile uh and then you know you can just plug and play like what types of machines you want the user miner to use. So just put in your electricity costs, what machine type you're running, and then calculate from there. You know, it's always hard to gauge how actionable it is. But I do think that this is, you know, like a pretty useful tool. I think if you run this, you know, it might give you some food for thought on like, whether the decisions you're making are, you know, the right ones, and whether to like spin up a new operation, whether to scale down a little bit, maybe, you know, if that's the right thing to do. Um, so yeah, that was kind of

the perspective we went into this with is like, look, we're making a lot of assumptions. A lot of them are straight up guesses, but, um, like by letting people fiddle with it, by letting people put in what they think is going to happen, uh, you know, we'll, we'll do the intermediate work on like you put in what you think is going to happen in the world. Uh, and we'll let you know if this is a good idea what you were thinking of doing in the first place yeah like one variable that i think is really interesting and being able to play around with it and run it through models can actually lead to some like really good decision making at the individual minor levels like the reaction days to the particular models like newer models having longer lead times to

get to market versus older models and the ability to actually pay for a ship in a minor is get it delivered to you and then plug it in the difference between those i totally agree and we're in like a historical market failure right now with the uh asic supply chains um like there's just clearly so much demand and it is so profitable to run a mining operation uh and and there's just no no new asics like really being shipped out for months and months right so um it's it's i think a pretty interesting thing to fiddle with and um yeah the the growth rates the um the turn on times the shutoff times all of that is uh uh really stuff that like if you have some information that the market doesn't and you plug that in it could be it could be pretty useful right and so

yeah let's just talk about this for a little bit like the supply crunch at the at the chip level what are you seeing there um any insight yeah what do you think i'm hearing rumors that MicroBT is having a hard time finding foundry space for 2022. Obviously, right now, there's long lead times for the latest generation models, whether it be domain or MicroBT. What are you hearing on the ground? You know, yeah, so we're just, you know, we're hearing the long lead times as usual. The large buyers, you know, they're kind of soaking up all the supply where it's available.

And even they're struggling to get machines for months and months. um and yeah i mean like look like asic supply chains and and you know chip supply chains are pretty constrained just because there's not a ton of like fab space um and bitcoin miners are really like near the bottom of the barrel there like because because uh uh demand is so volatile and you know like the um the actual manufacturers just like they prefer working with like steady reliable clients um so yeah we're i mean like the whole world is kind of feeling this this fab space shortage uh from autos to computers to everybody but uh bitcoin miners are you know inking a little extra just because um because you know number doesn't always go up yeah hash rate is not a

trailing price as it has historically because of the supply crunch and i mean that's another part of the point that leo's been trying to make with his content at anicha right is the the cycles that these markets go through um and it's a very manufacturer um beneficial we're part of we're in that part of the cycle where the manufacturers have all the leverage we're seeing like crazy price per terahash uh invoices at great american mining like it's going up above a hundred dollars per tera hash for for many many people um it'll be interesting to see if that persists and like with that being said like do you think at any point in the next or during this cycle well that's like the thing does the cycle always repeat itself like will bitcoin mining

ever uh get more respect at the at the fab level um in the a6 will they will they get more um will people make more space at the fab level for them in the future because of a sustained Bitcoin price and demand from the mining industry? Yeah. I mean, so as price goes up, these ASIC manufacturers will demand more space, right? Like just the basic order size that they go in for will be bigger. That's a good thing. That, that means like, you know, if I can sell you like a thousand units of something, that's,

that's a lot more enticing to me than if I can sell you a hundred of something, even if, you know, your demand is a little bit volatile. The other thing that we're going to be seeing, hopefully as more institutional buyers come into Bitcoin is just dampened volatility because, you know, they have stronger hands than retail. And as volatility dampens on, on asset prices on Bitcoin, um we should expect manufacturer uh volatility of demand for for asics to actually um dampen as well

