TFTC: A Bitcoin Podcast - #457: How a Miner Survives a Bitcoin Bear Market with Drew Armstrong & AJ Scalia

Episode Date: October 26, 2023

Marty sits down with Drew and AJ from Cathedra to discuss how things have been going in the mining industry. Cathedra: https://cathedra.com/ 0:00 - Intro 5:04 - New York 11:23 - Current doomer status 14:36 - Lessons learned since last bull run 26:24 - Decisions made in 2022 34:20 - Underclocking and maintaining mining efficiency 39:16 - Evaluing mining businesses by hashprice 43:31 - Educating energy providers 48:25 - Cathedra firmware 52:07 - Shifting the bottleneck away from ASICs 58:20 - AI 1:06:46 - Geographic dispersion of hash 1:12:59 - Rising rates and ETFs 1:25:20 - Halvening prediction 1:35:05 - Wrapping up Shoutout to our sponsors: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Unchained⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠River⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Bitcoin Talent Co⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ TFTC Merch is Available: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Shop Now⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Join the TFTC Movement: Main ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠YT Channel⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Clips ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠YT Channel⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Website⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Twitter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Instagram⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Follow Marty Bent: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Twitter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Podcast⁠⁠⁠⁠

What's up freaks, this is your boy Marty here to introduce this rip of TFTC. This rip was brought to you by our good friends at River. River is a company that's doing it the right way. They build their own infrastructure, they build their own wallets, they're getting their own MTLs, and they've got customer support. You can call River if you have a question, okay? and they've got a new onboarding plan. So if you go to river.com slash TFTC,

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the industry building out the bitcoin standard enjoy this rip 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. All right, take two.

We had to do two takes. Drew, did you get caught in that New York flood the other week? Fortunately, I did not. Though the New York city infrastructure seems to be crumbling around our feet, it's yet to negatively impact me in any way. But I was looking forward to a swim. So I was hoping that I would have got some of the flash flooding my way. It's pretty disgusting.

What's going on? It's pretty disgusting. Is it climate change or was it the fact that the drains have not been properly maintained for years? You know, it's a miracle New York City still functions at all. So I would guess the latter. Also, I mean, many folk on Twitter love to dunk on New York City as being the most fucked up place in the world. And in many ways it is. But New York, I do wonder if it is just so lindy and if the staying power of New York is so strong that it may even survive the fall of the West in one way or another.

The West is falling? This is, I think, one of the great questions of our time. Can we say that? But if the West does fall, if something tells me, New York will reemerge again. There's a long line of American cities that are in much worse shape than New York City. New York City at least has many redeeming qualities. I think that's more than you can say for a great many blue cities in the United States. I was actually at an event two weeks ago.

Chatham House rules. I'm not allowed to talk too much about specifics, but one of the topics was around. the scene in new york and apparently there is a bubbling uh conservative scene it's really trying to bring back good aesthetics and good conversations and in the middle of new york city which i don't want to denigrate denigrate logan's been uh been uh making fun of my denigrate pronunciation for sometimes in philadelphia we say denigrate but don't want to denigrate new york too much now i'm thinking too much but yeah apparently there's a bubbling scene there's a lot of bitcoiners in the middle of it apparently uh around alphabet city

there's uh you know in uh i think what will it's funny because a couple years ago i moved out of new york uh because i was just really tired of the uh the culture um it was a very frustrating kind of monoculture where uh people just kind of regurgitating like new yorker new york times talking lines i think there is actually uh i think maybe it's always been there but it certainly gained uh some momentum recently um there are some more subversive scenes in new york and i think there is now a really interesting uh uh discourse happening there i think yeah dime square is like a weird manifestation of uh one one of these uh these physical areas that is basically within a city that's associated with the whole kind of intellectual movement right now

which i think is really fascinating um so yeah i mean i think you know i do wonder if uh in called like the last two years new york has now maybe become one of the more interesting intellectual places to live you know obviously it's not the bitcoin capital world like um austin or you know nashville's branding itself now is sovereign valley i'm hearing rumors that sf is so back But I think New York always just has this mix of like, you know, culture, finance, and especially now with like some of the more call like new wave dissident online, right? Like Red Scare adjacent sort of pockets of discourse. You know, I think New York is now a very interesting place to live once more. At the very least, that's all we could hope for is just better discourse.

Better discourse. Ideas competing. From my very remote perch in, you know, at this undisclosed location in the Mountain West, it certainly seems like the cool kids in New York and other cities are sort of gravitating towards this, you know, like online, very online right wing vitalism, if you could call it that. Which is interesting because New York is sort of, in many ways, it's very difficult to live a truly vital lifestyle in New York when you're basically slammed into these concrete boxes, incredible density, not that much sunlight. You know, you're pretty far from like the land, certainly far from swimmable beaches and swimmable oceans. but um yeah it's i think just new york because it's such like a natural shelling point you're going to attract the diversity of folks regardless and it's nice that you know some pockets that aren't just like web3 bullshit are getting some more uh some more traction in in new york right

now but of course i like i think also one of the other interesting things is uh some of the discourse now this is pretty i'd say pretty new saying that basically sf is actually coming back as well so it'll be it'll be interesting to see how uh how these next few years plays out because like the the staying power of a place with really strong network effects is just a hard thing to overcome and a hard thing to really really die um i mean what's it like in austin right now is it still uh let's call it the post-covid uh wave of like sf tech bros is that sort of subsiding or is it still in full force traffic would say that it's still in full force i'm just going to use the traffic heuristic if you try to get in the office by 9 a.m it's pretty pretty hectic commute but

other than the scene down here obviously we had the comedy scene blowing up right down the street here from the commons with rogan's mothership and so you have a bit of the arts and culture historically music's been in the center here and still a prominent theme in the city but you have these other types of artists comedians particularly coming in and then that keeps the tech bros entertained you know they have things to do with their their girlfriends and their wives on the weekend so yeah i think it's still still bubbling the the bitcoin energy is certainly very strong in this city no for sure that's great yeah are we doomers how are we feeling right now in the uh spectrum of optimism to to doomerism uh i guess it depends on what exactly you mean by doomerism

like uh mandibles all of rome probably yes uh are we all gonna make it probably yes uh certainly bitcoin gives me a tremendous amount of hope at least um for for people like us who appreciate its value and are working towards uh bringing it to more people yeah you know i find myself uh as many bitcoiners do you know when you're talking to your normie friends into your family you naturally kind of point out some of the things that you think are deeply wrong in the world and it's easy to just kind of fall back on the system is broken which i think it is um and you know many many folks don't really want to think that way but if i were to describe to you a uh let's just at least talk about like you know maybe government is a microcosm uh if you were to if

i would describe a government where uh laws that are many thousands of pages uh are passed after being introduced less than a day before uh and the people who voted on these laws have not read them uh and it's unclear who's written them this would sound like uh to me at least a broken system um so i think in many in many respects like that you know i do think there's some major some major headwinds and as AJ mentioned you know if you told me that we're witnessing the decline of of the United States empire I probably would agree with that but yeah there are many causes of many causes of hope I would say I'm I'm typically uh quite optimistic almost uh permeable by heart uh you know and I like this term uh I've seen on on parts of Twitter foundationalism

or foundationalist you know where there there are uh there's a great opportunity here to kind of restate some um really important institutions and some important spaces with really important values that that can't be forgotten um and so i think i think there's there's much exciting stuff happening even though uh you know so much of this this current system remains broken and you know it really is not just the money sure much of it may be downstream of money obviously money is tremendously important um but there's also like a deep cultural issue as well that you know whether or not that's downstream of money i don't know i think it that's it's a harder case to to make that all that's wrong with the culture or all that's wrong with the government is downstream of the

money but i mean i think we both certainly still believe that uh sound money and you know abundant energy as as the cathedral motto goes uh are both keys to human flourishing without that you can't have human flourishing but there might be much wrong beyond that agreed i think fixing the money bringing the foundationalist perspective to that let's fix the foundation of society our our economy more broadly by fixing the money and then yes the things that are downstream or may not be downstream and you can once you fix the money you can begin focusing on them more intently with more intent and it's funny i open up with this type of conversation because i agree with what you said aj bitcoin does provide me a lot of optimism i do think it's a very potent

tool in this cultural generational battle that we're having as we transition further into the digital age um and that's why i'm happy to talk to you guys right now as we sit around twenty eight thousand dollars you guys are running cathedra a bitcoin mining company or almost 15 years into bitcoin's existence the white paper anniversary is three and a half weeks away years that's quick i feel like last year was 10 yeah 15 decade and a half decade and a half and three and a half weeks since the white paper was launched and i think we all agree that bitcoin is this very important tool but only 15 years in even though it seems like a long time In the grand scheme of things, it's a very short amount of time.

