The Breakdown - These North American Bitcoin Firms Mined 59% More Bitcoin in July

Starting point is 00:00:04 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 Friday, August 13th, who-hoo, Friday to 13th. And the theme of today is all the bullish news you might have missed if you, like me, were intensely watching the floor fight in Washington over the last week or so. or if unlike me, you just have life and other interests. Either way, here is your breakdown of bullish news. And let's start right in with the title story. Five publicly traded North American Bitcoin mining companies increased their Bitcoin output significantly in July, producing

Starting point is 00:00:54 1,802 Bitcoin, which is about a 59% increase on the month before. These firms include Marathon Digital, Riot blockchain, Argo blockchain, BitFarm, and Hut 8. How did these firms firms increased their output so much, well, it wasn't an increase in the power that they were throwing at mining, but instead, the fallout of the massive downward difficulty adjustment from the month before. For those unfamiliar, Bitcoin's difficulty adjustment is a process that happens every 2016 blocks, or roughly every two weeks, in which the Bitcoin protocol automatically changes the difficulty of the puzzles solved by miners. If more miners are coming online, it can adjust the difficulty up, making it more.

Starting point is 00:01:37 difficult to win blocks. If, on the other hand, miners leave the network it adjusts the difficulty down. That downward adjustment incentivizes more miners to come online to capture the now easier to achieve rewards, and so on and so forth. In short, it's a mechanism for keeping the Bitcoin network's security and functioning impervious to exogenous shocks. I've said before, and I'll say it again, I think difficulty adjustment is one of the most elegant and often underappreciated aspects of the Bitcoin network, literally automating market forces to regulate and regularize the security being deployed for the network. At the beginning of July, the mining difficulty adjusted down 27.9%, which was by far the largest amount in history. This was an adaptation

Starting point is 00:02:23 to Chinese miners leaving the network after China's June bannings knocked out a significant part of global hash power. Remember, this time around when miners started talking about banning Bitcoin mining, our first instinct was to dismiss it as yet another China-bans Bitcoin story that wouldn't really amount to much. But when the Chinese Vice Premier himself spread that message, and then when provinces started actually implementing full shutdowns, including in both coal-powered as well as hydro-powered areas, it became clear that we were in the midst of a total transformation in Bitcoin mining. The beneficiaries very clearly have been North American miners. Month over month between June and July, Riot grew 82%, Marathon 66.42%, BitFarm 47.55%, Hutt 8, 53.85%, and Argo, 34.73%.

Starting point is 00:03:16 Now, of course, this wasn't entirely unexpected. We knew that when China miners went offline, the global balance of hash power would shift west, but it is still remarkable just to see how dramatic an impact it had. So why is this bullish? Well, a number of reasons. First of all, there's the overall energy mixture of the Bitcoin network. Mining in China, particularly in regions like Inter-Mongolia, often used coal as its primary energy source, whereas North American mining operations are comparatively clean. To the extent that it matters to the Bitcoin industry to shift its energy mix to relatively more renewables, the shift away from China is a demonstrably good thing. I know we don't care about him, but Elon Musk made this exact point at the B-word conference a few weeks ago. There is another point, though, as well. It wasn't an especially loud fud this cycle,

Starting point is 00:04:03 but one of the risks of the decentralization of Bitcoin network that some have historically pointed to is state capture of miners in China. With a preponderance of hash power in China, could the CCP exert enough force to actually harm the network? There were many, if not most, in this industry who were pretty dubious of this proposition, but still, it was a long-lived multi-year negative narrative that has now been completely extinguished. In short, for multiple reasons, hash power leaving China is a significant net positive for Bitcoin. One question to watch for is where the mining machines themselves will end up. How many of the companies previously in China will fold?

Starting point is 00:04:40 How many will redeploy elsewhere? And when those redeployments happen, will they be in the U.S. or closer to China, Kazakhstan or Russia? Still, whatever happens, it's overall hugely bullish. The breakdown is sponsored by Nidig, the institutional-grade platform for Bitcoin. As long-time listeners know, NIDIG is a major force in the Bitcoin space, and they're now making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers to offer Bitcoin. That mainstream access is critical for all of us, and you can learn more about it at NIDIG.com slash NLW. That's nydig.com forward slash NLW. So what else bullish might you have missed?

Starting point is 00:05:33 Well, let's talk about Coinbase's monster quarter two. One of the things that's different now that Coinbase is public is that every quarter, we're going to get some deep dive insights into how the crypto markets are doing, expressed through the lens of one of the U.S.'s leading exchanges. Let's go through their numbers first, and these come from a shareholder letter published on Tuesday. Coinbase made $1.93 billion in revenue in quarter two. That's up from $1.54 billion in quarter 1, and $476.4 million in quarter 4 of last year. Of that, $1.82 billion was retail transaction revenue and $102 million was institutional

Starting point is 00:06:09 revenue. Volume, however, tells a different story and also shows just how much more Coinbase makes from its retail practice. In quarter two, Coinbase saw $462 billion in total volume, which was split $317 billion for institutional versus $145 billion for retail. So even though they made less on institutional, it represented a much bigger portion of volume. For the first time, Eath made up a bigger percentage of trade volume than BTC, 26% versus 24%. And overall institutional trading volume was up 47% compared to quarter 1. The number of monthly transacting users went from 6.1 million in quarter 1 to 8.8 million in quarter 2.