um because you know it's all reflexive it's all intertwined um so i think that's going to be cool you know maybe it's not so great for for miners who already have um you know rigs out because it means there's going to be more competition but um if you're looking to spin up a new a new um mining operation or even like scale you know if you're not if you're not comfortably sitting on a piles of bitcoins uh it could be really good for you in the future yeah more competition is good we welcome it at great american mining no that like we we see it we see the oil and gas industry having um an inflection point if you will around the conversation about bitcoin and particularly mining with excess gas and it seems like that industry which is pretty massive globally um

wants to move into bitcoin mining uh with authority here and so like just thinking about like demand from that industry on top of the established bitcoin mining industry uh i think there could be a scenario which especially if the price moves up like you said and institutional money comes in and dampens volatility on the on the asset price asset price side um the demand for asics can can withstand itself better than it has in the past just because of the amount of new entrants that want to leverage um basically being able to bring a new liquid market to their their energy assets that that never existed before no it's cool and i think like also we are going to see institutional players start to enter mining uh hopefully that also kind of dampens uh volatility

of demand on on mining rigs um a big part of the reason for this is just like institutions like working with things that have cash flows and mining operations have cash flows uh as opposed to just you know buying spot bitcoin doesn't um so i think that's kind of cool and and you know it's a it's a really exciting time to be in mining yeah for sure it is stressful too um on the on the supply side that's why like uh having tools like yours is extremely beneficial like um how long did it take you to build this model and actually open source it and get it all on github yeah um i mean so this is something like we were both working part-time on you know leo is spinning up something new and really cool and exciting uh i've been you know at coin metrics

and kind of we we rushed to get this out before i uh i got to galaxy uh but um you know it is four months in the making all told you know part-time but um still we started you know with the new year and and didn't get it out until like mid-april um so i can't say i can't say we were actively working on it that entire time but you know it's non-trivial what was like the uh the most interesting thing that you learned throughout this process that maybe you didn't expect or know before before you guys worked on this you can do some like pretty simple simulations uh just like of like uh what we call the geometric brownian motion model right uh and it comes out looking a lot like the transfer phrase um you know it's just completely random and uh it comes

out looking pretty cool and pretty sick so i've always been a sucker for like pretty plots and kind of you know like it was it was cool to kind of be able to spin that up using simulated data not that not with like with without a ton of difficulty right like what if something could you like simulate something like the abrupt shutdown of the coal power plants in china that happened a couple weeks ago and obviously had a shock to that and then network hash rate for for a little bit yeah so our model for for network hash rate was uh like i mentioned just like entirely deterministic based on price so it didn't really incorporate these kind of like big black swan events um but things like you know price plummeting 20 overnight like we did a lot

of simulations and a lot of them came out that way uh that was kind of cool um just that you know there's so many like it's very hard to predict things but it's not that hard to like actually just model them um and there's the you know the the the saying amongst statisticians like like all models are wrong but some models are useful um and yeah it's not i guess it doesn't seem terribly difficult to make a model that's you know at least partially useful it's better it's better than nothing so that was kind of cool yeah like if so how would this these models be useful right like you model it out and then as your operation's going you just see where hash rate and price are and based off that at any given time look at the model like all right we're above

the profitability uh profitability levels of what the model's laid out for us once you dip below that like all right let's turn off maybe just it enables quicker reaction times yeah no totally and i mean like i think you know there needs to be a human in the loop on all this stuff at least for the way we have it set up but um just whenever you're at an inflection point and you're thinking about scaling up your operation or scaling it down what we want people to do is to just you know take a look at this model put it in what you think like it's just the supports for the model we're not asking you to like get prices today tomorrow whatever just do you think directionally we're going up and do you think volatility is going to stay the same ish or do

you think directionally we're going down and volatility is going to you know skyrocket as well or anywhere in between uh we just want people to put that in take a look and you know see how their operation does and you know maybe that'll inform a decision and you probably already know right like if price is going up and i'm making money today i'm probably going to be making money tomorrow as well um but it's just another tool to kind of inform yourself to see are the decisions i'm making rational are they right can i afford to open up in a bear market you know because a lot of a lot of the time like miners will continue to be profitable if price goes down quite a bit from here um so you know especially for for those kind of decision making processes like that's