We're learning a lot of lessons. There's a lot of trial and error that has happened over these 15 years within the Bitcoin space, whether it be how do you update the protocol? How do you scale the protocol? How do you build a mining operation efficiently? How do you pitch Bitcoin to people? And so we're going to focus on the mining aspect of it in this conversation. i think a lot of lessons have been learned in the mining industry over the last two years the last

time we talked was had to be 2022 early we were still outside at my house drinking some coors lights drinking some coors lights um so what have we learned since then about a year and a half ago since we last talked near coming off the all-time highs at the end of 2021 what lessons has the mining industry learned since the top of the last bull market yeah you know it's a great question and i think you know as we as we think about what it was like to sit on your couch and to talk through um the way we looked at the world at the time though i mean the world was just such a different place um we're in the middle of a of a global energy crisis um we're just about to start the most aggressive period of interest rate hikes in many decades.

And you know, I think as we've, many of the themes that have been going on since before then have certainly seemed to continue, but I think, you know, being on now like the other side of say like a regional banking crisis and you know, these crazy, basically government sanctions that freeze another government's financial assets to the tune of hundreds of billions of dollars. I think we've basically just seen the importance in the use case of Bitcoin only increase. But yeah, I mean, it feels like another lifetime ago when we were sitting in Marty's couch. It really does. So that would have been pre-Russia-Ukraine war as well.

It had to be right before it happened. Yeah. Yeah, I mean, the world very much, to your point, looks and feels like a very different place. What does the mining industry learn specifically? I would say one of the most obvious takeaways is highly volatile balance sheet assets and debt do not mix well. There have obviously been a number of very high profile bankruptcies in the Bitcoin mining space, but also in the broader crypto ecosystem, if you want to call it that. um i think uh people are much more focused today on making their operations more efficient and um preparing for the having which i'm sure we'll talk about that's coming up in probably less than six months at this point but then they are or then they were concerned with

things like growth and um getting their hash rate numbers as big as possible when we last met and i that holds true for us to some extent as well. The way we were approaching the business in Q1 2022, when it was still not clear that we were entering a different market regime characterized by aggressive interest rate hikes and a sell-off in basically all risk assets, we were thinking about things very differently than we started to, call it summer of 2022, when we went a little bit risk off and started to focus more on plugging in machines, even if it wasn't in the most ideal situation just to get revenue online shoring up our balance sheet and focusing more on efficiency and making sure our operations were dialed in did you agree with that yeah totally i mean like

again rewinding going back in time sitting on your couch marty um you know aj and i had joined uh cathedral and then then fortress now cathedral and it was cathedral at that time we joined in end of september 2021 um you know at that time you were still in the middle of these uh large mining specs many of whom had zero deployed hash rate uh you were seeing everyone go public everyone raising a ton of money uh and the reality is that mining is a scale game and so we were definitely thinking you know we're definitely focused on that and we were at the time very focused on the off off-grid opportunity. And we were going, we were manufacturing our boxes, looking to go take advantage of flared and stranded gas wherever possible, just because there's so

much white space and there still is so much white space there for Bitcoin mining. But you know, as executives and running a company, really your job is to surf the waves as they come in. And the reality is that by the time, say, we're ready to do our first off-grid deployments in early 2022, actually not that far after we talked, the global energy crisis had really changed the landscape for off-grid Bitcoin mining. You went from being in an environment where you could buy gas for maybe half a penny per kilowatt hour and lease generators for three, three and a half cents per kilowatt hour to an environment where oil is ripping, natural gas is ripping, you know, to such an extreme that some countries like

Pakistan had to exit the LNG market altogether because gas was just so expensive because of the European energy crisis, it became a global energy crisis. And so that caught three cents for leasing a generator and half a cent for buying, say, flare gas, ballooned out to one to two cents for maybe buying the gas and then seven, eight cents for leasing a generator. So at that point, you're paying more than retail hosting rates and you're still responsible for all the CapEx and all the operational issues. So to AJ's point, at that point, the only logical move was to then just go get these machines deployed elsewhere using third party infrastructure that was, you know, we're able to get some good deals on. And, you know, we, of course, still had an eye towards working, you know, to get off grid, which we are now.

But the reality is that as a CEO and president of a Bitcoin mining company, you're a portfolio manager of Hashrate or you're managing a portfolio of Hashrate rather. And so really your job is to just produce the best returns possible given the current environment that you're in. And I mean, I guess I can keep going through some of the other things that sort of have changed since then, because I think the genesis of sort of how we got to where we currently are, certainly, you know, I think there's been many interesting lessons learned over the last, over those last two years. Agreed. And before we jump into the individual strategy that you guys have employed at Cathedra, I do think it's important to talk and touch on some broader themes too. Because what you just described, this global energy crisis that sort of popped up in the wake of the Russia-Ukraine war and the interest rate regime that came alongside that.

i think it's also important to like back up six to eight months as well because here in america particularly we have this the china ban in the summer of 2021 and then that great migration and so like the the price was ripping everybody here in the united states saw this massive opportunity to take a large share of the hash rate and plug it in on u.s soil and so like the bullish tenor of the market at that particular point in time was palpable the energy was pun intended very high and it's just the whole industry sort of ran into this buzzsaw of macroeconomic headwinds at the same time when it was viewed as this incredible opportunity which certainly was and there people took great advantage of that opportunity but there was just these conflicting

sort of themes going on where there's this opportunity to take cash rate from china and then you run into the the global macro buzzsaw at the same time yeah totally and to your exact point around that china band so you have the china band happen in summer of 2021 uh bull market's still very much going obviously we did it down to 30k um but it was still very much bull market vibes um and so around that summer and into that fall when you have everyone in the US chasing that opportunity, many of them built very, very large data centers. It takes a long time to build a large data center. Many of those data centers were only coming online in Q2, Q3 of 2022. And as a result,

you basically have these massive data centers being built by companies often with leverage that took a long time. They started being built in the bull market. They aren't really finished until the bull market's coming to an end. We're entering a bear market. And because of the energy crisis at that time, it was so expensive to put on a hedge for your power prices that many of these large companies, many of whom are now bankrupt, basically had data centers coming online in Q2, Q3 2022 as the bull market's coming to an end, as energy prices are still quite high. So the capital markets are closed. They don't really have the money to uh to put on a hedge uh and as a result they basically ended up upside down

selling fixed and buying floating uh and i think that's why we saw many of these uh bankruptcies uh like compute north and core scientific of course the fact that they were had a lot of leverage just didn't help either um but i think yeah it was basically the perfect storm for that kind of buzzsaw and of course i mean then there's a whole block fi and uh and luna uh 3ac celsius collapse as well uh i mean definitely it was sort of the perfect confluence of events to just cause max pain for for many people yeah it's a miracle any of us are alive after all that when you when you sort of articulate everything in order like china ban all right we're gonna get all this hash right price ripping new asics being deployed by the manufacturers high efficiency high hash rate

everybody's like let's go and then boom you run into this buzzsaw and i think that's why i'm particularly excited about this conversation today is because i think you guys uh are an incredible example of a management team uh disclosure i'm a director at cathedral so obviously some bias here but i i do think the way in which you guys reacted to these headwinds as they were unfolding in 2022 is a great example of being proactive and sort of not hitching your wagon to two ideas during a different market environment in late 2021 so i guess let's fast forward to late spring early summer 2022 what were some of the moves you guys made seeing all this stuff unfolding that have allowed you to survive to today late 2023 yeah so it was around

the time of the the luna collapse that it became pretty clear to us that you know our thesis about uh a hash price super cycle or like a bull market that was going to continue through 2022 uh was plainly wrong and so call it may june of 2022 we took a number of steps to make sure that basically we were on sides from an operation standpoint, but also from a balance sheet perspective. So one of the first things we did was we went out and sold all of the Bitcoin that we had on balance sheet at a price of around 30K, which for two Bitcoin maximalists like us was extremely painful. I think Drew probably still has PTSD from that weekend conversation that we had. Yeah, no. Basically, I'm up in New Hampshire. At the time, I'm basically like subletting some

random room over this uh you know in some like woman's house uh because i you know i moved up there to oversee the manufacturing operation and i remember uh sitting outside uh looking at the the andrew scoggin river up there and uh just you know talking to aj at the time i felt a lot of resistance uh because i you know i never really sold bitcoin in my life uh and then uh just you know sitting there smoking a cigarette and just like fuck okay i guess i guess we do have to do this. And I mean, looking back, I think that decision was a really important one for making sure we withstood the storm because, yeah, I mean, it only got worse from there. Yeah. And we used the proceeds from that to basically pay off a bunch of debt that we had

taken out, you know, in hindsight at the very top of the market. And then in conjunction with that, we went out and did a small equity round. We raised about $6 million to further fortify the balance sheet we sold some of the latest generation machines that we had coming in in the next few months i think it ended up being like 400 of the s19 xps that we had coming in we sold for cash uh that ended up being a really good trade i think we sold them in the you know about 40 bucks a tera hash which at the time again was very painful because we you know it felt like the machine prices had already declined a lot and in hindsight it ended up being a very good trade um so that gave us what we needed from a balance sheet perspective to last through the worst of it.

