The Pomp Podcast - #1058 Why Are So Bitcoin Miners Selling?!

Starting point is 00:00:00 What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Today's episode is a conversation between myself and my brother, John Pompliano. We talk about Bitcoin miners and why so many of the publicly traded companies are having to sell Bitcoin, what the mining death spiral is, why you shouldn't worry about it, and exactly how some of the nuances of the mining industry end up playing out in bear markets like we're currently experiencing. I really enjoyed this conversation with John,

Starting point is 00:00:33 and I hope it's valuable to you. Before we get into this episode, I first want to talk about some of our sponsors. This episode is brought to you by Avalanche. Crypto wallets and browser extensions are outdated, limited in features, and don't meet the needs of today's Web3 users. Core, the free non-custodial browser extension

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Starting point is 00:03:17 of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. What do you want to talk about today? Let's talk about miners and how they seem to be just selling every bitcoin in their uh in their wallets miners are selling at a rapid pace they sold about 14 000 bitcoin in a single day equal to over 300 million dollars uh and miners just across the board public miners especially have been dumping bitcoin do you know how uh miners and the pressure they're under when the price goes down do you understand how that works a little bit could

Starting point is 00:03:57 you explain it in a little more detail so if you think of miners right the whole name of the game for a miner is to go find the lowest cost power possible, go find machines for as low as possible. Those are their input costs, essentially raise the cost of the machine, cost of the energy. They then plug them in and they mine Bitcoin. That Bitcoin usually is produced or mined at a cost to them that is lower than the current price. So we'll use an easy example. If Bitcoin was trading at $40,000, miners may mine it at $10,000 cost to them. So they spend $10,000 for every one Bitcoin they mine. Now I'm over-generalized numbers. If Bitcoin is trading at $40,000 and you, it only costs you $10,000, that's pretty good. It's $30,000 worth of profit for every

Starting point is 00:04:44 Bitcoin you mine. Now that is for the absolute best miners in the world. Those with the lowest cost power or access to the best machines at the best price. There are some miners, specifically usually the residential miners, you know, individuals, they may have a higher cost of power. Sometimes let's call it four times higher. So instead of paying three cents a kilowatt hour, maybe they're paying 12. And so in that situation, it costs you $40,000 to mine one Bitcoin that equals $40,000. Well, the problem becomes if Bitcoin's price drops. Now, all of a sudden, you're spending $40,000 to mine a Bitcoin that let's say now is trading at $30,000. So what do you do? Either you continue to mine Bitcoin at a loss, or you shut off your machine.

Starting point is 00:05:26 Now, because it's residential, they don't have a lot of miners. So what do they do? They shut off, not a big deal to the network. But if the price continues to fall and now it's trading at 20,000, those miners with the lowest cost power and the best priced machines,

Starting point is 00:05:39 they can continue to mine because they have a $10,000 production cost for a Bitcoin that's trading at $20,000. But one of the challenges is that these miners, their expenses are denominated in dollars. So as an example, let's say that you were able to mine $1 million worth of Bitcoin per month when Bitcoin was at $40,000 and your expenses were $700,000 a month. You had a $300,000 profit and all was good in

Starting point is 00:06:08 the world. If now all of a sudden Bitcoin's price goes from 40,000 to 20,000, you went from making a million dollars in revenue to 500,000 in revenue. Well, if you're making $500,000 in revenue and your expenses, which are denominated in dollars is still 700,000, you now are unprofitable. So what do you do? What many of the miners will do is they will sell Bitcoin that they've been accumulating on their balance sheets to be able to raise cash so that they can pay, one, their expenses, and two, is to ensure that regardless of how low Bitcoin's price goes, they won't go bankrupt, they won't go out of business. And so naturally, as the price falls, some portion of miners become forced sellers because they've got to raise cash on the balance

Starting point is 00:06:50 sheet. Now, one argument is that this is a positive thing because the miners are being able to protect themselves. Another argument is, no, the miners should actually do everything possible in their power to never sell the Bitcoin. The whole point of mining is if you can mine Bitcoin, even if it's at a profit today and hold it for a really long period of time, it's supposed to go up in value. And so naturally what you're seeing is miners, as the price fell down in June and when it broke $20,000, lots of miners were selling and they've continued to sell because they need cash yeah but when you look at it uh the big guys obviously are hoping and trying to weather the storm it seems like right like they're the ones selling off bitcoin they're the ones that