where we see this fitting in yeah yeah especially if your electricity cost is low you can definitely survive some downward volatility i'm like what's fascinating here is it just for me at least highlights the continued maturation of the bitcoin network and the mining industry more specifically overall like these tools are exactly what you want to see come to market so that businesses can make decisions about profitability and expansion or the curtailing expansion and this is actually fascinating because i've recorded a podcast that i posted uh this morning for great american mining with uh someone on our team who works on oil fields and has in the past and has worked closely with their business decision

making teams about whether or not they should drill new wells and um depending on the the amount of gas and oil that comes out of the ground and btu content and pipeline infrastructure and blah blah all the variables that go into that particular asset extraction and delivery uh business and it's very similar like at the business side they're running these monte carlo um simulations uh based on how many barrels of oil they can get out of the ground how they can get to market what the price of a barrel of oil will be what the price of natural gas will be at the given any given point in time so you have very dedicated and dedicated teams in other industries just simply that are running these types of analyses and it's beautiful that yourself leo and jack brought this model to

the bitcoin mining industry because it's something that was lacking and now you can equip businesses with with the ability to do this stuff create teams around this stuff and actually make smarter business decisions because that's one thing like mining's been hailed as the wild west just like everybody's shooting from their hip and it seems like the industry at large is getting smarter and smarter at a very quick pace too yeah it's pretty exciting i um yeah i mean bitcoin's like you know a real commodity now like it's kind of crazy it's a little scary but uh i think by and large like i've been pushing for transparency for a little bit now um just at cm that was kind of my my big push was just uh trying to find ways to discover patterns that kind of make

you know things that used to be opaque and weird and and foggy less foggy uh and i think one of the best ways to do that is to just you know build open source tools i i think it's just um it's almost our prerogative as bitcoiners and as people who kind of like want to see this thing succeed you really you just you just kind of have to have to open source the stuff you build um so you know hoping to continue to do that uh to kind of put out some cool content and uh stuff that you know isn't is just free to use and and helps the space yeah it's beautiful and if you want to work with me on that we're hiring over at galaxy so um join our research team get it get to shills and we're going to talk about galaxy gotta gotta talk staying on the model

like how do you see this evolving over time especially as derivatives products from for miners particularly come to market hash rate derivatives better more uh price uh options and futures options out there could you start working that stuff into the model you think you know i don't think we've thought about like hash rate derivatives and their space in the model i'm personally hugely bullish on the space they're going to continue they're going to start to fill in in the uh in the industry um i i think hash rate derivatives are are going to be the next big thing i don't really see a world in which they're not especially as we kind of start to see these like exchange-based hash rate derivatives take off um or exchange-traded hash rate derivatives

uh but yeah i mean they definitely like do change the equation pretty substantially right like if a miner is in a contract with um like a buyer of their hash rate for an extended period of time they can operate under conditions that would otherwise be unprofitable and the contract buyer is locked in right like they have to pay for legal reasons for you know exchange mechanical reasons or just like you know because otherwise they'll get margin called something like that um doesn't it really doesn't matter like like the miner is getting their money they're going to continue to mine the buyer has to buy uh so yeah maybe reaction times go up even maybe maybe they go down just because you have a much more liquid market and miners can kind of like hedge

out and and act more nimbly but um i think that's pretty exciting um yeah how do you how do you see the hash rate market evolving particularly i think how these contracts are delivered like are you bullish on hash rate tokens spot hash rate exchanges uh i have my own thoughts of how this may play out but interested to hear yours yeah i um i i've i've thought a little bit about hash rate tokens i've thought a little bit about um you know uh hash rate derivatives in general uh i put out a piece of galaxy on hash rate tokens and kind of the thing is like right now generally they're pretty overhyped like they you know this is not this does not constitute an offer to buy or sell securities or whatever and this is just me talking this isn't