And then from an operation standpoint, we basically just started plugging in machines on grid at third-party hosted locations and facilities that we had leased instead of pursuing the initial plan that we had to basically go down this path of building a vertically integrated off-grid miner where we own everything from these modular containers that we build ourselves in-house to the ASICs inside them, and then potentially even down to the energy asset yeah and just to touch i think you bring up like there's a couple interesting uh marty's your first question about some of the lessons um that you know i think we've all learned in the uh through the spare market and i think everyone learned uh these lessons in particular uh one to the point

around selling the machines we all learned just that the asic market is really not that liquid and you know back back when aj and i were at galaxy we uh you know i spent a lot of time working on the ASIC-backed lending product that we had, where we basically provided ASICs to miners and we financed them over time. And the idea was always, you know, worst case scenario, the miner doesn't pay and then we foreclose on the ASICs and then we just sell the ASICs. But I think as we learned, the market really was not that liquid in the end. And so as these miners who had these ASIC-backed loans were watching their margins get crushed,

the value of the collateral and the loans was also getting crushed. And so many, many an ASIC was seized. But, you know, as a microcosm of this, the XPs at the time when we sold them, I think we sold them for like $49 a terahash or something like that. And the current prevailing market indexes, and if you went on Telegram chats and we're looking at quotes, the quotes were all in, you know, $60 per terahash, something like that. And so you're seeing this one price on the ticker. But when you actually need to go close a transaction, you were seeing a very, very different price. And so I think there's a really general lesson there for just selling assets during times of stress anyway, and even just the fact that markets are often not as liquid as you think that they are. Yeah, the ask in a telegram channel is a much different price than where the deal gets done, basically.

Yeah, exactly. And then also, I think in terms of selling the Bitcoin, as Bitcoin maxis, we all believe that this is going to a million dollars at some point in the near future, right? Whether that's like five years or 20, I'm not really sure. But we're all really, really bullish long term. But the reality is that now coming out of this experience, I think our risk management attitudes have totally changed where we are that bullish. But you can't let yourself get in a position where you're jeopardizing the business surviving. uh you know but basically if the business dies before we see a million dollar bitcoin then we've lost anyway so the number one name of the game basically as executives as fiduciaries

is just to make sure that the company stays alive and to look out for shareholders even if it sort of pains us to to sell what at the time wasn't really what certainly wasn't the bottom um but it was certainly still painful to sell after seeing you know a 50% drawdown yeah i mean there was almost another 50% drawdown. It was definitely 40 to 35 to 40% after that. So, yeah. And we're still below that point right now. One of the other lessons I think is just, it was a stark lesson about the nature of the Bitcoin mining business and like what business it is that we're in. It's not really like, you know, most of the time hash price and therefore your profitability is declining. And it's only these very, very brief periods that last for nine to 18 months where

hash price is actually going up and you earn, you know, 90% of the returns that make this a worthwhile business. And if you're not staying in the game to benefit from those very brief periods, then you're in the wrong business. So yes, as Drew said, surviving at any cost is really the name of the game and at this point it looks like we're hopefully in the early stages the next bull market and we're we're just excited to uh to be around to benefit from it yeah totally and then i think part of the uh it definitely was easier to i think looking back on all those decisions i think we absolutely made the right choices and i feel very good about those decisions we made certainly also it was interesting to or it felt good to uh see many of the other miners end up

having to sell substantially all their Bitcoin as well at much lower prices. But, you know, I think, AJ, like to your point, you basically just need to stay in the game. You need to stay alive. And to that end, when it came to deploying our machines at third party data centers, you know, is it as sexy as like flare gas mining? No, but it from like a capital machine allocation standpoint, it was absolutely the decision that maximized returns for those ASICs. And that really is like your job at the end of the day.

just how can i get as many stats in the door as possible uh okay how can we maximize returns yeah and another part of that too which i think you guys have really spearheaded been vocal about and is being recognized by the market is being efficient with that fleet as well so trying to gauge what your cost of electricity is where the difficulty is where the hash rate is where the hash price is and really optimizing the fleet to ensure that you're getting the best profit margin possible maybe not the highest hash rate and i think this is a really important theme to really dig into is historically particularly with u.s publicly traded miners the name of the game is just get that get that hash rate number up as high as possible and you'll

be rewarded by the public markets for doing that but i think what you guys have proven what you would argue is that is not the most efficient way to run a mining business we're the most profitable way at the end of the day and so let's let's get into underclocking and maintaining the efficiency of your fleet of hash rate yeah so i guess maybe picking up the uh the story where where jay kind of uh where we left off so you know over the summer we're just trying to get machines plugged in um fortunately because uh there was some idle infrastructure with some other folks falling down we're able to get some pretty good uh hosting deals there um then of course in the fall you know things kept getting uh worse from a hash rate hash price perspective from a um bitcoin

price perspective obviously we saw ftx collapse in in epic fashion um and you know i think i think there's i'm personally tired of seeing the sbf ftx articles on twitter so i think uh we don't need to get too much into that but it doesn't have enough adderall just doesn't michael lewis would like a word with you drew yeah if only we had more effective altruists who were you know ripped out on uh amphetamines and uh you know engaging in some very interesting lifestyle practices uh you know maybe maybe there would be hope again but anyway the um it come like the november december sort of like real depths of the bear market uh we once again had uh had these You know, we had some machines that needed to be plugged in.

As we looked around, really the returns for plugging these machines in anywhere were really not very good. And I think this is really where Isaac and Reid deserve a ton of credit. Isaac, our C FOMO, and Reid, our CTO, I think they did an excellent job walking through some of the details of this on their podcast they did with you back in February or March, Marty. But they basically were, Isaac had this wacky idea. well, what if we just jam a bunch of machines into our legacy Washington site and put 50% of the power drawn to them? To me, that just sounded insane. Like, well, I've never heard of anyone doing this. This is just a ridiculous idea. But as we walked through it and as he tested it and showed that we could get 23 joules per terahash with an S19J Pro using aftermarket firmware and

underclocking, it all of a sudden became a no-brainer because our cost at that site remained unchanged. And we basically just doubled our hash rate at that site. And so it was pretty, I think that the constraints of the bear market really led to some amazing ingenuity. And now that underclocking is really a core part of our strategy, where each month we'll look at the different sites that we have. And we'll basically say, is this the most efficient clock given the cost of power and given the hash price? Or should we change this? Should we underclock? Should we move the clock back up closer to stock settings? And that has really unlocked a whole new sort of area for us to optimize operations. Just each month, what can

we do to maximize cash flow coming through the door? And then, you know, I think Isaac and Reid have really pushed that idea to the extreme in a way that I haven't really seen many other folks doing in this industry. Yeah, just to give you a sense of the magnitude of the effect that this has on our sort of our hash rate numbers. So I think if we were running all of our machines at stock today, we'd probably be between 450 and 500 peta hash per second and like headline hash rate. And I think the number that we disclosed this week

to the market that we're actually realizing is about 355 peta hash per second. And then the difference there is again, like that's the difference between us running them at stock and using this firmware to reduce the power draw and reduce the hash rate, but also, you know, maximize the amount of actual net cashflow that we're taking in each month. I think the way most other large,

