The Breakdown - Bitcoin Gas Flare Mining, With Matt Lohstroh

Episode Date: November 26, 2022

  This episode is sponsored by Nexo.io, Circle and Kraken. For this edition of “Grateful for Bitcoin,” NLW is joined by Matt Lohstroh, cofounder of Giga Energy. Matt and Giga are leaders in the bitcoin gas flare mining space. On this episode, he and NLW discuss the state of the bitcoin mining industry and how it’s changed over the years.  Find our guest online: https://twitter.com/lohstroh - Nexo Pro allows you to trade on the spot and futures markets with a 50% discount on fees. You always get the best possible prices from all the available liquidity sources and can earn interest or borrow funds as you wait for your next trade. Get started today on pro.nexo.io. - Circle, the sole issuer of the trusted and reliable stablecoin USDC, is our sponsor for today’s show. USDC is a fast, cost-effective solution for global payments at internet speeds. Learn how businesses are taking advantage of these opportunities at Circle’s USDC Hub for Businesses. - Kraken, the secure, trusted digital asset exchange, is our sponsor for today’s show. Kraken makes it easy to instantly buy 185+ cryptocurrencies with fast, flexible funding options. You’re covered by industry-leading security and award-winning Client Engagement, available 24/7. Sign up and trade today at kraken.com. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Michele Musso and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsors today is "Back To The End" by Strength To Last. Image credit: Nora Carol Photography/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.io, Circle, and Cracken, and produced and distributed by CoinDes. What's going on, guys? It is Saturday, November 26th, and today we are talking Bitcoin mining as part of the Grateful for Bitcoin series. Before we dive into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes

or go to bit.ly slash breakdown pod. All right, friends, well, I hope you had a great turkey day for those of you who celebrate Thanksgiving. We're back with another grateful for Bitcoin, and today we are digging into one of the most critical pieces of Bitcoin infrastructure,

which is, of course, mining. Now, some of this discussion is about the big picture around mining right now. Specifically why difficulty in hash rate are increasing even as prices go down. But another key point, Part of this conversation is around one of the most interesting and dynamic areas of Bitcoin mining, which is mining with natural gas that would otherwise be flared.

My guest is Matt Lostrow, the co-founder at Gigga Energy, which is one of the innovators in the gas flare mining space. This was a conversation I was super excited to have, and I'm thrilled to welcome Matt Lostro to the show. All right, Matt, welcome to the breakdown. How are you doing, sir? Doing well. Thanks for having me. Yeah, no, I'm super excited.

As I was just mentioning to you, I was asking a few, uh, trusted friends who they thought would be good to come talk about Bitcoin and Mining and your name came up a bunch. So I'm really excited to have you here. For those who might not be familiar with you and your work, I would love to just get a little bit of your background and how you got into Bitcoin and how you started this particular company that you're working with now. Yeah, so I got into Bitcoin back in 2016, just looking around in the space, stumbled across upon it, fell in love with it instantaneously just because it went very well with my personality. I got into the whole altcoins.

throughout 2017, and then by 2018, I was a full, full maxi. And by 2019, started the business Gigga Energy. Amazing. And so tell us a little bit about Gigga. And, you know, I think I'm going to try to extract a little bit of kind of 101 about the space you're in, but just for people who don't know, what does Gigga do? Yeah. So we extinguished natural gas flares on oil and gas locations through Bitcoin mining with our modular solutions as well as our natural gas generators. For people who aren't familiar with this space, what is the 101 on gas flare mining? How did it come about? How early were you guys relative to others in the space?

How mature is it now? Because this is something I feel like it indexes higher in conversation in some ways. Like a lot of people talk about it, but you guys are actually doing it. So for people who haven't spent much time with it, I'd love to just kind of get the background. Yeah. So we were the second guys to do this in Texas back in 2019. Why I'm referring to when I talk about a natural gas flare, the oil and gas industry is called oil and gas for a reason. When you drill a well, you don't get to decide what comes out of the ground.

Both liquids come out of the ground. So the gas is in a gaseous form and the oil is in a liquid form. The oil is extremely power to end and it's going to be trucked off location. The natural gas, however, is not super portable. So it needs to go via a pipeline. Pipelines take time, money, ride of way. political things going on in the climate. And so that becomes much more of an issue.

And what happens is these producers want to get to the oil so badly that instead of going after the natural gas and getting it to market, they burn it off on location on a large flame or torch on the oil well location. And that allows the pressure to be reduced for them to be able to access the oil.