Starting point is 00:06:50 All of that said, the company did point out that July was significantly down from June and that they anticipated that quarter 3 would be consequently lower. Still, it was quite a showing in Coinbase's first full quarter as a public company, and importantly, in a world where perception is reality, these numbers smashed Wall Street's estimates. But even on top of that, there were some interesting nuggets, and one of the spiciest. Coinbase said that 10 of the top 100 hedge funds in the world, based on assets under management, are now customers. We didn't get the exact companies, but they did mention a few customers by name, including Elon Musk, PNC Bank, SpaceX, Tesla, Third Point, and Wisdom Tree.

Starting point is 00:07:29 Third point is Daniel Loeb's firm, which has been significantly increasing its presence in crypto. And speaking of PNC Bank, reports are that the fifth largest bank in the U.S. is planning to start offering crypto services to clients with the support of Coinbase. PNC Bank didn't confirm CoinDesk's sources, but it seems like they might be on the path to becoming the latest big Tradfai Domino to fall. And speaking of institutions, Newberger-Burman, a $400 billion asset manager, has expanded its fund strategy to include Bitcoin and Ethereum derivatives as well as other investment vehicles. They're calling it a hedged cryptocurrency volatility fund. This was not the first we've heard from that firm.

Starting point is 00:08:08 In January, Steve Iceman, who is both the firm's managing director and author of The Big Short, said that he was staying out of Bitcoin. Quote, I stay out of it. I don't understand it. But the firm also wrote a report in the spring titled the Bitcoin Experiment, which called it, quote, a phenomenon worth watching closely. All right, all right. So on our journey of bullish things, we've got hash rate migration, we've got Coinbase performing

Starting point is 00:08:31 and institutions coming in. What else? Well, how about we throw some big fundraising on the pile? Tax Bit has raised $130 million for a total valuation of $1.33 billion, joining the ranks of crypto unicorns. This one makes just a ton of sense. I mean, we just spent two weeks debating crypto tax reporting requirements in the Senate, and in any version of that bill, there were clearly going to be some new obligations on the part of exchanges. What's more, the issue with tax reporting for exchanges isn't as simple as whether they're issuing 1099s or not. There are serious issues with accuracy because of the specific nature of crypto assets. So here's an example. Let's say that you bought Bitcoin at the top at 60K on Gemini. Then you transferred it into

Starting point is 00:09:12 your Coinbase account when Bitcoin was about 30K. So just so we're following, you're down 50% on your initial investment, right? Well then let's say you wanted to cut your losses and sold it when Bitcoin hit 45K. Coinbase is now going to issue you a 1099 that says, you made $15,000, $45K being $15,000 more than the 30K that the Bitcoin was worth when it was transferred in. When in fact, you bought that Bitcoin at 60K, so your 45K sale actually represents a $15,000 loss, not a $15,000 gain. The issue is that Coinbase doesn't know what you bought that Bitcoin at, just that you sold it for more than when Coinbase first saw it. There are solutions to this, but they're complicated. So, here we are, tax bits of unicorn

Starting point is 00:09:53 and big congrats. Another unicorn and a convincing one at that is Falcon X. The company raised a $50 million series B round in March valuing the firm at $675 million, and now they're back for a Series C at a valuation of $3.75 billion. As always, the thing to ask with fundraising announcements like this is who's involved, and the interesting one in Falcons case is that American Express's venture arm got in. Also interesting is their report on where institutional interest is going. Their CEO said in an interview, quote, institutions were coming in with Bitcoin as an inflation hedge, but now he says, quote, they're going a lot deeper. There is new interest in Ethereum, definitely a lot of questions on defy and yield generation. One more interesting note from that block interview.

Starting point is 00:10:40 In March, the CEO had told the block that he expected large hedge funds, i.e. $500 million or larger in size, to make up as much as 30% of their customers. And now they say they're trending towards that goal. So, just to recap, we've got a major migration of hash power out of China, which was a potentially challenging area for Bitcoin in the first place. North American firms benefiting from that. Coinbase having a monster quarter more institutions getting involved and crypto companies becoming unicorns left and right. So yeah, no matter what's going on in this regulatory sphere, which by the way, we're going to talk a little bit more again about tomorrow on the weekly recap, it is clear that the Bull mood is here in a big way. So I hope you are having a great Friday looking forward to a

Starting point is 00:11:25 wonderful weekend. Until tomorrow, guys, be safe and take care of each other. Peace.

The Breakdown - These North American Bitcoin Firms Mined 59% More Bitcoin in July

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