like most of the large publicly traded miners are doing it is, as you said, Marty optimizing for the hash rate number, being able to announce like, Oh, we reached, you know, five and a half, six, seven exahash without regard for like whether they're maximizing the amount of cashflow that they can be taking in each month through underclocking. Yeah. And do you think, I'm trying to think of, like how to tactfully approach this question but let's just jump into it like moving forward

like do you think there's going to be obviously there's bias involved in this but i'm pretty convinced that the public markets investors are going to get smarter and begin to appropriately price these businesses and just not fall for the hey we got six and a half seven x a hash and really dig into the numbers like all right what is your actual profit margin with this fleet of hash rate do you think we're going to see a sea change in how these companies are viewed and flip put plainly our equity analysts going to get smarter and actually understand mining businesses better i definitely think so i think um what it will take to see the like tier one and in tier two public miners adopt some of these practices is basically one of them just doing

it. Like as soon as Riot or Marathon announces that they're using aftermarket firmware to underclock, it's going to be sort of a race from all the others to follow suit. And I think, yeah, you know, the metrics that investors and equity analysts use to evaluate these companies will continue to be standardized and refined. I think, you know, probably this time last year if you had mentioned the word or the phrase hash price to an equity analyst they probably would have had no idea what you're talking about and that has sort of become an industry standard in many senses and i think uh not to pat ourselves on the back too much but in our most recent mdnas that we put out each quarter we've tried to do a good job of like

disclosing some of these these metrics and and how we are performing um on that basis so for example Each quarter, we put out a break-even hash price number that says, all right, if hash price falls to such a level, when will we stop generating positive cash flow at each individual site and things like that? So I think, yeah, the industry has a long way to go, but it's going to continue improving. And as soon as some of the larger guys start to do it, it'll become really, really incumbent upon the others to adopt the same practices. I think that's probably true, but I'll take sort of the bearish view that I don't think they're going to be adopting it anytime soon. because i think for a lot of these like large guys look they're sticking with the recipe that they've seen work um they will to unlock potentially some very very large compensation packages for themselves uh in doing so and like you know they basically they've grown uh they've

raised equity to buy hash rate and they've had they've communicated growth targets to the market and they want to hit those growth targets um and i think many of them are probably just going to keep on doing that until they're basically forced not to. And I mean, underclocking does also really complicate the way you communicate information about your business because metrics like uptime don't really make sense anymore. Hash rate becomes this variable thing as opposed to something that an equity research analyst can just plug into a model. So, you know, I definitely, I think it makes it maybe a little harder for people, unless they really understand mining, to really understand the business and what we're doing. But I mean, really what we're doing this for is trying to

produce the most value for the company as possible, for shareholders as possible. You know, AJ and I are both substantial shareholders ourselves. And so we want the company to succeed. And, you know, we really, we care about actually producing returns and to, you know, to the extent we can versus, you know, basically just chasing growth for the sake of growth. So we'll see. But, you I think to this end, we've only seen the beginning of firmware and underclocking, I think, in particular in this industry. Yeah, that's probably right. I'd say there's probably another full bull market, bear market cycle to go before equity investors really start to punish some of the companies that have been, number one, not very prudent with dilution and also with these games they play with the metrics they're disclosing. just to sort of like, again, raise capital

and line the pockets of the executives. Yeah, and there's another aspect here too, which is the ability with particular firmware to underclock and eke out these profit margins or increased profit margins exists, but you also have the educational piece on the side of the power companies when you're setting up these deals.

to say hey this is our strategy for mining to optimize our profitability at any given point in time we need some flexibility within our contract to be able to oscillate our energy our energy pool excuse me at different points in the market and so how do you guys see that evolving these conversations between the power providers and the miners that want to employ these type of strategies? No, it's a really great piece because I mean, really, it's a great point. I should say everyone cares about flexibility, right? If you're a power company, you might want a 90 PPA with 90% uptime. So that way in the extreme circumstances where, you know, maybe the cost of power elsewhere on the grid is really skyrocketing. You want the ability to take

advantage of that and to sell that. We as miners obviously want the flexibility to not be committed to a certain amount of power and whether you have a fixed PPA or maybe like a rate schedule from a vertically integrated utility um it this is all all very very different so it's definitely something we care about a lot where uh in all of our like key hosting contracts uh and certainly the sites that we control we reserve the ability to adjust the clocks so that way we can maximize the uh basically operating margin that we're getting from um and i think moving forward uh really what you know to your point how is mining going to look differently i think you're going to see a lot more called uh diversity and biodiversity within bitcoin mining so it's not

just going to be big box data centers where folks are plugging in you know new machines running them until they're not profitable then swapping them out for new machines um i think you'll start to see low uptime low cost of power sites you know maybe a site where it's only up 30 of the time but the cost of power is so cheap you can afford to run s9s or m20s and still make a really uh an interesting return there. We think about what it will look like when transaction fees make an even larger portion of miner revenue. You're even going to see folks switching online only to take advantage of these brief moments of really high transaction fees that elevate hash price. And so I think the whole mining industry is going to become much more dynamic.

And I think much in the same way where miners are going to seek really interesting power strategies that potentially have low uptime and low cost of power you're also going to see this saturation of aftermarket firmware so that miners can always be optimizing clocks depending on what they're seeing on the grid you know if you're mining in texas and the cost of power goes negative you want to suck as much power as you possibly can from the spot market and so you you maybe want to overclock all of your machines to the extent you can now it will require having overbuilt infrastructure to give you that flexibility to do so um but the whole game is about to become much more dynamic i think to date mining has been a very simple game of

get newest machine get low cost power plug in and it's it's now about to get much more uh complex about to turn into 4d chess if it isn't already i think it's also it'll also lead to the something we talked about in the past marty but like the increased integration of mining at the the actual site of power generation by the the companies that are generating the power themselves so it's not going to be i think it'll be less pure play miners partnering with power providers and more um companies that look like a mix of the two that are perhaps using mining not as their primary revenue source but as an ancillary source of revenue to support the sale of electricity or something like that and in that in that situation mining becomes much less important the uptime

in any given day becomes less important um because the two sort of support each other yeah no and i think this underclocking aspect of it in this aftermarket firmware is probably like the first domino to fall which provides mining companies or energy companies with the tools necessary to go after these types of strategies yeah i would definitely agree with that and i think um you know of course there's been this question where like when is one of the first energy companies really going to be like acquiring bitcoin mining businesses and stuff like that and you know clearly we're not there yet uh we've we've i think we marty you and i and agent maybe you probably would agree i think we probably would have thought we would have been

there by now if you asked us in 2020 um but you know i think it is it is definitely coming and basically it just the the idea of asic is a load bank it just is going to give uh energy companies a lot more flexibility and but to your point around underclocking especially this aftermarket firmware i think by the time this podcast comes out we will have uh released our own firmware our cathedra uh firmware where uh and maybe it might just make sense to talk about this a little bit you know i think there's many firmware uh products out there many aftermarket firmwares and you have Brains OS Plus, you have many others. And I think they all have called different puts and takes,

but it's all very like scary business at the end of the day because you're basically jailbreaking your machine. And you know that if you jailbreak your machine and you break it forever, it's broken and you're not getting any- Bitmain's not gonna honor your warranty requests. Yeah, exactly. So it's definitely like wild west out there with firmware.

And we have done a ton of work on testing different firmware, trying to find the best. And when I say we, I mean, I especially shout out to Isaac and Reid who have really done an amazing job. They really grok ASICs and thinking through, you know, as they told you on the podcast,

thinking through ASICs from first principles, what are the effects of voltage and frequency? How does this change in different temperature environments? What are the different nuances or ants that can get you if you start playing this game? because a change in temperature, if you have assigned an ASIC to a static voltage and frequency, a change in temperature can totally change the efficacy of that clock. And so, these are some

of the really important considerations to have. And so, what we basically are doing now with our firmware is we're basically sharing the best tools that we found. If you download our firmware, you can join a private telegram group where we're going to kind of help you and provide you with with some of the clocks that have been most useful to us, share some of the most useful strategies and most important lessons that we've learned in doing so. And so our hope is that we can really help get more people into this underclocking game.

It's a weird scenario where it's actually kind of a win-win where if multiple miners were to underclock, we're not really hurting each other, we're all just improving our unprofit margins and network cash rate even like marginally comes down. Now, of course, we don't think the whole world's gonna use our firmware, But many people have asked us, you know, how did you get these results?

