Unchained - The Bitcoin Hash Rate Has Dropped. How Long Will It Take to Return? - Ep.252

Episode Date: July 6, 2021

Kevin Zhang, vice president of business development at Foundry, breaks down the latest developments surrounding China and bitcoin mining. Show highlights:  how he came across crypto and which Bitcoin OG he joined at Bitcoin.com to help start its mining operations arm what Foundry does and its relationship with Digital Currency Group (DCG) why DCG wanted to build out a mining infrastructure business what news from China in early March kickstarted the process of the mining ban how China’s Central Television broadcasting company might have brought extra scrutiny to cryptocurrencies  what the 100th anniversary of the Chinese Communist Party has to do with its Bitcoin mining ban why the Inner Mongolia and Sichuan Bitcoin mining bans were especially disruptive for Chinese miners how much of China’s hash rate Kevin estimates has been shut down since May where are miners relocating to  why Chinese mining equipment will not be allowed to turn on in the US whether or not China’s Bitcoin mining ban will stick why China banning bitcoin mining will be good for the network in the long run  what significant risk to Bitcoin’s network is solved by China banning bitcoin mining how much Bitcoin’s hash rate will drop and what effect this will have on miner revenue why Kevin thinks that Bitcoin is good for renewable energy how immersion cooling technology works what tangible benefits miners could find by moving to North America if El Salvador’s volcanic bitcoin mining plan is feasible what Kevin predicts will happen in the Bitcoin mining industry for the latter half of 2021 Thank you to our sponsors! Crypto.com: https://crypto.onelink.me/J9Lg/unchainedcardearnfeb2      Tezos: https://tezos.com/discover?utm_source=laura-shin&utm_medium=podcast-sponsorship-unconfirmed&utm_campaign=tezos-campaign&utm_content=hero      Conjure: https://conjure.finance     Episode Links   Kevin Zhang Twitter: https://twitter.com/SinoCrypto  Mining tweet storms: https://twitter.com/SinoCrypto/status/1407524150885994497 https://twitter.com/SinoCrypto/status/1409227438262046723  Content from previous work experience: Greenridge Generation https://www.theblockcrypto.com/linked/57943/a-power-plant-in-new-york-is-reportedly-mining-roughly-50000-in-bitcoin-each-day  Project Spokane https://medium.com/@derekbrouwer/the-bitcoin-barons-how-a-marketer-and-a-money-launderer-sold-montana-on-digital-gold-2a255c96c981    Foundry, Subsidiary of DCG Twitter: https://twitter.com/foundryservices Website: https://foundrydigital.com/  Foundry USA Pool Bit Digital: https://www.prnewswire.com/news-releases/bit-digital-joins-foundry-usa-pool-with-5-679-machines-adding-up-to-280-phs-of-compute-power-to-the-pool-301283792.html  Bitfarms partnership: https://www.globenewswire.com/news-release/2021/04/23/2215897/0/en/Bitfarms-Partners-with-Foundry-to-Expand-Bitcoin-Mining-Fleet-and-Join-Foundry-USA-Pool-Instantly-Boosts-Operating-Hashrate-By-15.html  China’s Bitcoin Mining Ban Travis Kling noted 25 different announcements from China in June alone: https://twitter.com/Travis_Kling/status/1410630499748388865  Glassnode: mining difficulty to face its largest decrease ever https://insights.glassnode.com/the-week-on-chain-week-26-2021/  The Block: hash rate dropped 50%, Foundry up while everyone else is hurting https://www.theblockcrypto.com/post/109315/bitcoin-hashrate-declines-50-percent-china-mining-crackdown Nic Carter: breaking down the hashrate migration https://www.coindesk.com/bitcoin-unpacking-hashrate-nic-cart-migration Secondhand mining equipment prices are spiking https://www.coindesk.com/chinese-logistics-firm-airlifting-bitcoin-mining-machines-to-maryland-report https://www.theblockcrypto.com/post/109301/secondhand-bitcoin-miner-supply-spiking-bitmain Bitcoin miners shut down, 26 farms affected after Sichuan bans BTC mining https://www.coindesk.com/sichuan-becomes-latest-chinese-province-to-order-bitcoin-miner-shutdown https://decrypt.co/74075/bitcoin-hashrate-falls-17-overnight-after-china-mining-crackdown China’s Inner Mongolia announced eight measures in its crypto ban https://www.theblockcrypto.com/post/105973/china-inner-mongolia-crypto-bitcoin-mining-ban-measures  Hash rate hits yearly low https://www.coindesk.com/bitcoin-mining-hashrate-drops-low Miners are moving to Kazakhstan https://www.coindesk.com/chinese-bitcoin-mining-company-delivers-first-machines-to-kazakhstan Tweet thread on how bitcoin miners reacted to the PRC’s May crackdown  https://twitter.com/MustafaYilham/status/1396574185598590979 Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, everyone. Welcome to Unchained. You're a no-hype resource for all things Crypto. I'm your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto six years ago, and as a senior editor at Forbes was the first mainstream media reporter to cover cryptocurrency full-time. This is the July 6th, 2021 episode of Unchained. My book, The Cryptopians, Idealism, Greed, Lies, and the Making of the First Big Cryptocurrency Cray is available for pre-order. You can also purchase it on Amazon, Barnes & Noble, or Bookshop.org, or any of your other favorite bookstores. Go to Bitley slash Cryptopians. That's B-I-T-L-Y-S-C-R-Y-P-T-O-P-I-A-N-S to pre-order today. Tasos is smart money. That's redefining what it means to hold an exchange value in a digitally connected world. Discover how people are reimagining the world around you on TASOS. Conjure brings any asset you want onto Ethereum by allowing for users to create synthetic assets which track other markets. With zero interest loans and unlimited