And so basically where Bitcoin fits in is that it uses is that energy that would otherwise be burned off, right? Exactly. What we do is we go in, we take that natural gas and we redirect it to one of our generators, and that generator turns into electricity and we're mining Bitcoin on the actual well location. And so what is the actual setup like? And this is sort of the geeky specifics, but like, what is the footprint of this thing? What do you have to bring out to the fields for this to actually work? Very small footprint. And keep mind, right, we're 20 feet away,

40 feet away from the actual wellhead on the location. We then go in and take what would be the equivalent of two shipping containers worth of a footprint. One's an actual 40-foot shipping container, and the other one's a natural gas generator. We pipe the gas to the generator. The generator combust that natural gas, creating electricity, and then we feed that electricity into one of our gigaboxes. And then the box starts and hosts the actual computers in a safe, waterproof, and efficient fashion. And you guys started this when you were like sophomores in college, right? That's great. Like really early. Yeah. presumably this has to be done in partnership with whoever owns the rights to that well,

right? So, you know, you would imagine it's very traditional companies. Well, one, is that the case? And then two, what were the sort of initial conversations? Were people receptive right away? Did it take a lot of convincing? What was that like initially? Yeah. So we started back in 2019. Now in 2022, you cannot have a conversation about natural gas about someone joking about Bitcoin mining or being genuinely brought up with old oil and gas. Everyone's heard about it. Back in 2019, basically everyone told us to piss off. We had to go to the very much, like, low-level EMP producers, which are kind of mom and pop

guys in oil and gas, kind of small approach them. They're open to it. They don't have much to lose. And then kind of work a way up. Cool. And so you mentioned that over the course of the last three years, obviously, there's just sort of been a big change in awareness. What is sort of the state of this now? I mean, how have the number of players changed? Are the big companies thinking about this? You get whispers of

companies doing this stuff, but it's not necessarily sort of broadcast in the same way that other interactions with Bitcoin are. But, you know, where are things now relative to where they were? What's happened now, we're an interesting phase because energy is skyrocketing and Bitcoin's down. So all these energy guys out there, they don't really care about Bitcoin. Their beliefs may be proven that Bitcoin's dying, right? So they're really in the business is saying, hey, if I have access capacity, I'll sell it off. They don't have any little to no interest of actually getting into the Bitcoin game, which makes sense, right? They stay in lane of what they're good at doing. And we go in and we help mitigate that methane. The actual landscape, so from, so after

2019, right around December 2020, when Bitcoin broke 20K, for whatever reason, naturally that's Bitcoin mining like really caught on. It was like this really massive fat, right? Natural gas was super cheap in the space and so everyone was flaring it off, getting rid of it. Now throughout 2021, we saw this kind of mid-order rise of natural gas prices throughout the year culminating over the summer with the whole kind of Russia situation. But now what we're looking at is a lot of people getting out of the space because they're getting double-wambied, right? Bitcoin and hash price are going down and then natural gas costs are going up. It sounds like basically the, I evolution of the industry as relates to the business side of it has been strictly a business

consideration, right? So it's like the people who are trying this, it wasn't like they became like Bitcoin true believers or something like that. It was more that like, hey, if this is a good business decision, I'll do it. Is that, is that fair to say? Well, there's two sides right. And I say the majority are on that kind of 80, 90 percent or the one they're saying, hey, this is purely an energy arbitrage. And we can go out, we can mitigate that methane. And then like the 10 percent are really doing it because they love, love Bitcoin and are looking for a way to get into it. In a weird way, I think that that is strangely more validating to the industry in some ways than if it was like call it 50-50, you know, purist or whatever. I think it validates

the fact that, hey, I don't even have to care about this thing. It just makes business sense. It fits within this sort of this energy business infrastructure. I mean, obviously it's a little bit harder as things tick down. But I think in terms of the longevity and the underlying sort of soundness of the idea, it's quite validating. Yeah. I mean, just yesterday, I had a call with an oldman who has ranch, heard about Bitcoin mining, knows absolutely nothing about Bitcoin, but was like, I can make money on this. And now he's going out and doing it and try to like learn the whole process. All right. That's like very unique. And it's a different way for people to get into the Bitcoin world. Yeah. Listen, the brilliance of aligning financial incentives