How did you get the S19J Pro down to 23 joules of terash? And our intent in making this firmware publicly available and sharing with everyone is basically just to share this knowledge that we've had and to basically help more people use these tools that we found incredibly helpful because it's not really zero-sum. Like, mining is a brutally competitive business. But in this context, it's certainly not a zero-sum game where if we help other people breathe more life into their machines it actually benefits all of us i think you forgot to mention drew that we'll also be taking a small a small development fee off of any trash rate that uses

our uh yeah i mean it's not purely altruistic it's not like purely yeah we're not doing this as a charity uh but like it does actually it does benefit folks for sure yeah no that's absolutely right and i think like we're the intent is to do it very much in the spirit of the way things are done in bitcoin where it's you know it's not like quite open source but anyone can download the the firmware and join the telegram group um if you begin using the firmware that's when we get paid and i think it's like one percent of the hash rate goes to us and so from our perspective it's a really interesting way to potentially expand our hash rate exposure without investing another dollar in machines or infrastructure so i'm not sure like how material it will be to the

bottom line on day one but i can see it being a pretty appreciable product over the course of you know years to come um yeah completely agree and that's i mean one thing we've learned in the mining industry i'll speak personally like being in it for five six years now almost is trying to reduce the pure asic exposure risk and diversify like how do you accumulate hash rate without buying an asic and this is a great way to do that in my mind totally no i think if you understand that asics are really a shit coin yeah i mean that seriously that's one thing that we've seen with like with this announcement from bitmain in the last couple weeks that i think has been shocking to many people just the the scale of their manufacturing abilities and like how many

machines they can really put onto the market in a very short amount of time i think um yeah it's it's a little bit, it's a little bit shocking to people and people are going to be much more conscious of entering into these futures orders when you have no idea how much hash rate is coming online. Yeah. So let's educate any of the listeners who may be ignorant to what Bitmain has announced.

They've announced their S21 series, both air cooled and hydro cooled. They'll be coming in at what? 16 and a half joules per terahash. They'll be selling them for $14 a terahash. Is that correct? Yeah. So there's some nuance there around whether it's the S21 or the S21 Hydro.

And I think the pricing is also subject to fluctuate as well. But, yeah, they definitely came in with a bargain basement price for what is by far the most efficient miner on the market. And how much hash rate are they going to be producing again? Again, I think it depends whether it's the S21 or the S21 Hydro. But we're talking like close to 200, call it roughly 200-tier hash. And, I mean, I think what's really crazy about this too is that if you think about the price that they're coming in at, they're basically undercutting what the current market rate

for XPs is. So I think if one wanted to put some tinfoil on their head, they might question whether – Marty does not want to do that. You can just stop right there. Of course not. Sorry. I forgot.

Marty first takes his CNN takes, but anyway, I think they might be trying to bleed dry some of their competitors, because as we know, in addition to mining being a ruthlessly competitive business, so is ASIC manufacturing. And, you know, I think if they can stick with this really low pricing at $14 a terash, I think it's reasonable to assume that they have a lower cost of production than both MicroBT and Canon and these other new ASIC manufacturers, just because they're so scaled, they've been doing it for so long, and they probably have the largest amount of capacity with TSMC of any of these manufacturers. And so things could get really interesting if all of these ASIC manufacturers keep putting

the pedal to the metal, it will get really interesting in terms of thinking through what mining will look like in the next bull run. Essentially ASICs not really being the bottleneck anymore, potentially being infrastructure. Yeah. That's another trend we've been thinking a lot about is the shift from the bottleneck being ASICs to power and data center infrastructure for mining. I think when we joined, part of the reason that one of the first things we did when we joined Cathedral was to enter into these futures contracts with Bitmain was, you know, we had

come of age in Bitcoin mining where ASICs were sort of the scarce commodity and it was really hard to get the latest generation of ASICs from China. And I think in the last, yeah, certainly the last year, that's sort of flip-flopped where now it's much harder to get cheap power uh in a in a cost-effective way um than it is to to get the latest generation generation of asics and i think that will probably continue to be the case like there's all sorts of the of like uh powerful narratives that are aligned to bring on more semiconductor manufacturing capacity i think things like bringing more manufacturing over to the west from from the east um you know the whole the whole ai craze that's going on right now

and i think conversely when it comes to power uh despite marty's best efforts the esg uh thing still has some steam left in it and there does seem to be like narratives that are aligned against bringing on really cheap and reliable power so yeah we're gonna kill the esg narrative it's just gonna take a while i mean it's dying it feels like it's dying for sure it definitely feels like it's dying. I mean, I think the hierarchy of needs reasserts itself quickly. But I think to your point, AJ, about this infrastructure bottleneck, I had a tweet thread about this last year, or earlier this year, I think. But if we just think about in a post-having world, if Bitcoin were to 10x in price, for a hash price to remain flat at around like

this $60 per petahash level that we're at now, that would mean that the Bitcoin network We need to consume something like 50 gigawatts more power, which is really an insane amount of power. That's, you know, Texas is basically half of Texas, if not a little bit more in terms of power capacity. And it just takes a long time to build that type of energy infrastructure. And even with the white space of, say, off grid flare gas mining or methane mining, you know, you really have some some other bottlenecks that start to appear like the generators. How can I turn that methane into electricity? And so really, that is the I think really the bull case for Bitcoin mining, especially in the call this near to midterm, is that there's just so it's going to take so much for that much hash rate to offer so much infrastructure to bring that hash rate online. That once again, I think there'll be a really interesting window for miners to really capitalize on, you know, bullish move in Bitcoin price.

and one of the first lessons i think aj and i learned in bitcoin mining was back in uh really back in like 2020 almost you're either hashing or you're not and there's nothing more important than just having hash rate on the ground staying in the game so that when that uh when that bullish price action comes you're there to take advantage of it because it will take network hash rate a while to catch up it always does yeah aj i mean you touched on it but i think it's a very important theme to explore too is ai and the energy demand that it brings to the market and ai hottest chick on the block right now uh but more importantly like some of the most respected backers we got microsoft google facebook open ai um these guys have a lot of capital and if we're

being honest with ourselves they'll probably get priority in a lot of these uh energy deals so that's another thing you have this competition for energy, which is already scarce. It's going to heat up not only between Bitcoin miners, but between miners in AI companies with their GPUs. And again, if we're being honest with ourselves, like I wouldn't be surprised if the AI companies get preferential treatment,

which in a roundabout way actually makes Bitcoin mining more bullish in that scenario where there's a lot of demand for people who already have hash rate for sure. Yeah. Yeah. And if something tells me, despite the best efforts of some of our friends in D.C., the collective lobbying power of the AI industry probably dwarfs the good work that many of our pro-Bitcoin lobbyists are doing. Yeah. I mean, I think also when it comes to AI, it's funny because this AI high-performance compute market, right? like it's been around for a long time i remember aj and i looking at hpc and pitch decks of bitcoin

miners back at galaxy in like 2019 and it never really left those pitch decks like it was still there even though the market never really developed but obviously the last year um with chad gbt and with stable diffusion and mid journey like it now seems like we finally hit this this uh escape velocity where it's here it seems like it's going to be here to stay i do think there's some nuance that maybe gets lost in some of the discourse where everyone's incentivized to change their name to xai at this point right and to start uh basically start trying to raise money on that but in many ways it seems like this ai high performance compute business is going to be pretty similar to bitcoin mining where you know currently

right now the hardware the computers the gpus they're the scarce resource they're the bottleneck and much like asics they seem to basically be getting priced based on the current margins associated with uh with using them uh for for rendering or for training llms and so you basically have this interesting thing where the capex is always going to scale with the margin at that point in time which makes for really interesting or really easy to just get get wrecked if uh if demand falls off um weirdly though people are already comfortable with like gpu back debt uh and and i just had a tweet this morning you know i do i do wonder whether we're going to end in a similar environment where like the hpc market's gonna suffer many of the same uh pitfalls

as bitcoin mining including this like gpu that ma gpu back that market that basically is uh susceptible to the same reflexivity on the way down that asic back that was back in 2022 but it definitely seems like it is it is uh here here to stay um but you know i think it's probably true that 98 of the called ai startups that you read about are not for real like they're not going to make it and they're i'm not going to say that they're scams but i think it's possible that 98 of its noise and it's still here to stay much in the same way that you know with like crypto whatever uh there's real signal in bitcoin but there's most of what you hear about in the industry is just noise i completely agree with that and i

all things like the cycles of the hardware, the hype cycle that exists. It is going to be fascinating to see. And again, like anchoring back to the power brokers within the AI industry, like, and they're well capitalized from other lines of business that they have, whether it's Microsoft,

Facebook, open AI is pure AI, but they're pretty well established at this point. Oh yeah. And then, And that's the other thing, too, with the GPUs. I do think they'll have an ASIC-like cycle, but it may be less pronounced due to the fact that they're not a special purpose as a Bitcoin mining ASIC. Yeah, I was going to say it'll definitely be volatile.