assets, it's helping defy to consume tradfi. That's C-O-N-J-U-R-E dot finance. Check it out. The Crypto.com app lets you buy, earn, and spend crypto, all in one place. Earn up to 8.5% interest on your Bitcoin and 14% interest on your stablecoins. Paid weekly. Download the crypto.com app and get $25 with the code Laura. The link is in the description. Today's guest is Kevin Zhang, vice president of business development at Foundry. Welcome, Kevin.

Thanks for having me on, Laura. Before we get into all the Bitcoin mining news, and there is a lot of it, why don't we just start with your background? Because you're kind of like a crypto-O-G. Tell us how you got into Bitcoin. Sure thing. So like many others,

I'd heard about Bitcoin quite early back in college in 2011. And I initially wrote it off. It's, oh, it's magic internet money. Nothing just goes to thousands. It's not really backed by anything. And I kind of disregarded it for several years. But then it came back to me when I was quite bored of my corporate finance job at Ford. And it was actually through some of my video gaming friends on World Warcraft.

They introduced me to Bitcoin money. And that particular friend that introduced me to it, he was a childhood friend with Roger Beer. And when he told me that he was building a mining operation, out in California, and he's looking for someone that had a background of finance, consume Chinese, to work with the manufacturers, and a passion for the technology. I was sold right away. So I packed my bags and flew out to California and kind of pursue this crazy Bitcoin money that story.

I love that story. And you tell us where you worked there because I think that you worked at some companies that were associated with Roger Veer. Oh, absolutely. So prior to me joining Roger at Bitcoin.com, I was working on several different large-scale projects in North America. So I spoke about there was this project on California. Well, very quickly, we learned in late 2014 how difficult it is to operate and maintain a mining facility in very hot climates like California.

We also needed cheaper electricity and more scale. So eventually we found the business up in Montana. And that became known as Project Spokam, which eventually got acquired by a group called Hyperblock. In 2016, that was what we claimed was one of the largest facilities, if not the largest, in North America at the time. Eventually, I did join Roger over at Bitcoin.com. I helped him with his Bitcoin mining operations and bringing business to Bitcoin.com's mining pool. Eventually, I did find my way back into the U.S. I worked on the project called Greenwich Generation, which was a very large-scale natural gas power plant.

and the first fully compliant behind the meter mining operation for Bitcoin at a power plant. I guess that caught the attention of those at DCG, and I joined Mike and Barry here at Foundry Digital. All right, yeah, and we'll dive a little bit more into some of the details there later on. So tell us what does Foundry do and what do you do there? Sure. So I'm the vice president of business operations or business development here at Foundry. Foundry is a decentralized infrastructure play for digital currency group. What that means is we provide services in the infrastructure layer for both proof of work and proof of state.

