The Pomp Podcast - #1224 Jaime Leverton | Bitcoin Miners Are Perfectly Positioned For Artificial Intelligence

Episode Date: July 13, 2023

Jaime Leverton is the CEO of Hut8 Mining, one of North America’s largest innovation-focused digital asset mining pioneers and high-performance computing infrastructure providers. In this conversation, we cover their diversified approach to mining, capital allocation, geographic approach, regulation, & more. ======================= Backed by world-class investors, including Google's AI Fund, Range has redesigned wealth management from the ground up. Range delivers a tech-first experience that provides fast, high-quality, transparent wealth management services making it simple to optimize and grow your wealth.With Range, you get comprehensive services like tax optimization, investment management, and estate planning with no hidden fees. That means no AUM fees.Get started today with code POMP15 for 15% off any quarterly plan for your first year at range.com/pomp ======================= Pomp writes a daily letter to over 250,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/

What's up everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. So it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should

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Use code POMP15 for 15% off any quarterly plan your first year at range.com slash POMP. Again, code POMP15 and go to range.com slash POMP. Okay, next up, we have CEO of HUD 8, Jamie Leverton. I'm very excited to talk to her. So let's bring Jamie up on stage. Jamie I thought a great place for us to start this conversation is in the differentiation you all have with many other miners most miners are bitcoin and bitcoin only and they're just focused on go mine as much bitcoin as you can and survive the bear markets you all have this diversified

approach where you are bitcoin miners but you also have a lot of high computing power computing performance that you're looked at as well can you help understand what is the difference between just being bitcoin only versus some of the you know high computational power that you all have And then what are the advantages to having more of a diversified strategy? Yeah, I'm happy to jump right in. So I'll take a step back a little bit. Hudit was one of the first publicly traded Bitcoin miners. We went public in early 2018, originally on the Toronto Venture Exchange, and then over

time moved up to the Toronto Stock Exchange and then were the first Canadian public to do a list onto the NASDAQ in June of 21. I was brought in by the board in December of 2020 after Hutt had gone through a particularly difficult time during the bear market. I mean, all miners had a rough go in that bear market. And those that survived were people like Hutt who had Bitcoin on balance sheet. And we were able to use that Bitcoin to help kind of weather the dog days of that bear market. others survived because they were mining other coins that had different economics and that was able to carry them through um and when the board looked to to bring on a new ceo one of the things

that they were that they were focused on was somebody that had a background in tradition more traditional compute or technology that had done transformation work in the past uh that loved Bitcoin and and could start to think about how to diversify the company to kind of avoid that going through those that type of a bear market experience again. So I came in. First thing we did was really focused on the balance sheet. We cleaned up the balance sheet. As I say, we do a listed onto the Nasdaq just to drive better capital markets access, more liquidity. And then we we started growing the the mining side of our business. But also we're looking at ways to um to bring in fiat-based revenue streams that were uncorrelated that could kind

of help dampen some of the volatility of bitcoin mining economics because there's so many so much of bitcoin mining economics are out of our control we obviously don't don't control the price of bitcoin we don't control the global network cash rate and we also had the additional complexity of an energy crisis, and energy is our largest input cost. So we looked at the industry and made the decision to purchase our high-performance computing business from another Canadian public company. So we bought it as an already established cash-flowing business.

We have two data centers in Toronto, two in Vancouver, one in northern BC, and they come with a diversified customer base, a variety of products, cloud co-location managed services, which is obviously getting a lot of headlines today as we see an insatiable demand for GPU-based compute driven by the explosion of AI and all of the excitement in that community, tons of new startups in that space. And really for GPU clustered compute, unlike Bitcoin mining compute, which is done by ASICs, They really have to be in a traditional data center environment. You need, and of course, we're interacting with customers on that side of the business.