Starting point is 00:07:29 have the most machines have the cheapest power all that stuff uh but when you look at retail what should the average person do should they just turn off their machine if they're losing money every single day the machine's on like that's the ultimate question i think well there's uh some people who are not economic actors in mining some of you they just like the idea of mining and they're going to do it regardless they feel like they're contributing to the network right there's some people who say uh i don't care if i lose a little bit of money now i already have a sunk cost of uh the machine i already spent money on the machine the second thing is uh i just tapped into the electricity in my house or i'm doing in my garage or something so yes i'm

Starting point is 00:08:05 paying you know 12 13 14 cents a kilowatt hour but whatever it's not like i have like a special agreement you know whatever it's just my electrical costs at my house uh and then oh i'm going to just mine the bitcoin and if i hold it for long enough then eventually the bitcoin be worth more than it is today and so yes i'm losing money in the short term but i already bought the machine so i should just keep mining and then there are the people who are the economic actors who say like why am i mining bitcoin out of laws uh if i'm going to deploy more dollars uh then i should just go buy bitcoin rather than buy more mining equipment how much of this is energy cost versus bitcoin price so for those uh that are unaware um those are two main components there is one a third thing

Starting point is 00:08:48 that is important here so you have the energy cost which is fixed right most people don't uh go to their power provider and say hey bitcoin was at 40 000 i was paying uh five cents a kilowatt hour uh it dropped to 20 i need i'm gonna have to have you hook me up with two and a half cents right it's just like you pay five uh five cents this is why miners are obsessed with how do you get the lowest cost power because one, it optimizes your profitability, but two, it acts as protection when Bitcoin's price turns down. Second thing is obviously Bitcoin's price. But the third thing is the difficulty adjustment. So if you go back to May of 2021, when about 65% of all hash rate was in China, China, specifically one province said, hey, get the hell out of here. We're serious this

Starting point is 00:09:29 time. And about 50% of all hash rate on the Bitcoin network left. And so they unplugged their machines and move them elsewhere. Sometimes they didn't actually go plug them in anywhere else. Other times they moved and they ended up plugging them in. When we had a 50% drop in the hash rate because of that China ban, what we saw was the difficulty adjustment went down. Meaning that if there's a hundred people trying to mine, right, then the difficulty adjustment, let's just say is kind of flat. If all of a sudden there was 150 people trying to mine, the difficulty adjustment would go up because it's trying to make it more difficult for any one miner to win, right? There's more competition. If all of a sudden we went from a hundred miners down to 50, the difficulty

Starting point is 00:10:10 adjustment would adjust downward because it wants to make it easier for those 50 to go ahead and do it. Now, why would you do that? If it's easier, what does that act? Next is an incentive. The easier it is to mine, the more people would want to mine. So it brings back a ton of miners. If all of a sudden there's tons and tons of miners and it's really difficult, the next incremental miner it isn't as attractive to them right or it's less attractive than it was uh before all those miners showed up so naturally that difficulty adjustment acts as almost like a regulator right or like a balancer in terms of always ensuring that as miners shut off their machines because the price is going down the difficulty adjustment moves downward as well to ensure that miners

Starting point is 00:10:51 always want to come onto the network and so that balancing mechanism is what prevents this idea of like a mining death spiral, which there is an idea of like, well, if you have miners who all of a sudden flip to losing money on each Bitcoin, they would shut their machines off. So the network would grow less and less secure. And then they would need to sell their Bitcoin in order to be able to fund, you know, expenses. And that would then push the price further, which would cause more miners to shut down, which would cause them to sell more Bitcoin. And like you would get in this death spiral on the way down. The difficulty adjustment is what helps to prevent that from actually occurring how do you think about um is the ultimate goal just as many miners on the

Starting point is 00:11:30 network as possible or does the difficulty get too high to where it's like not economically sound for so many retail miners that like the big boys are playing the whole space and there's no there's no room for any like retail miners there's a relationship between price and hash rate right hash rate is the measurement of how much uh how many miners how many computing powers on the network um some people will say hash rate leads price some people say price leads hash rate chicken or egg, right? Depending on who you talk to. Uh, but I do think that there's a very important part, uh, of, uh, the Bitcoin network is ultimately secured by the miners. Now the nodes technically are validating the transactions. Uh, and so we want as many miners as possible