But my guess is for today we're running into focus on the Bitcoin line side. All right. So why did DCG decide to start Foundry? Because they had been industry players for quite a while before doing so. Yeah, that's a great question. Even prior to me joining DCG, when I was at Greenwich, we were looking to research. capital and partner up with many of the known staples within the crypto community and investors. And there was this saying that was being passed around a lot of the more institutional investors.

They were saying friends don't let friends mine. And clearly there was something that was missing there. And what it all came down to was we realized that there was the Bitcoin mining space needed cleaning up. For lack of a better term, it really was quite a shit show, especially for Westerners trying to break into the market. It certainly lacks a lot of transparency. It's very opaque. Lead times for deliveries to be very long. It's a very risky and capital intensive endeavor. And most people have typically shied away from it. And DCG, our mission is to build a better financial system for the future. And part of that is bringing an institutional adopters, right? And to get that institutional adoption, you've got to make industry more mature, bring more transparency and credibility. So we realize that we have an ability and an opportunity to leverage, leverage our balance sheet, our capital, and our reputation to break into the mining ecosystem

and really clean up the ecosystem for other investors to kind of follow the path that we're a clear example would be, let's say with both our subsidiaries, sister companies at great scale and Genesis, you're dealing with a lot of flow and a lot of coins that are custom that are looking to generate yield and returns on the crypto that we're managing for them. Well, when you're dealing with billions of dollars of digital assets, it's very difficult to trust, let's say, two college students in a dorm room for their staking service. And we realize that as a space needs to be more mature and institutionalized, we should first be able to serve our own sister companies and portfolio companies. And if we can provide an institutional product internally,

then we can offer it to others. And the same is true with mining, right? I mentioned before that there's all these risks with not only procuring the miners, but also building your facility, knowing who do invest in what co-location insights to work with. And we wanted to bring our credibility experience to the table. And just to kind of draw out the issues there, it's that when you talk about the delay and purchasing miners, it could be that you calculate what your cost would be and figure out whether or not you could be profitable based on the price at any given time and the difficulty, your electricity costs. But as time goes by, those factors start to change a little bit. And then

that could affect whether or not you could have a profitable operation by the time the miners arrive. Is that kind of what some of the issues are there? Yeah, absolutely. So I think one of the most critical things that a lot of investors and market participants miss when they enter into the mining space is timing, right? You have to actually be quite countercyclical, where usually if you're buying and you're purchasing mires or building your sites when the economics are very profitable. Usually it's too frothy. And by the time you actually get your operations online, units are delivered, there are very long lead times, right? We're talking six to nine months, if not a year. So by the time you actually get your equipment and everything powered on,

the economics are no longer there because the rest of the competition has either cut up or the markets have themselves corrected. All right. Yeah. So now that we understand a little bit of what the mindset, is of a mine operator. Let's now talk about the news coming out of China regarding mining. Obviously, there's been this ban that's been in the news. Why don't you tell us what happened? Sure. So this may be quite long tangent, but I think there's a lot of things to cover, right? The way I look at how China is cracking down on mining and crypto regulations in general, it's not focused only on money.

The CCP and China's a country, their main focus is social stability and maintaining their authority and their status quo by making sure everything is under control. And that is oftentimes challenged when crypto is in everyone's faces, everyone's fervent investor, right?