this isn't the views of galaxy but um like the fact is there's there's hash rate derivatives or hash rate tokens right now that are trading with a 45 year payback period if that sounds reasonable to you so be it but it just doesn't to me um yeah the whole i mean i agree with you the token model of delivering hash rate does not make sense to me right because you can't guarantee that the miner will actually deliver the hash rate number one yeah and fundamentally that makes them unscalable right because like like who's gonna lock themselves into a contract to like issue hash rate forever and really the only it leaves them with two options in the long run they have to either buy back those tokens or default um because nobody's gonna be you know like

nothing lasts forever uh so it's it's kind of to me a little bizarre um i am bullish on hash rate derivatives generally i think we're gonna see like basically mirrors of the of the traditional financial markets on it i think we're gonna see like you know options swaps whatever uh i think they're really cool because they have cash flows so yeah right like it and like the token is just that model leads to inherent mispricing because you have retail really doesn't understand the market FOMOing into a token with an associated value to it as well. And it's like, eh, I don't know.

Yeah. People do love tokens, though, is the thing. Yeah. Yeah. How would you see a spot market developing around this? What would that relationship between the miner

and the purchaser, the hash rate look like and how would the delivery play out in your mind? Yeah, so I think we're going to see markets. I think it's an important clarifying point here. When I talk about hash rate derivatives, and I know you're thinking of it the same way, I just wanted to kind of level set. I'm talking about derivatives on the value of an individual's hash rate, not derivatives on the network hash rate. uh there's these like network hash rate derivatives most famously launched by ftx and i believe shuttered actually last month um just for lack of trading volume uh and you know those just aren't exciting because in the long run network hash rate just kind of

goes up uh and it can't be used to hedge out uh mining risk um just because like it the the relationship between the hash rate network hash rate and price on the value of your hash rate is is multiplicative not additive so you can't combine those two to to kind of like uh try to hedge out any risk that you might have as a miner so i'm not too excited about those but when i talk about like like hash rate derivatives um i think the majority of the market is gonna settle on like uh you know synthetic delivery um so just these like cash settled derivatives that um you know uh you can trade on leverage you can kind of do all the cool stuff that like derivatives do when their cash settled uh but what i find most exciting is is actually like

the physically delivered hash rate futures hash rate swaps etc where um a miner will actually like route their hash rate through you know a hypothetical exchange that is is kind of facilitating all of this and um like the buyer gets to route it to whatever mining pool they want um and then gets the the revenues from that it gets even more exciting when you kind of start thinking about stratum v2 uh which i'm hugely bullish on uh which lets you uh kind of order your own block templates or sorry it lets you order your own transactions um and form your own block templates so you can select which transactions you want to include in the block right now if i'm a frequent transactor uh let's say a large exchange i could potentially be

interested in kind of buying some of these as a hedge to make sure that i can like settle transactions smoothly and easily uh even if like you know fees go up a lot or even if like you know problems happen on the network there's there's some sort of disturbance um and i think that's super super exciting yeah we saw um cash app over the weekend send out a new notice on their app like hey network congestion is pretty high right now we're going to limit users to i believe one on-chain transaction a day because they cover the fees so something like this would certainly allow them to facilitate like a smoother process on their end i would imagine and then you get into like fee fee rate market derivatives and

stuff like that and you can get some pretty uh intricate hedging strategies and planning strategies from large businesses miners again the maturation and development of these financial primitives is pretty exciting to see and it's going to be pretty necessary bitcoin is going to be the network that we think it's going to be and it should be um so seeing this stuff is extremely bullish yeah no i mean fee swaps are super cool too and and it's it's just um we've already seen like informal markets for these kind of things evolve uh specifically around like out of band payments uh where like someone will you know uh so some of the some of the mining pools you can actually just like i don't know what exactly i think they take paypal i was gonna say you can

just spend your credit card or something to get your transaction included yeah and yeah your transaction included uh and that's not included on chain i think that's like a way worse way to do things than these um derivatives just kind of like it's opaque it's iffy um so i'm kind of excited to kind of see it move toward a more more auditable more like okay this is what's happening these are the transactions that are getting included like the blockchain is the canonical source of truth kind of situation yeah yeah you're not depending on some pool operator to get a credit card payment and be like all right now i'll include your transaction um exactly i'm like so yeah like paying up front for fees like using these hash rate or fee derivatives