Starting point is 00:12:09 because that means that the network is more secure. Now, one of the things that, uh, uh, has occurred is obviously 65% of the hash rate was in China. Now, all of a sudden about 10% or so is the latest estimation I saw. 10% of all hash rate globally is in Texas and about 30 to 35% of all hash rate globally is in the United States. Now, 35%, let's call it, is better than 65% in any one country.

Starting point is 00:12:33 But I think we have to be careful that we don't over-rotate from 65% in China to 65% in the United States either. Like we actually want a truly decentralized, distributed network where folks feel like there is no ability for one country to unilaterally act to shut down miners. All right.

Starting point is 00:12:53 What are your thoughts on like, obviously a bunch of retail miners have loans, it seems like, to pay for these machines and then payments are recurring every single month. They still have to pay those. Those are the fixed costs. Like how should someone think about, okay, I have a loan, but I'm still mining at a loss.

Starting point is 00:13:06 I have conviction, but I still don't know when that will happen. Like what's the timeframe of all that? Like how should they think about that? Yeah. It's kind of like leverage, right? Yeah. It's almost worse than leverage,

Starting point is 00:13:18 which is, in leverage, you have the ability to liquidate the asset. Like if I, using an easy example, if I borrow $100,000 to buy Bitcoin and I posted $200,000 as collateral, I basically can weather 30, 40, 50% drawdown before I would get liquidated. But if at any point I'm like, oh shit,

Starting point is 00:13:41 I think the Bitcoin price is going down, I can just, with the click of a button, sell the Bitcoin, pay off the leverage or the loan, and I still have some Bitcoin left. But there's a 24-7, 365 highly liquid market that I can do that immediately, right? If instead I basically took a loan and I didn't go buy Bitcoin with it,

Starting point is 00:13:59 I bought mining equipment and I want to quote unquote liquidate to be able to pay off the loan because the price is dropping, it's not as easy. It's not a 24-7, 365 highly liquid market where I can just press a button and bam, the miners are sold.

Starting point is 00:14:14 And so I think that ends up being one of the uh the difficulties there now if you're a large-scale miner you've got a big balance sheet you've got access to capital markets and you're able to uh kind of in a sophisticated way get access to debt to be able to finance this stuff sure there's plenty of people who will go do that right debt is a component of uh businesses all in every industry yeah i agree and we've actually seen the cost of miners has dropped obviously in correlation with price going down miners getting off the network they're selling their machines they don't know what to do with them i don't know what it is now it used to be uh like the s9s that that was when i uh when i first started uh mining

Starting point is 00:14:52 uh that was um that was the the best piece of equipment at the time uh now uh pretty much no one uses those um they essentially would price them based on what they thought uh it would take nine months or so to mine back your money so they would say like okay cool if you use this machine and you mine for nine months, you'll make $3,200. So then they would sell it for $3,200, right? And then I think at some point it went from nine to maybe 12 months or whatever. But basically it was like,

Starting point is 00:15:20 we want to price the equipment so that you can buy it. If you plug it in today and you mine for nine to 12 months, you'll get your money back. And so naturally, if the price of Bitcoin goes down, well, they have to drop the price of the miners, right? It's also a function of, if the price of Bitcoin goes down, people are less excited.

Starting point is 00:15:35 So there's less demand for mining equipment. if price goes up though is bananas right there there was uh uh s9s um i'll probably mess up the numbers but i think it was like twelve hundred dollars maybe it was like the average price and at one point people were buying s9s for like three four thousand dollars uh during the 2017 bull market gotcha yeah bringing up a uh bringing up a chart now um all right whatever uh can you talk about the minor capitulation like i've seen that all over twitter obviously that's what we're talking about is basically minor saying uh yo it's over like i gotta shut off my machines i gotta sell my bitcoin because i've dollar denominated uh expenses um and so the the