So you need a billing team and a sales support team and a network operation center and all of those things that go into giving a great customer experience, which doesn't exist in a Bitcoin mining world where predominantly we actually don't have end customers. When we're prop mining, we are really just putting the compute power to the Bitcoin blockchain and receiving Bitcoin in return. It's a very, very different kind of go-to-market motion, but my background is almost entirely from the traditional tech side. I spent 22 years in trad tech before coming over to HUT, and a lot of it in data center and infrastructure. I really see a world where, over time, the type of computing that we do in a Bitcoin mine, which is really, really a lot of power, tons of density,

but we don't worry about excessive security controls or redundancy. It's all just single-feed power, and it's really built to be a flexible workload. So a Bitcoin mine will power up and down on minutes notice based on power pricing or the peak demands of the local grid, depending on how we're working with local operators. Whereas a traditional data center workload, including GPU clusters, it's a net taker that base you need a stable base load you need to that data center needs to be up and running uh 24 hours a day seven days a week and there's a ton of complexity that goes into how we ensure those data centers don't go down at dual power feeds multiple generators ups um

things that we don't need to have in a bitcoin mine where it's a flexible workload and ultimately it's not customer data that's being protected at the end of the day it's just pure horsepower are being applied to the to the algorithms. When you start looking at that high performance computing, it's obvious how the Bitcoin mining is very kind of straightforward. And as you described a bunch of advantages to it, are there things that you're actually able to in the future potentially put these together? Can Bitcoin mines perform better or benefit from actually going into some of these, you know, kind of redundant type facilities? Or is there an advantage to keeping them separate facilities and actually using what is kind of unique to Bitcoin and the

mining process and not trying to commingle these. So ASIC compute does not play well with other types of compute, just the pure, the heat, the environmentals, you don't mix. There were a lot of experiments to actually bring ASIC compute into traditional data center environments during the 17-18 bull run. And it was just proven out that it creates all kinds of environmental imbalances within a traditional data center environment. And frankly, the cost is too high. Because if you think about to build the infrastructure to support a Bitcoin mine, you're looking at anywhere between $300,000 and $800,000 per megawatt, depending how you build

it out. Whereas in a traditional data center environment, because of all the security and redundancy you need, you're looking at, you know, it could be anywhere between 8 and 13 million US dollars per megawatt. So really, really massive difference in approach that is difficult to intermingle. And again, primary differentiator is a traditional data center is a net taker. They're always taking the power. Whereas the benefit and beauty of a Bitcoin mine is that it is a flexible load and can work in conjunction with the grid in a way a traditional data center can't. And I do think we're going to see parts of these worlds converge a little bit more over time. And, but it's still very much early days. We just talked about the differences,

but the similarities are pretty obvious in the sense of you're running servers or computers, and it's hardware, you got to plug them in, you got to take power, and then you got to do different things with them. Talk a little bit as to kind of the story, right for public markets, so much of public market investing is about the narrative is about the story of a company and being able to say, look, it is two different things. And there are differences in those things, but also there is this commonality that positions you all at kind of the forefront or the tip of the spear of computing for this next generation of all of these different applications. How do you think about what that story really is and the power of being able to share that versus just

being, you know, kind of a single focus Bitcoin miner. This episode is brought to you by Accenture. When your advertising operations fall out of sync, everything else follows. Spotify and Accenture are working together to reinvent the rhythm of ad sales using automation, analytics, and smarter workflows to simplify campaign delivery and access better data across the business. The result? Less time spent on operations, more time connecting brands with the moments and fandoms that matter most. Learn more at Accenture.com slash Spotify. Yeah, I think really the power comes in our ability to flex as market demand and economics evolve. We also can drive synergies from things like a network operations center that is monitoring, is there to monitor our data center sites 24-7. There are things that they can do to help on the Bitcoin mining side as well, which are also running 24-7, but with a different type of manpower outlay.

