The Breakdown - The Hashrate Migration and Bitcoin’s Resilience, With Compass CEO Whit Gibbs

Episode Date: December 20, 2021

This episode is sponsored by NYDIG. Welcome to “The Breakdown’s” “End of Year Extravaganza.” First up, Whit Gibbs, CEO of Compass Mining.  Find our guest on Twitter  Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   NYDIG, the institutional-grade platform for bitcoin, is making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers, to offer Bitcoin. Learn more at NYDIG.com/NLW. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our holiday theme music is “Spike The Eggnog” by Two Dudes. The music you heard today behind our sponsor is “Dark Crazed Cap” by Isaac Joel. Image credit: BTC Keychain/Flickr/CC BY 2.0, modified by CoinDesk.

We've seen a really big push from people who compasses their first touch for Bitcoin. We were talking to people and they're like, hey, can you tell me what a wallet is? You know, for us, that's kind of like running before you walk. But what we've come to understand is that because you have this tangible asset in an ASIC that's correlated to the price of Bitcoin, people actually see it as an easier way to get in. Bitcoin is just like this ethereal thing that you have. It's nothing that you can physically hold. but an ASEC is a physical good. 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 Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Monday, December 20th, and we are now kicking off the breakdowns' end-of-year extravaganza. This is something I did last year as well. Basically, I have a slew of interviews, about a dozen interviews over the next two weeks, that will close out the breakdowns year. These interviews are each a fun, fast, 21-minute way to look back at the year that was,

to speculate on the year to come, and to try to have a sense of what 2021 meant. We're kicking off the series with someone that I've wanted to have on the show for a long time. Whit Gibbs is the co-founder and CEO of Compass Mining. Now, Compass Mining is one of the coolest companies to rise in the space over the course of the last year or so. They are a Bitcoin-first company that is, quote, on a mission to support the decentralized growth of hash rate and strengthen network security by helping more people learn, explore, and mine Bitcoin. As you'll hear, what that really means is that they help regular people,

retail investors, retail customers get involved in mining more quickly, more easily, and in a way that fits with a lot of different types of interest and portfolios. I'm excited to have Witt here to kick off the series. All right, Witt, welcome to the show. Super excited to have you here. Nathaniel, thank you so much for having me on. Looking forward to this. This is like a fun, full circle, because before you were the founder of Compass,

this incredibly exciting Bitcoin mining company. You actually had a podcast for a while, and I got to hang out with you like forever ago, pretty early in my crypto journey. It was actually one of the first podcasts that I ever recorded. So, yeah, that was like two and a half years ago. I know. I love it. We're gray hairs now.

It's great. So listen, as I was just mentioning to you, you know, I've got this bank of questions. It's just a fun way to reflect on the year that was, think about what's going forward. And so let's kick it off with just super high level. What do you think was the most important story in Bitcoin this year? The most important story in Bitcoin this year, in my opinion, was the Chinese ban on Bitcoin mining. That is something that I think showed the resilience of Bitcoin's network when you have half basically of Bitcoin's hash rate drop off the network between one day and the next effectively. And then you just saw this amazing period of profitability.

for everyone who had a machine plugged in. And the big benefactors of that were the miners in North America by and large. And from all of this, what we have really seen is this hash migration from China to Russia, Canada and the U.S., who now, between the three countries, account for the majority of Bitcoin's network. So a huge event for Bitcoin strength on the network overall. Also move Bitcoin towards more renewable sources of power, Bitcoin mining, that is. So it was a big deal.

So I guess, so mostly I'm not asking people about their companies as I'm doing these things. But I think it's relevant here. Like, how did you, what made you want to start a Bitcoin mining company that was making Bitcoin mining accessible to kind of regular people in some way? I mean, really what it boiled down to is I wanted to mine Bitcoin. But everyone that I talked to told me I needed to have a million bucks. I needed to build a data center. There are all of these barriers to entry. and I'm just the kind of person that when somebody tells me I can't do something, that's ultimately the only thing that I want to do.

So I started to dig into how could I, without a million dollars, without a data center, mine Bitcoin. And I reached out to a lot of the other people who were hosting in the space and there were still barriers to entry. It may have been a certain minimum order of machines that you had to buy or a certain amount of hosting space that you had to take out. But I really wanted to get it down to where I could buy one machine with. a 12-month contract and put it at a quality data center somewhere in the world. And that was really how the idea of Compass came to be. We ran a basically, our first sale was just this group by where we got a bunch of people together and we went to a data center and we were able to start tapping into those economies of scale. And then from there, we just kept doing it. We realized that we could go as a company

and secure these larger orders and then break them down to smaller pieces into, you know, one unit sales with a 12-month contract and give everybody access, and the market responded very favorably. So it's been really exciting to know that I wasn't the only person that wanted to mine Bitcoin. I love it. So this is kind of bridges to my next question, which was, what was the psychology that you had at that moment when the China Bitcoin mining ban happened? And how did your customers respond? And I guess just to bring the audience into this a little bit, we had been very used to, I think, brushing off China. anything is fun, right? Like, even a week earlier, they had like reiterated some old PBOC policies.