Starting point is 00:16:16 whole idea of minor capitulation is basically uh similar to what we saw uh on the trading side is at some point there had to be liquidations right there had to be people like damn it's it's over it's done right um and so naturally what you get in those situations um is on the minor side same thing you get people shutting down their equipment you get them selling their assets uh and it's either because they're for sellers which is the equivalent of being liquidated if you had like leverage or something uh or two is psychologically uh they think it's over now i don't think we're getting a lot of psychological capitulation right i actually think it's the exact opposite people are like damn this is annoying but like they have long-term conviction in the

Starting point is 00:16:56 asset in the market uh i do think that there's a lot of for selling so in june if you remember Bitcoin's price drew all the way down to $17,500, significantly below the realized price on chain and a number of other metrics. It was the first time in Bitcoin's history that Bitcoin had dipped below a previous all-time high after a bull run. And so there's a lot of miners, just a lot of pressure. And so what were they doing? That's where you saw the miners selling pretty much from June 1st till today. They're just forced sellers. Now that we talk about retail, I want to talk about like the big boys right so they sold a lot of bitcoin in july verse june they sold about 23 percent of their holdings public miners is that where are you at all that they're selling so much

Starting point is 00:17:39 that they're selling 23 of the overall holdings it's better than selling 50 right again what they're trying to do is they're trying to play a game of how much do we have to sell but if you were to go ask them like hey wave a magic wand do you want to sell any bitcoin they'd say no, right? And so, yeah, look at these numbers here. Bitcoin sold in June, the top five Bitcoin sellers in May and June in public miners, Core Scientific between May and June has sold 9,900 Bitcoin, right? Just under 10,000. Bitfarms, Northern Data, Argo, and CleanSpark have sold between, you know, call it 538 and 3,300 Bitcoin. And so when you look at this, in many cases, the selling in May was much smaller than the selling in June. Why are the percentage in June

Starting point is 00:18:29 versus May so high? It's because they were forced sellers, right? Now, forced sellers doesn't mean that like the business is bad or it's going to go out of business or whatever. It just means that they are having to sell Bitcoin to make sure that they have a strong enough balance sheet that they can, uh, fulfill their us dollar denominated, uh, obligations. Uh, and they want to make sure that they're going to survive because the name of the game in bear markets is to survive. And then the name of the game in mining is to mine as much Bitcoin as possible and never sell it. Right. Those are like the two strategies that you'll see people kind of talk about who've been around for a while. Uh, when you see mine are selling, it just means that they're selling

Starting point is 00:19:05 because they have to, not because they want to from in most cases. Yeah. And then how do you think about the transaction fees that they're receiving right so having more machines on is good because you're getting more you're more money right but you could be operating at that loss so like should they think about plugging in more machines if they really have that much conviction right like none of this financial advice but yeah most miners i think um you know look they do inside of a block you basically get uh the mining reward there's some transaction fees as well the uh the idea is uh 2140 uh all the bitcoin will be mined uh and then the network will be sustainable on transaction fees at that point. There's plenty of people who argue that are

Starting point is 00:19:41 critics that say, no, that's not possible or whatever. When you begin to look at what miners are doing, I don't know very many miners who are like, yo, let's go set up more miners because we're going to get more transaction fees, right? The way they look at it is that Bitcoin reward is going to end up being the big incentive, if you will. And then on top of the Bitcoin kind of block subsidy, you also see miners who say to themselves, how do I manage my balance sheet? I know what my dollar denominated obligations are. If I have to mine at a loss and I got a really, really big balance sheet and I've got deep conviction in Bitcoin and I'm basically taking a directional bet that within 12 months it'll recover, then maybe I go plug them

Starting point is 00:20:22 in. But if I don't have a big balance sheet, if I'm not coming at this from a position of strength, maybe I don't go plug in new machines. Maybe I don't put in that new order because I need to be able to ensure i'm going to get to the other side like rule number one is survive rule number two is get as much bitcoin as possible but you don't focus on number two if you're not sure you're going to actually fulfill rule number one of make sure you survive what are your thoughts around the one demand for this uh but to the actual execution of it of the biggest difference is i'm getting paid bitcoin for doing something and i'm paying out all my creditors in cash right in usd whatever dollar denomination you want to use. What is the demand for, hey, I'd love to pay what I'm earning

Starting point is 00:21:03 through mining in Bitcoin for my creditors. And then how would that execution work of actually getting paid Bitcoin for something? Obviously, it's very volatile. So this is a good question. I think there's a difference. Dollar denominated expense versus I'm paying in dollars, right? Now, what I mean by that is I could say, hey, John, you can use my warehouse to mine Bitcoin, right? And, uh, your, uh, your payment, uh, your rent payment is going to be $5,000 a month. So cool. Thanks, man. And when I say that $5,000 number, that is a dollar denominated expense, right?