I would be surprised if it's quite as volatile as Bitcoin and ASICs. And just thinking through, maybe because demand for something like Bitcoin and, of course, Bitcoin supply is perfectly... Yeah, Bitcoin supply is perfectly inelastic. Supply for GPUs and compute is not so. And also, I think the demand for Bitcoin probably fluctuates a lot more secularly with changes in monetary policy and macro backdrop. But I think you guys are absolutely right. They're probably going to relearn some of the hard lessons that ASIC-backed lenders and miners have learned in the last couple of years. So, yeah, it'll be fun to watch play out.

Yeah. And even though I did mention that there's going to be this competition for the energy that I think in the short to medium term, AI may get preferential treatment. And I'm interested to battle test this idea with you guys, because I think in the long run, like they're going to be co-located, particularly if you're training models and you want the cheapest power. you're going one of the best ways to get cheap power particularly on grid is to be able to participate in demand response and we know if you're training models downtime is not an option so if you want to participate in demand response programs you're going to have to have a6 co-located with your gpus that have that interrupt interruptible load aspect that can actually respond to demand response that allows you to lock in that lower that lower price yeah another great example of you know bitcoin mining being used as like a supplemental or ancillary revenue stream in support of a primary revenue stream um i could totally see that happening and but

one one point also uh that i you know as a disclaimer i'm not like hpc gpu ai llm training expert but i do wonder if there would actually be a market for uh called like value hpc where you know google um you know microsoft these companies often like their data centers have like you know five nine stipulations where it's very very high up time they care a lot about redundancy i do wonder if they'll basically be a market for uh called more like budget hbc where maybe the work uh maybe there's a way to interrupt that work maybe it's it takes longer uh to do it it's over you know instead of being done kind of like on an asap basis maybe it's uh lower priority lower priority but as a result uh it would allow those operators to participate in an hpc type

uh oh sorry in a demand response type program so that they can secure the lowest cost power and yet it won't get you you know it's not the same redundancy or the same resilience or the same uptime but uh you basically benefit from that on the cost side of things yeah and i can certainly see that happening like all the big ai companies are competing for very similar models but you can imagine a scenario in the future where somebody has a very specific model idea that nobody's really thought of and they have the luxury for that for that interruption and the training totally and like i mean at the end of the day that i think that is at least how that's how a bitcoin miner thinks about it because once again you know we're cockroaches we want to figure out

what are the ways that we can save money we're happy to do scrappy things um i mean much of the the bitcoin mining data center design business what makes it so interesting uh relative to say uh traditional data centers with you know high uptime requirements is that bitcoin miners uh the the quality of the data center design isn't just does it work and is the uptime high but it's also it you know is the uptime attractive for the cost that went in right like if you could double your cost for another five percent of uptime it oftentimes isn't worth it and so i think the uh this whole like cockroach engineering mindset where it's just you know know, you're basically building your Bitcoin mining data centers so that you can run your

ASICs effectively. So you can earn the most money possible and you don't necessarily get, you know, brownie points just for having spotless wax floors in your data center. Yeah. And I want to pivot a little bit to just get your guys ideas on the broader theme in the Bitcoin mining industry, which is this geographic dispersion of hash rate. It seems that there's a lot of activity happening in the Middle East, in Latin America, Nordic countries. It seems like China may be coming back online to a certain extent.

How does that affect your view on the market overall? America's been the big theme in the mining industry for the last three years. I think that will continue, but there is competition from other parts of the world where people are waking up to like hey this can actually be a profitable business it can help our energy assets like that's another variable that's beginning to materialize and become a pronounced trend moving forward yeah i think i'm not sure how much it affects our business specifically in that we are quite conservative in the areas that we're willing to go and just as fiduciaries and executives you know there's many states even within the u.s we don't feel comfortable

deploying hash rate in um and yeah i guess you could say that many states within the u.s do have sort of a third world feel when it comes to doing business because you don't know if the rug is going to get pulled out from under you uh without any advanced warning so i think there will be lots of like adventurous entrepreneurs who go out into russia or china or parts of latin America and the Middle East. We probably probably not on our roadmap anytime soon. I think there's a lot of wood to chop here in the US. And I think a country outside of the US would have to have a very long track record of supporting Bitcoin miners and property rights and things like that for us to to really feel comfortable. But I don't know, it's not something we really

talked about in a while. What do you think? Yeah, no, I mean, I think we've we've long thought that there will be opportunities for people willing to go further out in the geopolitical risk curve, uh, to get low cost power and really attractive operations. You know, I, I wonder if there are basically some like, uh, uh, called like a black market Bitcoin mining consultants who like go and, you know, like arms dealers are basically making deals with, uh, random warlords who somehow have access to like cheap hydro or something like that to basically get them some hash rate online. But I think, yeah, Bitcoin mining, like my, my attitude is basically network hash rates probably going to, it's network hash rates going to go up. It's not a question of, uh,

it like is it going to go up it's just where is it going to go up um and i think the dispersion is natural it makes sense uh especially with say the uh publicly traded uh miners or the capital markets in in the us have definitely not been as receptive for bitcoin miners uh lately it's only natural that that's gonna you know the hash rate's gonna flow elsewhere whether that's um you know uh maybe a nation state or some sort of uh quasi nation state entity that is uh has found a way to get themselves cheap power whether that's by stealing it from the private sector or just causing their citizens to subsidize it uh or maybe the energy is just abundant who knows i think i think this is going to continue to happen and i think it's good like we don't want all the

the majority of the network hashrate to be controlled by publicly traded bitcoin miners in north america that would be a really terrible outcome so i think it's nice that there is sort this natural uh um self-regulating mechanism here which is just the there's only so much hash rate in the world um hash rate flows like water to where it is treated best there's only so much cheap energy in the world there's so many so much rack space it's fascinating it has been really really surprising though i mean it feels like uh from a concentration standpoint the percentage of hash rate in the u.s peaked sometime in 2022 and the the estimates that i'm seeing have more hash rate coming online and places like you mentioned marty the middle east china um parts

of latin america in the last year and it's been crazy to see how quickly that has sort of returned after the um the you know the the wave that we saw into the u.s after the china ban yeah it's such a fascinating industry it's very masochistic in a way but it's incredibly a real button for for pain to want to participate in the industry yeah but it's tantalizing isn't it no of course i i still am uh i still find it to be like cosmically and intellectually so beautiful and it's such uh like proof of work is such a beautiful mechanism uh and i mean energy is still uh such a cosmic such an interesting it's like endless rabbit hole uh just as a concept um but yeah it's sort of like simultaneously still kind of retaining that uh appreciation and the

love for bitcoin uh the an appreciation for the beauty of energy and for the importance of like building physical things in the real world you know uh atoms not bits um paired with the fact that it is a ruthless business that it can be incredibly brutal and as we all well know bitcoin intense assault for the path of max pain but in the long run you know it uh inshallah will uh will still benefit us all yeah agreed it's a fun journey the wives don't like it all the time though can't blame them i do feel like i aged maybe about a decade and during 2022 but yeah i definitely have some more gray hairs i definitely uh you know i definitely smoked maybe a couple cigarettes more than i should have but uh you know i i maintain that cigarettes are

actually healthy for you and i'd be a nice organic fit um but the i think in general it's definitely like looking over the last two years uh it it is it is really fun just in terms of how much growth comes from working in a in a business in an industry that is just so uh so intense 24 7 uh and really all you can do is just keep trying to make the best decisions you can each each where you know along the path so definitely the it's been an insane learning lesson over the last few years and i definitely feel pretty excited moving forward yeah as we can see here on the block clock we've got 27 950 oscillating above and below 28 000 this week we've got the fed holding rates higher for longer at least that seems to be the consensus if you look at treasury

markets and a lot of the macroeconomic think boys out there they're convinced and i guess shifting this over to just bitcoin the asset and what it's going to do over the next year as we approach the halving before we get into how that will affect the mining industry that's really this very interesting time in bitcoin again it's about to turn 15 at least the white paper is in a few weeks here and this is really the first time in bitcoin's existence over the last year and a half that's that it's existed in an environment where rates are are rising and i think that's the big question looming in everybody's mind right now is if the fed does hold higher for longer does bitcoin disconnect from the markets despite that because i think a lot of people would make