to protect the thing. I think people who dig deep into Bitcoin, like that second layer of things that gets people excited in terms of kind of the brilliance of the system. But it's been very cool to see how many different ways in which that's manifest. So, I mean, for you guys, how much of this is, this is just sort of, you know, business arbitrage and you're excited about it versus, you know, you're really passionate about Bitcoin versus this is sort of a very different way of coming at, you know, environmental goals. From your kind of motivation standpoint and what Gigas mission is, how do you guys think about that? So I think it intersects three particular places, right? And you touched on all of them. One is this has significant outsized impact on methane emissions

that are real out there. And there's two sides to those methane emissions, right? There's the climate side of it, which people debate. And then there is the actual pollutant effects, which have, like, legitimate detriment effects on humans and cancerous behaviors. So there's the environmental side of it. There is the business side of it, whereas there's a great business opportunity. It's really fun. We have about 20,000 square feet of manufacturing facilities.

We're building, like, engines with 255 moving parts. Like, it's really fun, and you're building something of value. And then, of course, you're in the Bitcoin side of things. And so, of course, I'm a Bitcoin maximalist. I fell in love with the space. I have no doubt in Bitcoin and its meat order to rise over time. And so combining all three of those really made the business a no-brainer for us to continue to grow it out.

How have you seen the political discussion? And that could be an environmental discussion or any other dimension change over the time that you've been doing this. It's very bipartisan. We've talked to a lot of lawmakers. We're helped sponsoring a bill in Texas at the state level. And then we're also helping write like a federal bill. And so it's no-brainer.

right? Like everyone agrees that flaring is bad or a waste and we should stop it. And in doing so, there's a lot of things that you can do, right? You can do tax incentives, tax breaks on the actual income that you're doing, can incentivize people to get out there. You can maybe do credits for like treating types of gas that maybe people don't want to go after to help reduce those emissions. And so it's very bipartisan what we've seen out there. Yeah, I mean, this is one of the things that has continued to be, I think, unique about Bitcoin relative to the U.S. government is that it just hasn't calcified into hard left-right lines. Weirdly, even when people try to do that, you know, they kind of try to get ideological with it, there's such sort of countervailing forces.

And I think that you're right that this is a great example of why, because it's like anyone who's coming from this at sort of a first principles basis rather than whatever they're thinking about, there's a lot to like here. I guess it's interesting, you know, the critiques that seen tend to be hugely ideological from the start in the sense of if your premise is fossil fuels just shouldn't exist at all. And so, you know, anything that helps solve in the short term, the issues of flaring and what it means, both on the polluting and the climate side, then you're sort of just enabling it to go longer. But that's such an ideological position. I mean, is that what you found in terms of people who are actively opposed to this? Yeah, that's a pretty common one

saying, hey, you're propping up these oil and gas companies to do what they do. and giving them another source of revenue. In reality, the amount of money these guys are making off hydrocarbons on the oil and gas side is minuscule to any amount of money we would pay them for the actual natural gas. I mean, we would pay them little to nothing. They don't care about it at all. And they're going to flare it one way or another.

They just don't want to flare it from an environmental standpoint. So pragmatically looking at it is these things will happen. How can we come in, not necessarily enable them, but go in and reduce methane emissions and make it a net benefit. Want to keep more profits when trading? Get the best possible prices and trade with 50% lower fees on Nexo Pro. The new Spot and Futures trading platform uses aggregated liquidity of over 3,000 order books collected from multiple sources. Utilizing the complete Nexo Suite allows you to earn interest and borrow funds as you wait for the next trade setup.

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As one of the largest, longest-lasting, and most secure exchanges, Krakken continues to set the industry example for transparency and trust. Twice yearly proof-of-reserves audits verify your assets are backed by real assets. Industry-leading security keeps your funds and information safe. And award-winning client engagement teams are available for support 24-7. Buy crypto instantly with fast flexible funding options on Cracken. Download the Cracken app on Google Play or the Apple App Store or visit crackin.com to join. It feels to me like I don't know if it's fully settled in, but I do believe that it will be a legacy of this year of a little bit more of a return to realism as relates energy politics in the U.S., right? I mean, just seeing what happened with the conflict with Russian Ukraine, seeing sort of like the way that the SPR has been tapped into, it's very clear that maybe there was a world in which we could just talk about sort of renewables, you know, a couple years ago, but it doesn't seem like the world we have.