Starting point is 00:21:41 I didn't quote it to you in five Bitcoin. I didn't, uh, didn't, uh, didn't, um, uh, communicate it to you as five rocks or five pesos, or I said $5,000 right now, if you say to me, Hey man, I appreciate that. I'd love to pay you that $5,000 monthly rent in Bitcoin. I may say, yes, I made it not. But the amount you owe me is $5,000, right? And so if Bitcoin is trading at $5,000, that means you owe me one Bitcoin

Starting point is 00:22:09 if you want to pay me in Bitcoin. But if all of a sudden Bitcoin goes to $10,000, you still owe me $5,000, right? It's denominated in dollars. Now you only owe me half a Bitcoin. But the same thing happens if all of a sudden Bitcoin goes down to $1,000 and now you owe me five Bitcoin.

Starting point is 00:22:22 And so the denomination of the expenses in dollars, that's different and separate than whether people are actually paying in Bitcoin or in dollars. My guess is that some of these companies that have kind of are vendors to the miners, some of them probably do want Bitcoin, whether it's an energy company, whether it's the landlord, whether it's even the people selling them, the miners, they definitely accept Bitcoin. So like there are people who will accept Bitcoin, but in most cases, what you're going to find is that the expense itself is actually denominated in dollars. rather than in Bitcoin or something else. Do you think we could get to a point where so many miners drop off and so many big companies are dumping Bitcoin, causing those drawdowns to where that could be a break in the network or anything like that?

Starting point is 00:23:06 No, I don't think that's going to happen. You don't worry about the security of the network at all due to miners leaving? No. If you look, we continue to see hash rate explode upwards over 3, 6, 12 months. If you were to go look at the nodes in the Lightning network, which is different but still a good signal, uh, that continues to hit all time highs. Um, so like, yes, the price is down, but I actually look at the disconnect between hash rate going up and price going down as a classic, the fundamentals

Starting point is 00:23:35 are disconnecting from the price or right from the, uh, the, the, um, if you're looking at public markets, uh, you can see a situation where, uh, let's say a company's cash flows were increasing, but the price of the stock was going down. Now, of course, hash rate is not cashflow, right? But that is one of many metrics people look at for the health the strength the value of the network and so if hash rate is going up but price of the asset is going down uh you have to be careful because what you don't want to happen is like oh price drew down two weeks ago and hash rate just hasn't corrected yet right but if truly the price has now been going down for eight months and hash rate has not all of a sudden done a 70 drawdown either right so you have a a strengthening

Starting point is 00:24:13 fundamental uh data point while you have a price decline that tends to mean that you actually are getting some sort of disconnect now you can't look at it in a vacuum as like that's the only analysis to do there's many other metrics that you should uh look at in terms of the health of the network uh but i i don't worry about uh all of a sudden a bunch of miners leaving in the network becoming unsecure or anything like that yeah i mean over the last like three years hash rate has increased exponentially right it's gone through the roof uh but over the last two months three months it's kind of stayed stagnant almost peaked a little bit in may um that doesn't worry you There is becoming that larger and larger disconnect.

Starting point is 00:24:50 This is the mining rig's cost that we were talking about earlier. You can obviously see they've drawn down with the price of Bitcoin going down. Every single rig, S9, M20s, S17s, M30s, and S19s have all come down in price since reaching that top. The hash rate is interesting because everyone's fighting for it, right? What do you think?

Starting point is 00:25:13 I think people will, regardless, there will be miners on the network. So I don't think they're going away anymore. There's over millions of miners. I think the big boys will continue to be the big players, right? Like retail just cannot move. Like you just don't have enough capital to make those like significant moves or plug in, you know, 50,000 machines or something like that.