And we were like, we've seen this story before, whatever. But then the mining community reacted reacted very strongly, very quickly to this particular news. And so I guess bring us into that a little bit more. Yeah. So everyone thought that this was, you know, just the 47,000th time that that China was banning Bitcoin. And a lot of people didn't think too much of it. Obviously, Bitcoin at that time was, I believe, around 50K, and we saw a little dip. So people were assuming that this was just flood to drive down price. We, on the other hand, at Compass, we're seeing behind the scenes that, you know, these Chinese mining concerns that large entities that were mining in China were actually calling us and saying, hey, guys, this is real. We need to get our stuff out of

China. So we took it very seriously. And fortunately, we were able to, you know, help some of these miners move over. But also, we were able to start facilitating the sale of some of some of the of the machines that needed to leave China and get hosted in the States to some of Compass's clients. And we actually saw in the month of June following Bitcoin 2021, we saw about a 300% increase in our month to month sales between June and July. And the two factors there were that there were more machines that were flooding the market that were available to sell. And the other aspect is that mining became so much more profitable that everyone was now looking to get into it. Super, super fascinating. And so I want to kind of lean in on mining for a little bit because

you're perfectly positioned to kind of know this. So you're dealing with these huge structural shifts in Bitcoin mining and the distribution of global hash rate. At the same time, we have this larger kind of cycle of narrative making and media that's been going on all year, right? How have you seen progress or regression in terms of how, you know, I guess let's constrain it to America, but maybe we can go outside of America as well, how the U.S. about, you know, Bitcoin mining, energy consumption, et cetera. You know, like, are we any farther along in terms of helping people understand than we were, you know, a year ago? Has this hash rate migration helped? Or is it still kind of all over the place? Well, I mean, I think by now,

everyone has heard that Bitcoin mining consumes as much power as Las Vegas or Switzerland or some random geographical location that mainstream media likes to pick out. But in reality, I think the biggest narrative shift that we've seen over the course of the last six months, months is that with this shift in hash rate from China to the United States and North America in general, what we've really seen is Bitcoin moved from a network that was powered by a lot of fossil fuels in China to now being powered mostly by renewable sources of energy in North America, whether it's hydro or wind or solar or whatever the case may be. So we've actually taken what was a net negative in a lot of people's mind and we flipped that on its head and now

made Bitcoin mining. Obviously, it's more resilient now that the hash rate is a but it's also much more defensible in our position with mainstream media because now over 60% of the network is powered by renewables, which is exciting. I think we're going to see more of that in the next year. NIDIG, the sponsor of this podcast, provides banks, corporate treasuries, pensions, and hedge funds with ironclad Bitcoin custody and white-gloved service. Learn more at nidig.com slash NLW. That's nydig.com slash NLW.

Do you think that there's more work to be done or more opportunity, I guess, in advocacy, particularly around public officials with this sort of hash rate shift, what it means to have more mining domiciled in America? Is there an opportunity that perhaps we're missing to be speaking to people that we would have formerly considered opponents, but who actually might be allies? Yeah. Yeah, you're, I mean, this is very well said. I think that education is a key component of everything that we're doing in this space, right? There are so many aspects of Bitcoin and cryptocurrency that are nebulous and very hard to grasp for the average person. And mining is no different. So you've seen a lot of, whether it's political action committees or, you know, the digital chamber of commerce or certain blockchain counsel start to reach out to legislators and policymakers and help to educate them. I think this needs to continue and will continue and grow. in 2022 because it's critical. I mean, we're talking about the underlying infrastructure,

which is powering basically the future of everything that we're going to come and experience in the world in the next coming decades. So it's important that we make sure that our policymakers take kind of a do no harm approach until they really understand what they have their hands on and what the opportunity truly is. And then we can have, you know, regulation is going to come. But we need to make sure that they are properly educated on how to regulate this market so that it doesn't stymie any potential growth. Do you have a wish list for regulation as you think about this industry? Yeah, just let us do our thing.