And of course, you always have synergies when you're when you're looking at the corporate structure. So from all of the corporate functions that support our Bitcoin mining side of the business can can equally support our data center side of the business. And again, I do think we're going to see an increased world of convergence. And there's all kinds of innovation happening behind the scenes on, you know, can can potentially GPUs go into a container type of environment and take advantage of some of the lower cost power available at Bitcoin mining sites? How does how do we how do we handle some of the network connectivity issues for those types of applications? But that's certainly work that's being done. And I think we're in the infancy of it. But over the next, you know, two to four, three to five years, we'll continue to see products and offerings and potentially even hardware that starts to bridge these worlds in a more meaningful way than we've seen to date.

When you start thinking about capital allocation decisions, obviously you have a dollar to spend. How do you think about the return or the risk that you take by diverting it to either side of the business? It's kind of this fascinating exercise where maybe there's not just one answer and there's some variables there. but how do you think about that capital allocation? Yeah, it's in the Bitcoin mining side of the world, when we think about allocating capital, how we look at it, you have to run massive sensitivity analysis where you're really guessing on where the price of Bitcoin and global hash rate are going to be at any given point in time in that return profile that you're building for the investment in the mining hardware in particular. And that's why, so we're actually

in the middle of a merger that's pending final approvals with a private Bitcoin mining company called USBTC. And one of the things that we love about the USBTC model, they're diversified just like HUD is, but rather than being diversified into HPC, USBTC is diversified into they do prop mining, but then they also do hosting for other miners and they have a managed infrastructure operations business, which is really just, think about it almost as professional services. They bring their bodies and their purpose-built software in to manage mines for other people. And all three of those businesses have a much, much different capital profile. The most intensive business across both HUD-8 and USBTC's operations is prop mining. Prop mining,

highly, highly, highly capital intensive, a ton of variables that you're really just kind of running sensitivity analysis and making your best guess on where the returns will go over a period of time. Whereas hosting, much less capital requirement because the client brings the mining equipment. And then in the case of MIO, really no capital investment at all. And then, as I said, on the HUD side, prop mining, we also have a repair center, and then the HPC side. So it gives us a lot of flexibility based on what we're seeing in the macro environment, either on traditional HPC or on the Bitcoin mining side. And we can kind of flex between the different the different lines when we think about what's the best allocation

of capital, obviously, in a go forward state, assuming we're successful in our merger. So obviously, you've got this kind of capital allocation decision, but there's also M&A, which is another form of kind of capital allocation. You all seem to be one of the more aggressive companies in the public markets that have Bitcoin mining, but also are pursuing M&A strategy, whether it's with other public companies or private companies. Talk a little bit about kind of the advantages you see there, maybe the opportunity set in terms of choosing not to do this once, but it seems like now this is becoming somewhat of a strategy. So what are you seeing there? Yeah, I think, I mean, I come from a bit of a unique background where

I've got a lot of experience in transformation and with distressed. The strategy we took in the bull market was to really focus on shoring up the balance sheet. We have a large stack of Bitcoins. We've got over 9,000 Bitcoin on our balance sheet that's unencumbered. Very, very, very little leverage in the business. And my thesis was the Bitcoin cycle has always repeated in a very similar fashion. And so I was taking the view that the last bull market would eventually end and we would roll into a bear market, which is obviously what we saw in this case, the bear market for miners in particular, especially challenging on the back of the energy crisis, as well as lower Bitcoin prices and a global hash rate that just continues to grow. So kind of the perfect storm for miners and in our case, because we had short up the balance sheet, we had already successfully done our first M&A transition transaction being the HPC business that was integrated.

and I really, when looking at kind of what was happening in the market and the opportunities available, it felt to me like your dollars were going to go further through investing in inorganic growth and organic, particularly with the challenges we've seen in the supply chain. So just really, really high prices across the board, long lead times, whereas in the inorganic space, opportunities to do pickups that give you kind of an immediate benefit without exposing you to the challenges on

the inorganic side. And then when you start thinking about those M&A opportunities, obviously being a Canadian based business, you've done some stuff in Canada, now you're doing some stuff in the United States. Are there other geographic regions that you're focused on or think could be strategic for you? Yeah, I spend a lot of time looking at assets in various regions. I think it's really important to look at geopolitical risk, not just short-term but long-term, and that can be a challenge.