like giving a miner some bitcoin up front to guarantee inclusion in a block at some point in the future when fees are higher all this stuff is crazy interesting and again comparing it to other commodities businesses let's focus on oil and gas specifically because that's near and dear to my heart obviously like we mentioned that they have these business planning teams running these monte carlo simulations to determine whether or not they should drill wells but they also have these teams that are dedicated to hedging and the hedging strategies of the oil price and the commodity price risk that they take on when they, when they embark on these drilling endeavors.

And so I think it's, it's all coming together. Like these are some of the boring, even though we may not find the boring, but some of the boring details and market structure, infrastructure that's coming together on the backend that most people are not talking about is Doge pumps is everything else pumps. that's uh uh everybody's caught by the siren calls the shit coins right now but in the back like all this really important and integral financial infrastructure is is coming to market and it's beautiful because it's leveraging bitcoin's native properties too like you just

mentioned you want to use bitcoin canonical ledger as as the the source of of objective ultimate truth for for these contracts and it's beautiful that we could do it it's really cool there's so much i mean there's just so much like cool stuff happening on on bitcoin right now um and yeah i mean i think like like new ways to model uh i mean just just thinking of this way right you can't you can't have a sophisticated operation without sophisticated financial modeling it just makes it much harder you you you have way worse decision making capabilities you don't get that kind of like insight into the different circumstances and what could happen um and and of course i'm talking about like mining modeling the way that like the tools that uh me

and leo built out and and uh and jack but like um i'm also talking about like things like risk modeling right like like so few miners know um kind of what their sensitivities are to like different uh conditions um you know even excluding monocarlo like like how low can the price go before you go under right like just stuff like that uh and and there are tons of miners who do know that but but you know there's tons of people who are just like plugging in machines and like and don't uh it's like a prayer he's like i'll just plug this in yeah so stable 13 cent kilowatt hour electricity cost oh we'll be fine yeah man i mean it works when the price is going up right uh well that's what leads me back to like one of leo's earlier pieces too like is this

cyclical you know like obviously it has been cyclical up to this point probably will remain like will the we have these conversations with price all the time and probably naturally ties to the mining stuff too but will the depth of the cycle be the same particularly thinking about Leo like right now manufacturers have all the leverage people are FOMOing into mining

price is eventually going to hit a crescendo at some point in the future not going to pinpoint exactly when but when that happens more and more newcomers going to FOMO into mining and then you have a crash but again going back to

the types of players moving in like does it is that crash as as pronounced as it has been in the past i'm just ranting here yeah no i mean i'm with it like market cycles are pretty real right and right now we're like going up i i don't know about if any of the stuff associated with market cycles that some bitcoiners say is real is real but like you know sometimes price goes down for a while and sometimes it goes it goes up um and when price is going down like like plug it in and see what happens like that's not you know really the best strategy to adopt um so was that a slate towards stock to flow might have been it might have been it might not have been so i declined more than i

what uh what else are you cooking up let's talk more about galaxy what what's the intention behind the research arm i mean you've got some really good bitcoiners in the space i met with uh drew and aj from the mining team while i was in austin last week we had a really good conversation um but seeing alex come over from fidelity to build out the research team you're the first hire my ears are perked two very good bitcoiners very smart bitcoiners you guys have added a lot to the space in many aspects i mean your research uh has been incredible since you started putting it out for coin metrics what do you guys have planned what are you going to focus on mining specifically a little bit of everything uh what's the intention is your research

going to be aimed at institutional investors looking to make decisions or just get the general public at large better insight into what's going on in bitcoin yeah so i mean like um like you mentioned right now the team is just me and alex right uh and we are going to be covering everything uh that we or our clients are interested in uh we have a lot of interest you know it's a it's a big industry uh it's a big space and and there's a lot of stuff going on that i think is really really exciting um so yeah we're gonna be i mean we're definitely gonna be putting out a ton of mining content just um galaxy does have a mining desk uh run by amanda fab uh and we're also going to be covering like