Yeah, I mean, energy is national security issue. There's multiple ways to go about it, right, through renewables, through hydrocarbons, right? And everyone has a different opinion on that. but overall it's saying hey make sure first and foremost we have energy security and then push towards the independence on that yeah let's talk a bit of maybe a little bit broadened out to sort of the mining industry in general what what are you seeing what's your perception of kind of the state of mining right now so for those of you who don't know what hash price is you should look it up but hash price is basically the computational uh value of a unit of computing power We're at an all-time low for hash price. It got down kind of low around this back in like October 2020, but we're back down.

We're about $55 a pet of hash. People are hurting, but this is different because back in 2020, finding a couple million bucks, like you couldn't get money out in the space. Now everyone has access to capital one way or another and is getting Bitcoin mining stuff online. And so it's a very interesting space on that front. and there's still a ton of capital out there that can be deployed. But on the flip side, like, people are just getting wrecked that have been in it for at the wrong time, frankly, with the wrong operating experiences.

A lot of the discussion is what particular set of combinations has led to exactly where we are right now? And, you know, one of the pieces of it that is sort of just the actual financial structure with sort of cheap credit and minors taking on more debt financing in the last cycle. How much do you think it's that versus some, other sort of, you know, exogenous factor that just wasn't planned for. So definitely the buying A6 to $80 a tarahash with 18% interest will tread into your downfall. So that's, that's one. Two is rising natural gas prices.

That has external effects on everyone else. So there's people in Georgia that got shut down with contracts that were supposedly locked in. That happened all over the state. And so natural gas affects the electricity markets. And so we saw this like super cheap energy costs across the region, because of cheap natural gas. And that's going away for other reasons. And so people got screwed on that.

People have massive amortized payments on their A6 at super high entry points. And then the most common thing I see when I'm looking at models is people never hit their Bitcoin output assumptions for whatever reason. And so it's really easy to stick it into model and say, hey, we're going to make XYZ Bitcoin a month. And it may degenerate by some amount, but like that no one ever hits that. And so that's just due to operational failures, lack of experience in the space, or inability to get assets online just because of not understanding the on-grid politics. And so it's a majority of reasons.

But I think those kind of three large contributors end up really hampering and what we're seeing now. Yeah. Do you have a theory or a thesis for why hash rate continues to spike and grow? Because this is, I think, something that, again, particularly passive observers, If it's counter to what they would imagine with Bitcoin prices going down, more hash powers coming online. Yeah. So hash rate is sticky.

Hash rate follows price. Price rose massively over the past two years. It took time for capital coming in, build infrastructure out. And now we're seeing people in the Middle East get in at very large scale. And then as well as you're seeing like every other person getting millions of dollars and turning stuff online, that adds up pretty quick. And so I'm not surprised, right? You're still able to stay profitable.

You're able to auto tune these computers down so their efficiency increase. And so you can maybe an S-19 may have an 8-cent break-even, but it can go up to a 12-set break-even. And you're just trying to stay cash flow positive, even if you have a negative ROI. And all those things are happening. I'm not surprised at hash race continuing to rise. That's what we should plan for. And there's a lot more people out there with cheaper power than what one would assume. You actually kind of hinted at something that I'm interested in your take on, too, which is the global dynamics of this. So obviously you work and operate inside the U.S.

A lot of what we were just talking about is kind of U.S. context. But you mentioned the Middle East coming in. How have you seen changes in the global distribution of mining over the last, I don't know, whatever the right interval is, six months, 12 months? Yeah, so obviously there's massive concentration in the U.S. starting to maybe kind of trickle out as people are realizing that the energy sources are soaked up, the low-hanging fruit over here, and people are going elsewhere. But there's also very large players in the space that are slowly getting into it. It takes time for them to get into it to put in hundreds of millions of dollars. But eventually, inevitably, I think all nation states are going to be doing it and trickling in little by little.

Interesting. Is there any region that you are particularly keeping an eye on or think is distinctly interesting or relevant compared to, you know, where it was in the past? I still think the U.S. is very interesting just because there's, you have private property rights. That's really cool, and that's very unique around the world. And so having security and people building out these massive assets and capital being comfortable enough to flow into the space, I think there's still a lot of opportunity to grow in the U.S. It just takes time to build out gigawatts of infrastructure. And I don't think, like, most Bikorners aren't electrical engineers, nor my, but, like,