That's my, no. I mean, when it comes to regulation, I think that it's a necessary evil. I think that my wish list would just be clarity on taxes. If I could ask for one thing that the government could do, it's give some clarity on taxes. And then also consider subsidies for. for people who are consuming clean energy in areas where that consumption is helping to either balance the grid or allow for traditionally fossil fuel producing power plants to start to convert their energy production to clean energy because miners are natural offtakers for these

newly built clean power producing plants. And when you're talking about some of these existing power companies, they have fossil fuel plants that they can't shut off because they're powering cities and their profit generating for the companies, but they have to have an off taker for this power that's going to eventually replace the fossil fuel system. So it would be nice to see the government step in and provide some kind of benefit to the miners who are the offtakers for this power, which is going to eventually allow us to move towards this, you know, air quotes, more green power production that everyone's harping about. I guess one kind of semi-related question to that is how much do your customers, or just sort of the, let's call it,

the type of minor, the category of minor that you guys represent, think about these sort of issues. How much do regulatory issues matter to what they do? And I guess maybe to build on that too, just kind of getting into their psychology, how much do they think about things like market cycle? Basically, what I'm wondering is, how do your miners differ or reflect other kind of mining interests, which people maybe have a better handle on? Yeah, it's a great question. You know, we focus mostly on retail. So we are getting, a lot of the people who find their way to the space, but they've read the headlines. And I think by and large, everyone wants to leave the world a better place than they found it. So our customers

are sensitive to the power sources that that's being used to produce the Bitcoin that they're mining. So we do get a lot of requests for people who they want to be in a facility that's mostly powered by hydro or nuclear. So that's definitely something that we see a lot of. When it comes to cycles, I got to say, people are getting incredibly smart. Like, this isn't something where anymore, it's a FOMO in, capitulate out situation where people are looking to rush in to get started with mining. We're seeing very efficient and intelligent deploying of capital from our customers who understand that it's time in the market and not timing the market.

So whether it's programmatic buying of or systematic buying of A6 at a set time every month or at set time every quarter, we're seeing people that are. scaling into these mining operations, starting small and growing large, with the understanding that this is going to be a 10 to 20 year business opportunity for them in which their only goal is to stack as much Bitcoin as possible because they believe that over the course of their lifetime, this Bitcoin is going to really set generational wealth for the family. So it's been something that is, in stark contrast to like prior to mining, I was into, you know, alt coins and those kinds of cycles.

And it's hype, right? It's, it's, it's, you know, what's going to pump today? how can I chase the pump with mining? It's a much more measured approach that we're seeing with our customers, which is really refreshing. Yeah, and I mean, it feels to me like, or I guess maybe a question is, do you think that your customers represent sort of a, extreme is not the right word, but a longer tale of folks who are highest long-term conviction, low-time preference, kind of parts of the market

cycle, the people who really kind of tamped down volatility by having that time horizon? Yes, yes, absolutely. I think these are the people who traditionally they would invest in equities or bonds or they would put their money in something else. But they're seeing now that there's such an opportunity in Bitcoin and in mining that this is their new interest. This is where they want to deploy their capital. A growing cohort for us at Compass, you know, are people who used to buy rental properties or wanted to flip homes. But now they're able to see a faster and better return on that investment by purchasing ASICs and getting into mining. So we're seeing people who have taken this. methodical approach to growing their wealth over many, many decades, now coming into mining with that same mindset, but, you know, fortunately, they're seeing a faster return than they ever could have in any other asset class. That's super interesting. There's such a huge passive income TikTok community, passive income YouTube, you know, that who are kind of thinking in those terms who are like, to your point, they think in terms of things like generational wealth, winning back time, freedom, all those kind of ideas. Yeah. I like that that it seems like you're seeing that. And maybe I guess another question is, are a lot of those folks that you're seeing come in not just already into Bitcoin, but this is the way that they're getting into Bitcoin? Growing. Yes. I mean, we've seen a really big push from people who compasses their first touch for Bitcoin, which was surprising to us when we first saw that. Like when we were talking to people and they're like, hey, can you tell me what a wallet is? You know, for us, that's kind of like running before you. walk. Like mining we see is a little bit more advanced. But what we've come to understand is that because you have this tangible asset in an ASIC that's correlated to the price of Bitcoin, people actually see it as an

easier way to get in. If you're not a trader and you don't really understand the ethos of Bitcoin, Bitcoin is just like this ethereal thing that you have. It's a coin that's out there, but it's nothing that you can physically hold. But an ASIC is a physical good that you can purchase. So we see that as the reason why people are choosing to use compass as it's on-ramp to Bitcoin. Super interesting. All right. So now let me do a few questions that are sort of broader about the year. What's something that happened this year that you would have never predicted? Something that happened this year that I never would have predicted. Could be Bitcoin, could be macro, it could be a cultural event.