the argument that m2 money supply is a big driver of the bitcoin price when when they're printing more money a lot of that's going to flow to bitcoin and when they're pulling it out bitcoin's going to suffer as a result but i'm not so convinced that that adage will hold true over the next year especially if this wave of institutional adoption that everybody's talking about by way of an ETF or similar products, I do think the incremental demand that that market access could provide could outweigh anything that's happening with them too. Yeah, I totally agree with that. Regardless of what happens with the Fed funds rate or the macro backdrop, if Big Daddy Fink

comes through with an ETF, a spot ETF, the price of Bitcoin is going to go nuts. Yeah. And also, in talking with both Alex Thorne of Galaxy and James Seifert, who is the ETF analyst at Bloomberg, we had some meetups with them at PubKey in New York in the last couple of months. And they basically have certainly sold me on the fact that so many different RIAs or family, wealth managers, things like that, so many of them would basically just be at the ready to allocate 1% of their client's portfolio, of their portfolio, as soon as there's an ETF that's ready. I think it would just be like a massive capital inflow, you know, overnight. And I mean, like, so I think the ETF will be very important, be very bullish. But I

also think, I'm not sure how much longer this current sort of tightening cycle can go on for, you know, famously, I've been, you know, for the last like a year and a half, I'm thinking that I didn't think they were going to go over two and a half percent and here we are five and a half I remember we were talking at the very beginning of the hiking cycle you didn't think they could raise uh interest rates 25 bps yeah you didn't think they would get there and you know what it didn't sound crazy at the time I was like more inclined to agree with you than the view that we were going to be at five percent within 18 months or wherever we are no totally and and like I think you know as uh having read the enders game you're basically like all right

Something's going to break at some point, and then that's going to cause the Fed to have to reverse. Now, something did break, the regional banks, but the Fed was able to paper over it with BTFP. You know, I think if they continue to try to hike and try to stay higher for longer, there's certainly, I don't know what the next catalyst would be. Maybe whether that's, you know, corporates having to refinance or, you know, something else breaking. but I was talking with Larry Lepard about this earlier this week because we were both in in LA for the mining

event at Pacific Bitcoin and Larry's view is that you know something in the bond market is probably going to get sufficiently disorderly that the Fed will have to step in and he thinks that that could happen very soon now whether or not it's already sufficiently disorderly

it's pretty disorderly right now but TLT is down like 20% this year which is unheard of yeah so i mean like i don't know like it's i've been thinking since uh you know i was uh inhaling the hopium that arthur hayes was peddling in uh q2 q3 2020 uh 2022 um i thought that you know something's gonna break and the fed's probably not gonna be able to keep hiking but i've been wrong this whole time so who knows yeah at least for me personally i find that a great way to just stress myself out and waste a bunch of time is to worry about what the price of bitcoin is going to do in the next six to 12 months when i'm when i'm like feeling a little bit uh either concerned or

like worried i like to just zoom out and remind myself of the mac like the very very macro picture which is you know we're clearly at the in the late stages of a massive credit bubble um you know whether you look at sovereigns or the private sector, and the US debt continues to go up at an absurdly fast rate. And whether it's this cycle or another cycle in another couple of years, it's not sustainable. And over the long term, we're going to be right here. If it's not in 12 months, that'll be fine. We'll live to fight another day. I do think though, a lot of people are underestimating, or maybe it's not underestimating but it's become popular in sort of hardcore bitcoin maxi circles to sort of poo-poo

the idea of being excited about the the spot etf um just because obviously like blackrock and others like them are you know large you could argue they're an extension of of the government and are large um highly regulated entities that you know may not have the best interest of bitcoin and Bitcoiners at heart. But I think it would truly be one of a very small handful of the most important things to happen in the history of Bitcoin to get a spot ETF. I think contrary to the narratives of... This is something Drew and I talk about a lot. We call it the elite theory of Bitcoin adoption. Contrary to the sort of banking the unbanked narrative that we should be working in third world countries to help people who don't have access to financial services use

Bitcoin, all of which is fine. I think that's a great noble mission. That's not going to cause the price of Bitcoin to 100x. There's probably fewer than a thousand individuals and organizations in the world that have that power. And I think BlackRock and some of the other asset managers that are filing for ETFs are among them. And we really want Bitcoin to be successful. I think number go up is definitely a prerequisite. I completely agree with that. The Global South meme and trying to service that market like you said aj extremely noble but i i think we could easily make the argument that getting people with the most amount of wealth in as well actually aids that noble goal because if the price number goes up it helps the global south and everybody

using bitcoin in that part of the world and to make number go up you need people to put their their wealth in it and a lot of the wealth is at the institutions that you just mentioned don't think that they'll be securing bitcoin the right way or that that is how most people should get exposure to bitcoin but whether we like it or not bitcoin's permissionless system at some point it is likely that one of these products is going to get approved and there's nothing you can do to stop others from buying bitcoin it's just ensuring that everything outside of that is done correctly and is done in a way that respects the fundamentals that make Bitcoin valuable in the first place. Totally. Yeah. And I'm not saying we shouldn't be, you know, like pressuring folks

like BlackRock to abide by, you know, consensus rules and like, you know, be good stewards of Bitcoin and stuff like that. Of course we should be doing that. But in terms of just overall impact to the project of Bitcoin, something like a BlackRock ETF would be so enormous. I think even with the amount of hype that's been generated, it's still a little bit underappreciated. And that is really, the US dollar doesn't get pegged to Bitcoin

by marginal countries in Africa and Latin America adopting Bitcoin. The US pegs the dollar to Bitcoin because Larry Fink, we basically seduce larry fink into to joining our ranks and becoming a complete shill and uh advocating for his own financial interests by pushing bitcoin on everyone yeah and as we think at least like personally and of course we we only have like one narrow experience for you know coming to bitcoin but at least for me it was number go up at first you know and so i think

numbers set up number go up is often the thing that seduces you into really starting to like grok what bitcoin is and some of the uh really important ideology behind it um i mean it kind of in a way will also if a bunch of the billionaires that have already adopted uh i think bitcoin have also provided some cover for from a regulatory attack as well um you think about like mike novogratz owning uh you know how much bitcoin he owns and he's such like a large donor of the democratic party you know if some of my democrat gets too negative on bitcoin nova is probably going to give them a call if he hasn't already and so not saying that that's like perfect and that's like great you know i think ideally we we end up like living in a world where maybe

people are um people are living a little bit uh in a more like localized way uh maybe there aren't these massive uh government institutions who are you know wielding this like insane amount of power but you know i think bitcoin is a mind virus and i think the more people that we can affect infected with the mind virus the better and i think an etf tj's point really helps with that and by the way that's why that's why blackrock and all these other asset managers are interested in launching an etf product it's not because they are part of an evil cabal they might be part of an evil cabal but i don't think it's a conspiracy to co-opt bitcoin or or change it in some way um i certainly don't think they're doing it to be altruistic and you know for the

reasons some of us work on bitcoin um they're doing it because they want to get rich because they see there's a massive market opportunity they're getting an incredible amount of interest from their clients and a bunch of really really rich people who have their wealth with blackrock and that's that's why they want to get into the market and that's good same reason we got in you have to imagine there's been a number of conversations like hey if you don't find me a way to get access to bitcoin i'm gonna have to take my money somewhere else and get that access and at that point it's like all right we'll go get it for you we want to keep those fees within blackrock exactly yeah and if if they end up kind of following the path of a lot of

these gold etfs and they allow for physical withdrawals all the better yeah we'll see we'll see i'm optimistic very bullish right now yeah i think there's a lot as as always uh there's much to be there are many black pills many white pills uh i think i think but i think there's much to be bullish about right now in particular like we've already we kind of went through a pretty massive uh chaotic bear market uh over the last 12 months let's think too like the deleveraging that's happened in the bitcoin market like how how many marginal sellers are there on the edges and how much bitcoin do they have to actually sell at this point yeah totally even in this high interest rate environment um totally and even even outside of bitcoin i feel like there's

there's definitely uh there's signs of optimism you know always always uh many things to motivate you to keep on pushing to to get to the quote promised land yeah all right let's wrap this up on some having talk are we optimistic about the having it's definitely going to happen at block height 840 000 what's it going to do for the mining industry what's it going to do to the mining industry yeah i mean you never want to bet on the direction of the bitcoin price in the short term um so we're you know as a company we're not betting there's going to be the typical full four-year bull market where the halving happens and then subsequent to the halving you start to see the price of bitcoin going up but

You know, it does seem like that is the most likely scenario at this point. If, you know, thinking about some of the macro topics that we've already touched on here, potentially like interest rates coming down around the same time, things like that. So, you know, we're optimistic. As I said, we're mostly focused on dialing in the efficiency of our operations, getting our breakeven hash price as low as possible in the months leading up so that if we're wrong and the price of Bitcoin doesn't see meaningful appreciation afterwards, we're still able to continue generating positive cash flow.