And it's on top of everyone's mind. And I literally recall that in the middle of, I believe it was May, I had friends texting me from China. They were like, hey, Braceale, DCG, and Barry, they're on CCTV too, right? So when you have a state brand news channel that's broadcasting on cryptocurrencies, and they spent a whole 30-minute segment covering doggie coins, and the crazy returns you can get on those coins,

you know that, okay, the Chinese governments have to respond to some way with their own news channels of broadcasting billions of people. So a lot of this is focused around financial risk and control, right? And this has been ongoing and it's been a pattern of cyclical for some time now. We saw the same thing in 2017 when there was the ICO boom and Bitcoin was pushing 20,000. Almost immediately after the state ran CCTV news channels are covering all these crazy returns from ICO investments. A few weeks later, the Chinese government came and cracked down on exchanges at the time. So many of the staple changes like,

will be finance, OKX, they moved overseas. And this time around, it's very, very similar. The one thing that I think is different is we also have the focus in the spotlight

on the 100th year anniversary of CCP that was just yesterday. So I think they want to demonstrate even more control over what's going on in space. And the one thing that's different than three years ago was there's a lot more of an effort on their environmental impact, to Bitcoin mining and ESG efforts from the Central Party.

So Bitcoin mining was more in the crosshairs this time around, and they did crack down, right? Everyone's talked about the same narrative that, oh, China's banned mining, China kills Bitcoin again, this and that. But this time around, they actually did enforce and crack down quite hard on these different provinces. And we can go through the whole timeline and the cascade of the events, if you like. Yeah, why don't we do that? And also, when you do that, if you could just,

explain a little bit what the relationship is between power plants in China and miners, because from what I understand this, 100-year anniversary really did affect even how the power plants themselves, you know, how willing they were to enforce these crackdowns. So, yeah, let's go into the timeline. Yeah, absolutely. So we won't go all the back to 2017. We'll just start with this year, right? So I think the first major news that hit this time around was March 1st. So March 1st. So March 1st, Inter-Mongolia announced that they were cracking down on Bitcoin mining. They had listed several large facilities that they were going to inspect and further offer more stringent regulation for operating their Bitcoin mining farms.

What ended up happening by the end of the month was that further stringent regulation turned into, oh, we're going to suspend mining activities in our Mongolia. So at the time, most people were suspecting, oh, this is more. of environmentally driven type effort from the central government because Inner Mongolia is largely backed by coal fire plants that supply the Bitcoin miners. And before I talk about some of the other events that happen, I think it's also important to illustrate that in China, there usually is an annual migration of miners. So during what we call wet season, anywhere from mid-June to late June, when there's a lot of rain,

oftentimes miners will send their equipment in their ASIC servers down to Sichuan where there's an abundance of hydropower. And then by the time November rolls around, they'll return their miners to the northern regions or the coal-fired regions like Xinjiang or Inter-Mongolia. And in this case, the miners are starting off in their position in Inter-Mongolia waiting to be sent to Sichuan. So a lot of that got accelerated. And even then during this period of March and April, most people,

they were still not fully confident that Chinese government would actually come in, step in and actually shut down some of these operations. So there were those that actually stayed behind. What ended up happening is by the end of April, the operation that they stayed behind, they were all shut down, they were sealed with police tape,

and the transformers in a lot of substations, they had padlocks on them. So my operations did cease for good at the end of April, at least this time around. So one of the largest GPU mining farms that I'm friends with over in their Mongolia, they had all their equipment stuck and they couldn't even access them because they went with the bed that maybe the Chinese government isn't actually going to regulate this or crack down so hard. Unfortunately, they were, they're quite serious this time around. But when you say that their equipment was padlocked and everything, why wouldn't they be allowed to ship it out where they want? as long as they were just not in inter Mongolia. Yes, I think one of the things I may have glossed over was the tone of the crackdowns

and the regulations from the beginning of March towards the end of March changed drastically. So initially in March, they were like, we're going to take a look at this and offer guidelines for how to maintain Bitcoin mining and be compliant. But towards the end of the month, March, the tone had changed to, okay, we want to cease all Bitcoin mining activities. So they've given the deadline for that by the end of April. When they first, they want everything out. And that's why the people that decide to stay behind and kind of go with the gamble or

risk that maybe they are going to actually inspect the crackdown that hard, they were kind of caught with their pants down there. Oh. Yeah. Wow. Is that mining equipment going to be destroyed or confiscated or something? So there's a lot of, there's a lot of conspiracy theories. that that the state's going to confiscate this all and the Chinese government is going to