We also – kind of markets that I really liked ended up not faring well in the energy crisis, so that kind of changed the perspective there. I think some of the technology we're seeing continue to advance in immersion. The economics are starting to get more attractive. That opens up hotter climate markets. I think the UAE in particular has done an incredible job of really attracting some of the best and brightest in digital assets from across the globe and certainly have a very open, easy to navigate regulatory environment. But it remains to be seen from a mining perspective what might make the most sense, but certainly open to it. And I like the jurisdiction.

Yeah, that makes sense. When you think of regulation, you talk about the jurisdiction there, but what about in the United States or in Canada? How has that affected decision making for you? Yeah, I think we've got the fortunate position of really just being focused on Bitcoin. It's only Bitcoin we hold in our balance sheet. We really are just infrastructure as far as the markets are concerned. We don't interact directly with retail consumers or any other kind of token. And I think really the focus in the U.S. right now from a regulatory perspective is more focused on exchanges and other types of securities.

There seems to be broad consensus that Bitcoin is a commodity. and certainly that's what we feel as well. One of the challenges we're seeing on both sides of the border in Canada and certain jurisdictions in the US is really in some cases a lack of understanding about how Bitcoin mining really works and how it can benefit local grids and local communities. And so in an absence of understanding,

we've seen unfortunately some mining moratoriums or mining bans. So it's really a jurisdiction by jurisdiction in Canada, province by province, the U.S. state by state as to how mining is being perceived. And I think as an industry, one of the areas that we really need to be focused on is education and really kind of breaking down a lot of the misunderstanding that surrounds Bitcoin mining and drive more conversations that lead to kind of thoughtful regulation and us being able to really partner with grids and communities in a way that benefits all parties, which I think is the unique beauty of this type of load.

There is no other industrial scale power consumer like Bitcoin mining that can work seamlessly with and to help support the grid, but also to stabilize and help monetize without the need for government subsidies or intervention. My last question is that you are not a Bitcoin luddite. You didn't necessarily, you know, kind of come to Bitcoin and be like, oh my God, the government's going to fail and I'm going to get rich because of this. You've had a very impressive career.

Maybe what are some of the surprises as you've gotten deeper and deeper into the Bitcoin market, into kind of the culture of Bitcoin, into the mining process? Is there anything that kind of sticks out to you that was either kind of an assumption that ended up not being true, or maybe something that was a surprise as you kind of built all this out? Certainly the biggest surprise was how supportive and collaborative the entire community is. I mean, coming from traditional technology, mostly all of my career was in large public companies.

I did a stint in one of the banks and capital markets. And there's certainly, there isn't the level of collaboration, kind of this spirit of community that permeates our space, that was the biggest surprise. And it continues to be. All of the companies really in our space know each other. We're broadly trying to do what's in the best interest of the industry when we think about, you know, we created the Bitcoin Mining Council a couple of years ago really to help bring a unified opportunity

for us to speak and speak out in defense of some of the misunderstanding and the FUD that was permeating the headlines often about the energy use. And so I think really just doing as much work as we can as an industry to educate, again, critically important. But biggest surprise for me is just the amount of positivity. And really, at the end of the day, everybody wants the industry to be successful and are supporting the participants in order to ultimately get us to the place that we think this industry deserves to go. Jamie, where can we send people to find you on the internet or find out more about HUD-8? I have the great benefit of a name that doesn't exist on anyone else on the planet. So at Jamie Leverton, the way I spell it, if you Google it,

assuming you don't find one of my imposters, it's literally at Jamie Leverton on Twitter, on LinkedIn. I'm super, super easy to find as is HUD-8, website's HUD-8.io. And really just super thrilled to be here. Awesome. Thank you so much for doing this. We'll definitely do it again in the future. That would be great. Thanks, Bob.