Yeah, I mean, I think that the the endless money printing is something that I never would have predicted. I never would have predicted that in my lifetime, I would have seen the kind of the convergence of events that's led to just what I think is great for Bitcoin, but a complete economic breakdown of the system in the United States. What do you think sort of follow up on that? What's your take on the Federal Reserve's 2022? They're kind of caught between this rock of fight inflation, but risk the rebellion of equities markets or don't fight inflation, but, you know,

have people lose their minds and vote them out politically. Where do you think they land on all that? I think they go for the path of least resistance, which is going to be to just keep doing what they're doing. At this point, I don't think they're as worried about getting voted out as they are about the markets crashing. I think that for the powers that be the most important thing that they could do going into the next election is continue to have the stock market trending up and make it look like the sky is raining milk and honey, even though it's a complete smoke show and we're all just getting absolutely raped right now. What is something that you pay attention to that you think others should pay more attention to?

You know, what I have really been paying the most attention to is the language that China is using when they're having conversations abroad. Like, I'm sitting in Eastern Europe. And I have the benefit of engaging sentiment of people who are not American, looking at how they view China, how they view America, how they view other parts of the world. It's been somewhat disheartening to me over the last couple of years to really just see how the sentiment is shifted to where people used to think

that America was this passion of greatness that everyone wanted to be there and this is where business could, you know, grow and thrive. And now I'm seeing that gravitational pull towards Asia. There's a lot of people who would say that China has already won the language that they're using when they're speaking in, you know, different jurisdictions and different rallies, it's very strong speaking out against the United States. And recently I was watching something we were talking about our war crimes in Afghanistan and how the United States needs to be held to account. The geopolitical scene right now is getting very adversarial between the U.S. and China. And that's something that I am constantly paying attention to because right now I'm kind of

straddling. I'm right in between both, right? So I'm just looking to see. what's going to be the move over the next few years for my family and my life and our business and all of those things. Fascinating. Really cool answer. We could do a whole episode on that. Maybe we will at some point. But super cycle or four year having base cycle still intact?

My heart says super cycle. My head says four year having cycle still intact. I want to believe the hype. I want to believe the hype. But we won't know for, like, we need to break out of this range. Yeah. Maybe to just build on that, let's dance in the realm of the realism for a little bit. If we did go into something that's more of kind of an extended bare market, what do you think

would be different than the last time around? Because plausibly, we could still have that sort of bear market, but it might not be the same as the last one we saw, right? Yeah. I mean, I think that this bear market's going to play out in the 20s and 30s. instead of the threes and fours basically, right? We're going to be in a, you know, a 10x multiple of the last bear market. I think that, you know, mining will still be profitable if we do drop into an extended

bear market. Right now you're looking at mining profitability at anything that's, you know, 40 cents per kilowatt hour or below. Cost of production for one Bitcoin for a miner is somewhere between $12,000 and $18,000. So even if we hit, you know, 25K and say there for an extended period of time, mining is still going to be profitable. And that's something that was definitely different than the last bear market. The other thing that I see is that, you know, when it comes to the broader ecosystem,

there's so much interest in Bitcoin right now that, you know, an extended bear market is really just an extended buying opportunity. My friends and I talk about this a lot. Is there any chance that it's healthy that we didn't ever see some parabolic rip up to 100K, you know, only to have the thing crater two days later? You know, the thing that we were all expecting, or so many people, I guess, were expecting at the tippy top of this cycle, is it possible that it actually shows maturity or improvement in market structure in some way? So, you know, I don't know about maturity because we topped at 69,000. But no, I think that it's definitely better for us to have this healthy rise.

And I know, you know, dropping from 69,000 to 47,000 seems like a big move. but in the grand scheme of things, you know, we're still ranging at a very healthy level. And I think that as, you know, as time goes on, we'll be appreciative that we had this 30 to 40% drawdown before we move up to 100, 100K, rather than just continuing a parabolic run and then going from 100K down to 40K. Yeah. Last question. What's one prediction you have for next year? My one prediction that I have for next year is that we are going to see the total network cash rate for Bitcoin reach and sustain new all-time highs. We will see continued difficulty increases every epoch from now until the end of 2022.

I do not think we will see any downward difficulty adjustments for all of 2022. All right. I like it. Witt, thank you so much for everything you do and for coming and join us on the show. And hope you have a great holiday season. Thanks, Nathaniel. I appreciate you. Have a happy holiday. I won't be doing final recaps on this series, but I do want to say thank you again to Witt for joining us at the breakdown. If you want to learn more about Compass, go to compassmining.io.

It's an awesome company. I hope you check them out. Until tomorrow, guys, be safe and take care of each other. Peace.