shadow line and do this with that. But no, it's all. So there actually been some videos that have been circulating on the internet or some pictures over the years. But they actually do confiscate it into their police departments and depots. And it's all just sitting there, collecting dust. Oh, boy. Wow. Oh, yeah. So it's a lot of, yeah, quite a lot. Okay. All right. So keep going with the timeline. All right. So what also happened during the middle of April was Bitcoin also pushed all-time highs, right? So not only the Bitcoin price pushed all-time highs, right? So did Bitcoin money hash rate? So Bitcoin money hash rate, it was averaging around 170x hatches, maybe even 180x hatches, turns that time period. So the Inner Mongolia crackdown hadn't really affected the global money network too much. The people that did move out, which was the majority of miners up there. They were able to find other open capacity available in China or abroad.

And then things started shifting and changing come May 13th and May 15th towards the middle of May. When I mentioned before that story of the CCTV2 broadcast, that was when Bitcoin had really, and crypto in general, had really hit mainstream news and it was all over the state broadcast media, this and that. And then almost immediately afterwards, this was, I believe, May 21st or so. The State Council of People's Public China, they made an announcement that they want to crack down hard on trading and mining.

But this was only just a couple sentences. So there wasn't focused only on mining, but they wanted to crack down all cryptocurrency activity. And they did say we want to regulate trading and mining. During that time, Bitcoin price had also been correcting. It already fallen from 64,000 down the low 40s or so. And the hash rate had also been dropping, and it recrrected down to 150S-hashes. And around that time, this is kind of worse,

started the sharp decline of hash rate as we entered the month of June. So June 2nd, at the very start of June 2nd, a lot of the miners already started sending their minors over to Detroit. So I talked about how minors will relocate their miners, to take advantage of lower rates and abundance of electrical capacity that's stranded at the hydrodams in Sichuan. So a lot of the mining equipment was actually migrating from northern China and other coal-fired areas to Sichuan.

And a lot of the power plants and miners, they're worried that, oh, if China, during the May 21st announcement, if they're going to be taking a harder stance on Bitcoin mining and trading, how are they going to regulate us here? in Sichuan, right? So they proactively set a council in a meeting to discuss how to do fully compliant mining within Sichuan. And then they wanted to weigh the pros and cons of

of should they permit mining at a provincial level. So what came out of that was, okay, we're continuing mining and we're going to see what's going to happen at the state level. That was a ghost signal for a lot of miners to kind of send their equipment to Sichuan if they hadn't already. But then on June 9th, we also had announcements come from Xinjiang and Qinghai, that they were also going to be

suspending mining activities. That forced to hand all the other miners that had to move to Sichuan. So essentially at this point, most miners were moving their equipment to Sichuan, China, in hopes that the hydro power would be sustained and will be allowed for Bitcoin mining. And then the big bombshell came on June 18. And this is when Sichuan made the announcement

that they were going to suspend all Bitcoin mining activities. they initially called out 26th of the largest power plants in the mining facilities. But everyone else, they essentially shuddered and they were like, well, if these were the same plants that participated in the June 2nd meeting, they proactively set the guidelines for how they were going to be compliant and meet the regulations that were set forth in front of them. And they were told to shut off. Many of the other even smaller medium-sized mines, they decided to shut off their operations as well. So this is the point where we saw global hash rate starts spiling in the onwards.

And we can take ourselves to essentially present day towards roughly the end of June, where the last province, which is UN-N, they also followed suit with banning any remaining mining activities, which essentially took off 90% of the hash rate capacity that was being mined in China. And we can see that global hash rate now from an all-time high of 160,000,000,000,000. 70, 180 X-a-Hash averages back in April, May. Those have now plummeted down to 90 X-a-hashes or so. Wow, that's incredible. So at this moment, it just feels like we're in this transition period,

and we haven't really seen a ton of the miners come online yet in other places. But as far as you know, at this moment, where are miners looking, or what are the factors that they're considering as they decide where to set up shop? Yeah, that's a great question. I think that's the question on everyone's mind, right? And the tough answer is that there really isn't that much space to plug in this much capacity into it, right? When essentially it's overnight, right, over the course of one or two months, you had over 50% of the entire network go offline. You're able to build that capacity so quickly.