Starting point is 00:25:32 It's interesting to see which ones will survive, which ones will navigate out of those big mining companies, which will navigate the storm, be able to kind of just weather the storm, right? Like that is the name of the game is just getting to the other side in a lot of cases, not every case. uh but yeah i think they'll continue to go in people are people have been doing this for the last five years mainly but really the last 10 miners have been chasing cheap power so where are they going to get it i'm sure we're going to get influxes of people talking about esg go solar

Starting point is 00:25:59 go win go nuclear there's a million other ways uh that people will talk about getting power i've even seen people talk about uh mining bitcoin in space because you can get solar power you can get it all all day right or uh 24 hours instead of just eight hours during the day uh so there's a bunch of stuff i think people will kind of um migrate to as it becomes a little bit more difficult the thing that worries me a little bit is when we get to 2140 do the transaction cost do they really because that's the problem with ethereum for the most part is their transaction fees are through the roof no one wants to use the network a lot of the times right it's one of the things that people don't uh actually pay attention to is if you compare bitcoin fees to ethereum fees

Starting point is 00:26:38 on the network, on layer one. The Bitcoin fees have been incredibly low compared to the Ethereum fees for a while now. Most people who have been around for a while remember Bitcoin fees spiked. So Bitcoin has not always been like this. The Bitcoin fees in 2017 bull market were absolutely insane.

Starting point is 00:26:55 You know, tens of dollars, 50, $60, whatever it ended up getting to, I don't remember. But it was insane. And so if you have to wait on block times, right? So transactions could take day, right? And fees spiked. Obviously, we were like, damn, it's gonna be pretty hard to use this from a scalability standpoint. Now, what Bitcoin did was it pursued a scalability solution, one of those being the Lightning Network. So it provided almost a release valve to the actual layer one, where now tons of transactions can go through on Lightning Network. And so you get, along with other technical improvements and other things, you actually can get kind of higher throughput and lower fees on layer one, but also you're offloading some of the transactions to that layer two. Now, Ethereum, which is really just kind of from this specific problem, they were just a couple of years behind.

Starting point is 00:27:44 Now they ran into it. And so guess what they have to figure out? It's like, what is their scalability solution going to be? Now, if you talk to the Bitcoin crowd, they're like, oh, this is going to zero. If you talk to the Ethereum crowd, they're like, it's going to the moon. and so if you have to find some sort of scalability solution is it a layer two is it uh this transition from proof of work to proof of stake is it uh some sort of side chain or this or that like who knows right i don't pay attention to that shit because it's just not something that i'm like intellectually

Starting point is 00:28:10 very interested in but what i can do is because i'm interested in bitcoin i can see how the layer two is the release valve and fees are incredibly low compared to the historical average it's near all you know all-time lows uh on the bitcoin network and a big piece of it is uh technical improvements and then the layer two where would you go to learn about mining to learn about like the mining rigs and specific details and like how much you like like where does someone go to start mining right on the retail level so i don't know about start mining uh there's a bunch of services out there you can go check those out what i would say is um if you just want to learn about the technical components and kind of how it works and and all that uh there's actually a website that

Starting point is 00:28:48 people, I don't know how many people actually know about this site now. It's been a while since kind of a whole cohort of people came in. But if you go to, I think it's, let me not say it out loud. Let me make sure I get it right. Yeah. If you go to lop.net slash Bitcoin, I just put it here in the chat. You can get, you can go ahead and look there. And Jamison Lopp has a ton of great resources, everything from setting up a wallet, running a node, the history of Bitcoin, network statistics, transaction fee estimates, block explorer visualizations. He's got a whole section on mining, data anchoring, technical resources, security, privacy, economics, even art and music, charities, tax accounting, exchange rate, all that type of stuff. So I'd

Starting point is 00:29:36 go there. It's a great website that also has a ton of different information that I think people would enjoy. Yeah, it's good. I'm looking at it now. I didn't know that existed. Yeah, there you All right, where can we send people to find you on the internet? You could find me on Twitter. It's probably the best place to find me. Just go to my Twitter, John Pompliano. Very simple, J-O-H-N-P-O-M-P-L-I-A-N-O.

The Pomp Podcast - #1058 Why Are So Bitcoin Miners Selling?!

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