yeah um we're also going to be covering like a ton of other stuff um so hopefully you know we'll see some content out of there on on lending definitely on the markets um and you know one thing that i kind of talked about uh a little bit in public uh is that you know galaxy hasn't actually put out like an article yet on like why bitcoin and why bitcoin matters um and so me and alex are gearing up to write that one because i i think yeah i mean i think we just kind of need to you know lay out our case so can we get a preview to what your case is going to be what you guys thinking about you dive into usage stats what's going on around the world yeah i mean i will say it's pretty stats heavy um just given my background and given um alex's background

there's you know a pretty solid like on-chain data guy uh investor in coin metrics you know big early data player in the space um so uh definitely gonna have a lot of that you know we're gonna kind of touch on like how the world is changing you know declining trust in institutions things like that uh and i promise it's going to be good so okay you heard it here first it's a promise it's going to be good it's a promise that's the uh that's the other hard question is it soon tm research piece or soon tm soon tm yeah i'd be lying if i said i'd written a word they get so all right uh some soonish tm we'll say that yeah yeah yeah i'm also excited to be

working on um you know it's been a minute since i've done anything deep deep on nonce analysis um but that's still where i cut my teeth and i'm pretty stoked um galaxy is going to be putting out some pretty good nonce analysis content yeah that's why we that's what we discussed the first time you were on gosh when was that was that pre-covid post-covid during covid i think so i started it i started at coin metrics in early may so i think it was around then yeah it had to be yeah because i think it was your first uh state of union or whatever the weekly newsletter is yeah yeah it was my first state of the network um network yes my bad yeah that came out so that came out like early may yeah i i crazy man time flies especially when you're like bunkering down

so you had just moved to la or we're about to move to la when we talked and now you're in new york already yeah i'm back in new york i i lived in puerto rico for a minute that was kind of wild boss uh shout out yeah shout out to puerto rico it was it was pretty sick we're right down there i was in san juan um really really awesome place honestly cannot recommend it highly enough i did get dengue fever i got i got bitten by a mosquito and just got like super sick that part was awful like uh terrible man terrible but we we're we're out here uh we are a-okay and um we're out in new york where the mosquitoes are you know nice and friendly so i'm not gonna give you fever dreams what was like the biggest side

effect of that just like cold sweats all day yeah i had a i had a pretty high fever uh that was yeah and like the back of your eyes just kills you it just hurts so much really um but yeah no you know we made it out it's um it's uh it's in the past now so um i'm just gonna wear bug spray like every day for the rest of my life pretty much would you rather get dengue fever or covid toughy toughy uh i i was rooting for zika the whole time i was like yeah i was waiting for my test results to get back i was like okay fingers crossed you know like praying it's uh it's crazy man be careful the mosquitoes they'll get you they'll get you they'll get you and they're after your bitcoin too i swear

and your bitcoin and that's what uh down in austin it's just in austin for two weeks they massive mosquitoes down there like massive like this big was uh that's crazy freaks listening right now can't see how this big is i'm holding my hands up pretty big uh but yeah did you see the bats did not see the bats i heard a lot about the bats and i walked over the bridge where the bats fly under or fly from during sunset but i wasn't able to catch it maybe well i think i think we'll be spending a lot more time there come fall so hopefully when i get back we'll we'll be able to check it all out next time man austin's awesome yeah uh great vibe down there a lot of quality bitcoiners and the food food is pretty dope too yeah i like it god shout out like taco

joint and loro the places i frequented most when i was down there yeah no austin tacos very very good very good yeah um before we wrap up here like what else are you looking at the bitcoin world right now what's interesting you what's what's catching your catching your attention what are you what are you following outside of the mining stuff and your why bitcoin piece anything catching you by surprise that you think people aren't talking about or aren't as heavily focused on right now yeah i mean i'm always interested in like lending markets um that's something that you know i've kind of been following a little bit on the side and haven't really gotten the chance to put out anything deep on. One thing that I've always kind of just been