understanding the breadth of, like, what goes into, like, requiring these massive pieces of infrastructure and then also demanding low cost, it takes time. So I think the U.S. is still a very interesting play. But naturally over time, right, things will happen and distribution will happen, and people start to leave the U.S. and somewhat to next time. interesting. Do you think that to some extent what we're seeing and kind of how you described it a little bit, you basically described a lag from new infrastructure came online to follow price. And now that new

infrastructure exists and people aren't just sort of turning it off on a dime, it's still going. Do you think that we're actually seeing kind of a shift to a more long duration view from, you know, miners where it's just going to be, acyclical isn't right because it's obviously, you know, kind of contextualize in the cycle, but you're not going to see people just turn. things off and try to go. You're going to kind of see these long-term generalized increases in infrastructure being deployed against this network. And in periods of low price, it's going to look like this a little bit. I mean, is that kind of what you're seeing? Yeah, yeah. And that's what we saw last run in 2020, right? Bitcoin rose up to 17K, 20K, everyone in their mother got into it.

All 2018, all 2019, people were building out infrastructure. We rose from like 10 X-A-hashes to like 150x-ash. the difference is now we're reaching the fringes of like global infrastructure and like there's so many externalities I mean you're having semiconductor manufacturing like where like TSM is going to be like saying like you can't produce more chips because Apple needs to produce chips like I think if we see like another big rip that's going to be it on the infrastructure side for like a very long while until people build out like more infrastructure and like Bitcoin goes to like 150 K in the next couple of years. There's just going to be a massive amount of capital pouring into space. And quite literally, the regions will not be able to handle it. So we're recording

this on Wednesday, November 16th. And one of the stories that I'm featuring in today's regular episode is about Apple moving chip production to the U.S. or trying to, which has obviously been a huge point of conversation over the last, you know, two years really since the beginning of COVID. And I feel like obviously there's implications for the U.S. domestic Bitcoin mining industry with that as well. Oh, yeah. Yeah. I mean, that'll happen eventually too, but it's the nice thing is the chips that we're using A6, like aren't or no one near. Do we need it that size? Right. Yeah. I mean, there's just like so much other stuff that goes, it's no longer about Bitcoin mining and like finding cheap stuff. It's like, hey, how do we like redo like global manufacturing and supply chains?

And we haven't quite hit that yet, but it's getting there. What are other frontiers of Bitcoin mining that you're at least keeping an eye on or paying attention to? I think the natural gas size thing still has a long time to evolve, like dramatically. That's the one part. It's cyclical in nature because of how it works with the energy side of things, but I think there's still a massive amount of development. There's not that many people, and it's still at large scale rate, you probably count on my two hands, like the majority of people out there.

So that's one side of things. Immersion, in my opinion, still has, like, a massive way to go. So, like, people are, quote, unquote, doing it, but, like, very few people are doing it successfully. And so I think there's, like, a massive amount of fluid engineering that needs to go in in the space. and then eventually it's going to get there, and you can see iterations over time, and I think a lot of it has to do on the chip level, too.

So having ASICs that are specifically manufactured in small fashion, kind of the biggest frontier two is going to be on the PSUs, the power supply units for these ASICs. It's very archaic technology. And so there's massive efficiencies that can be gained just based on ACDC voltage conversion. And so there's still people conflate the fact that we have really high-tech computers with the fact that we only have two manufacturers,

and so we're in this vacuum of a monopoly of kind of like really low quality service. And I think as space continues to evolve, those iterations will come over time. Matt, this stuff is awesome. Really, really good to get your perspective on all this. I appreciate you hanging out today. If people want to learn more about what you're doing

or what gig is doing, where can they find you? Yeah, I mean, you go to our website, gigenergy.com, or they can find me on Twitter at Losstro, L-O-H-S-T-R-H. Awesome. All right, Matt. Thank you so much for hanging out. Awesome. Thanks for having me, Nathaniel. All right, guys, well, the thing that stands out to me from the conversation here is the idea

that Bitcoin mining may be moving to a slightly different paradigm in which, to compete, miners just have to be prepared to operate at lean times, not just boom times, due to the huge outlays and infrastructure required to get up and running. If that's really what we're seeing, it sort of presents a vision of long-term conviction, backed, of course, by money that is fairly nice in an environment that is otherwise very, very stressful right now. Of course, there's still lots and lots of different interpretations about what's going on, but I want to say thanks again to Matt for joining the show, and hopefully we can have more conversations with other people in the mining space soon. For now, I want to say thanks again to my sponsors, next to dotio, circle and

Krakken for supporting the show, and thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.