Yeah, I think that's right. And I think if you look at last year, it actually wasn't, I don't think hash price perfectly fell in half last year. I think hash price last cycle, last cycle, I want to say hash price fell somewhere like 35%. And I think this is again why hash price is a useful metric, is that if, you know, when block subsidy gets cut in half many miners are no longer going to be profitable that's going to cause them to switch off so it's not like a perfect 50 reduction in mining revenue um i thought you

had a good uh good phrase the other day on one of our calls you just have to be you don't have to be faster than the bear yeah just just the guy next to you just the the compass miner with eight and a half cent hosting for an m30 um but i think i think i think it's like but obviously you know there are going to be many folks who switch off. Obviously, there are many miners who have incentives that aren't necessarily economic in nature, whether it's maybe trying to get money out of certain regimes, or maybe they just want KYC-free sats. I think there's many reasons why someone might mine at a loss on paper. But I think it really comes down to just battening down the hatches, knowing that you weather the storm. Whether or not the halving is what caused the

bull market i feel like we're about to re-enter that uh that sort of discourse all over again about the efficient market this is so tiresome but like maybe maybe the base take this whole time and the correct take this whole time was uh fed's gonna hit the soft dish landing and uh uh bitcoin moves in four-year cycles like who the knows but you know i think i think we all agree that there's enough the writing is on the wall that at some point in the next year or two we are going to see a bull market just because you know again uh bitcoin just makes so much sense uh and of course sometimes it can make too much sense it can cause you to make some bad short-term decisions but it makes so much sense that it feels inevitable that we're

going to see another bull run just just a question of one so in the meantime having gonna be bad gonna be painful um gonna cause many to have to shut down but we're doing everything we can to to make sure we stay hashing no matter what yeah yeah no i think the base case for bitcoin not the case the bull case i mean particularly anchoring back to the current conditions in treasury markets even if something does break the fed reverses there's still going to be that psychological seed that's been planted in people's minds that like oh i think are we going to stay at zero forever what does that mean for the value of the currency and if we don't and the fed does this again like the treasuries are shit coins like they're not they're not valuable risk-free assets

that they've been marketed for for decades like we need an alternative and i wrote this in the newsletter last night like bitcoin is the perfect uh alternative like if you and it's the epiphany i had earlier this week which is really just building on okay let's get back to first principles what is the treasury what is a government bond you're lending a government money to get your principal plus some yield back on the back end and all right it's a lending agreement and who's your counterparty in this lending agreement and how do they act and you look at the u.s government in right now. We have a president who can't speak, inform coherent sentences. We have a house of representatives that can't even pick a speaker right now. We have healthcare

costs that are on the rise and we're subsidizing that industry. We have a pretty inept education system here at the current, at this current point in time, we're dumping a bunch of this money into unreliable energy infrastructure. So if you're just looking at it as a lender and you're looking at the u.s government as a borrower it's like holy shit this person's a degenerate they're already 33 and a half trillion dollars in debt like how how much longer can they borrow from individual investors institutional investors sovereign nations banks before people wake up and say hey this is not the option like bitcoin is probably a better liquid asset to save my long term story my long term savings in uh and then when you think about it too like if many people

make that decision the game theory plays out or people assume that others are going to make that decision you increase number go up you increase the purchasing power of everybody holding bitcoin and then you get this distributed wealth base that can then go out and actually invest productively because there's actual opportunity cost involved in their decisions that the government doesn't have or hasn't had for a while maybe re-entering the conversation due to people waking up to this fact right now and it's just a much better option compared to treasuries and so i think long-winded way of saying like i think people are gonna wake up to this thesis and really begin to grok this like oh this bear instrument is much better than this

dead instrument and we'll see material um winding out of treasuries and into bitcoin no totally and like if you really want to store your own wealth and you want to do so in a way where there's no counterparty risk um and you do so in a self-sovereign way and in a way that's flexible where if you needed to leave some location you could and take all your wealth with you um you know bitcoin remains the best way to do that in the world and i think yeah i was surprised there wasn't uh more of a bullish response after like the uh the u.s froze uh russia's fx reserves like regardless of what you think about the conflict um like i think every

every government in the world knows now that the treasuries that you hold sort of can't be taken away from you um and you know arthur wrote about this a lot in 2022 where you know even if even if sovereigns and nation states start moving you know uh with current sovereigns or nation states with current account surpluses, even if they start rolling, you know, a small percent of that into other commodities, whether it's gold or oil or Bitcoin, like that, that just seems like sort of a prudent risk management strategy at this point. And so I think, you know, the mine virus is going to continue to spread. As AJ and I once talked about in Prospect Park many years ago, you know, Satoshi, in a way, you could dumb it down to just, he put this little thing on a table. The only rule

is that you can't make more of it and naturally as time goes on everyone's just going to want to carve up a piece of themselves everyone's just going to want to get at least some of it just i mean you can't make more but you might as well get some of it just in case it catches on uh and so it's only natural that like as time goes on as as people sort of uh find the concept of bitcoin less risky just because they're more familiar with it uh i think you're just going to see more and more folks just waking up to the obvious incentive which is i should have some fucking bitcoin like i mean i don't know i don't need to put all my money to bitcoin but i need to have at least some. And so I think this is just going to continue to play out. Um, and the fact

that, you know, the, the current call, like foremost, uh, uh, global reserve asset, the treasury is basically just showing more and more problems because of the government that's issuing it. Um, it's just feels inevitable. Yeah. And to your point about the lack of reaction around Russia's the freezing of Russia's treasury assets I do think it's driven by greed where people recognize that and said particularly BRICS countries and said all right this is not going to work we should diversify away from treasuries I think greed is driving we're like all right we're going to create the solution to this and we're sort of in this intimate intermediary period where they're trying to solve that with their bricks plus whatever basket of hard assets

or yuan back gold back oil back whatever it may be they're trying to figure that out make that work when bitcoin's there and they recognize because all these countries have to recognize like once they ape into bitcoin like the the field is level set and there's no going back and there's still that geopolitical dick measuring contest where they don't want the field to be level they want sort of dominate the settlement currency of the world and it's just going to take them time to realize like hey that's not the way things are going to work moving forward it'll take them time to realize that totally yeah i think that's right gentlemen it's been a pleasure what should we wrap up with it really always is what should we wrap up with um

I don't know a lot a lot of cause for optimism just got to keep grinding keep pushing yeah many many I think hopefully there will always be pockets of of human flourishing or folks that really care about human flourishing as sort of an end in and of itself and you know I think it basically just comes down to motivating yourself and keep pushing yourself and keep like trying to find those those pockets so that you can uh you know create a well i i forget what how the way you typically describe it marty but create a better world someday and i think in general that i think there's still some uh tremendously bullish things in addition to bitcoin you know there are many many promising aspects for abundant energy many many other

promising aspects for for folks who do care about human flourishing and are really making that a priority uh whether that's on the local level uh near you or somewhere further away so things very promising you heard it here first freaks things are very promising we're gonna win it's gonna take time but if anybody's gonna lead us to victory uh i think it's people that have been through the bitcoin mining cycles yeah we've we've been through a lot we've been dragged through the mud i thought you were gonna say larry it's larry fink but no larry can help get on board larry i think he's i think part of the reason is he wants to put bitcoin in an esg fund and uh increase the kegger of those funds so they can actually make money for the first time ever but

that's a that's a tinfoil hat theory that that we can touch on off off the record um gentlemen thank you for coming back on the show i'll see you in person next week which i'm very excited for and um we got to do this more we can't wait 18 months between episodes let's do this again soon yeah man whenever you want we'll be back and very much looking forward to hanging in person all right that's all we got that's all we got today freaks peace and love Thank you.