curious about in both traditional finance and Bitcoin is like, trying to gauge like how much leverage is in the system. And you know, like a formalizable and kind of like, like repeatable way. It's hard, it's hard. And frankly, like, because it's not like my deep, deep focus area. It's just kind of hard to make you know like sense of anything that's going on um but i think it's really important and i think kind of when we see these like huge drawdowns uh like we saw over over last weekend um that are that are kind of like very clearly there's a role played here by leverage um you know it's making everything a little bit more severe uh it becomes a really important question and and you know i touched on risk modeling earlier but like all of that stuff

like becomes so so much important when you're in a highly levered system where where you know the run-ups can be massive but so can so can the so can drops yeah it was really interesting yesterday i took a nap and the price fell from like 50 new to 47 and slingshotted back up overnight where we're sitting at like 54 right now i have no idea to be honest like i i couldn't i couldn't even tell you like the left digit on the right one but it is yeah it is there's especially over the weekend um like those cascading margin calls it seems at least that leading to these big red candles that then get slingshotted back uh it's very interesting how that happens it shows that there's a lot of leverage at least to me is what it last night showed that there was

a significant amount of leverage uh that got taken off the table and then there's a little significant amount of buyers as well waiting waiting in the uh the depths of of those price drawdowns to scoop up some sats all right man 75 by the end of the podcast let's go let's see where we are we got clark's dashboard here yeah 53 940 i can live with that yeah i can too yeah we we have been in this like weird range right yeah no it's um it's a trip for sure but yeah i mean beyond that like look i'm um uh really focused on building out the team in galaxy like uh it's just me and alex for now but it we really don't want it to stay just me and alex because then you know we have to do twice as much work so uh uh you know we're looking to hire like crazy

and um i am gonna continue to use your your podcast as a platform to show that what uh how big do you guys want the team to get uh you know we're looking at on like what like three-ish people now we want people with experience in finance especially um but you know anybody just like shoot me shoot me a message on twitter and like uh let's talk if you're if you're smart you love bitcoin like um i'm definitely open to having a conversation so at kareem help me right you know it yeah wow marty bet knows my handle oh stop it cream stuff i have to remember is my job as an interviewer thank you for and leo and jack for putting together this piece again i mean i talked to leo about it i wanted him to be on this

conversation with us but he said no i'm going to drop another piece that i'm working on then then i'll come on i'll talk is it okay damn all right i haven't heard about that one yet so i might be giving sorry leo if i'm giving away some no uh no information on the actual content of the piece so i'll be waiting for that with bated breath leo if you're listening and then we can talk about it but yeah no again like very exciting to see you guys put this out because it proves the maturation of the industry these tools that exist in similar markets commodities markets particularly in the mining industries whether you're mining for oil and gas obviously it's not technically mining you're extracting

these things but these models that business analysts can run to just make business decisions about whether to expand or contract operations and then again on the the futures derivative side that's starting to mature you're seeing it all come together which is a beautiful thing to see and open source tools like the ones that you guys build are are massive i mean i know we've tried i mean we have built these these models internally um as well at grand american mining but uh open sourcing yours and being able to iterate on that with a bunch of other industry players is going to be massive for the space so thank you thanks so much marty yeah i do just think of it as kind of like raising the floor like everybody has these like in-house models that they use but we want to

make it as easy as possible and and you know it's a simple thing but um doing what we can yeah well shout out to you we will link to cream help me in the show notes obviously we'll link to uh the intelligent bitcoin miner part two and cream if you have anything else you want to link me to or me to link the freaks to more importantly i'll uh i'll include that in the show notes too so now you got it man thanks so much um and and thanks so much for having me on yeah it's always a pleasure welcome back to the east coast it's good to have you on these eastern time zone again sorry i uh rescheduled this like four times today i'm still in a mental haze after the austin trip trying to get uh all my computers back on eastern time zone um yeah that's all we got this week

peace and love