We talked about before that oftentimes projects take six to nine months. That's after you got in the green light in approval to begin construction in some of the western more established countries. So the quickest turnaround time for mining operations to be built up in the countries and jurisdictions most similar to China, the people that benefited the most was Central Asia. So the most popular country for a lot of these Chinese miners to migrate to was Kazakhstan. But no different than everyone else, Kazakhstan, they can only support so much capacity as well. So much of the network has actually remained dormant and offline since these crackdowns. And we're seeing that with this large difficulty drop, the largest ever that's going to take place at the very end of today, Friday, July 2nd. Yeah.

And so when you say that, you know, there isn't this amount of capacity elsewhere, when you say it's just because they tend to look for excess capacity? Is that why? It's not just excess capacity. It's open capacity, right? So a little bit of background in the mining infrastructure needs to first be built before miners can be plugged in. You have to step down a tremendous amount of electricity, usually at the substation level, so you have high voltage electricity. Then you have to step down to medium voltage. And that medium voltage then you brought down to low voltage. And you have all these different layers, electrical equipment, permitting and sourcing of equipment and infrastructure that takes a very long time. A very interesting kind of dynamic that's being playing out in front of us is there's major

bottlenecks supply crunches on not just the Bitcoin mining equipment ecosystem, but all over the world. Electrical transformers are at a premium, and there's a massive shortage there too. All raw materials have spiked in price. So for all those credit traders, everyone else, they know exactly what we're talking about, about copper prices of shopped with the roof, lumber, et cetera. So a lot of these materials that go into electrical infrastructure or into the building of these facilities,

those are shot up not only in cost, but at lead time. And all of that is because of the pandemic? A lot of its larger pandemic driven, right? Well, it's, yeah, quite the storm. One other thing that I saw that you tweeted, which was really interesting to me, was you said a lot of the mining equipment is not up to code for Western countries.

So what do you mean by that? Right. So we also talked about, so you have all this equipment that's being shut off in China, lots of infrastructure. And actually, let me take a step back. One of the ways we can tell that the Chinese government is much more, quote, serious about this crackdown suspension of mining is that many of the power plants that were fully compliant and got the green light to go receive with mining from the provincial

governments. They're now being told to not only uproot and take out their Bitcoin miners, They're being told to uproot and take out what's for all, all their electrical infrastructure they can solve. So all these things that have taken months to source, they're being told to the need to remove it from the premises. And what I meant by some of this equipment won't translate so well into the West is one of the advantages that China and the Kazakhstan's of the world has had over the U.S. has been that they don't have as stringent electrical code as we do over in Western countries. In Europe, you have C-certified type electrical equipment. In the West, you have UL-listed equipment that you have to run.

That's a fancy way of saying you've got to build your electrical equipment with higher code and regulations and with better and more stable materials. So the aluminum that's being used in Chinese transformers, that's often required to be copper over here in North America. That equipment won't be allowed to be turned on here in the States. So you have all this equipment that now, is no longer able to be translated and used again in the West. But they sometimes can't be sent to countries in, say, Central Asia

where it's much more similar to China. Okay. Yeah. And one other factor for those who are looking to relocate in the U.S. Are the U.S.-China tariffs also a part of this calculation? Yeah, absolutely. So that tariff is still there, guys. So for those are looking to purchase to use minors oftentimes

it doesn't make sense to send them directly or to run them in the U.S. There are like proactive stances

that the manufacturers have taken right. So right now we're obviously focusing on the dormant miners

that were taken offline in China but the manufacturers have done a great job of also

spending up assembly and manufacturing sources in Malaysia and Thailand

other parts the world. So most of the U.S. Mining participants, they are actually purchasing directly from the manufacturers from these overseas manufacturing sites where the tariff doesn't apply to them.

But most of these used miners, they still have the tariff because they're mining in China and they're produced in Shenzhen, right? So that's another reason why a lot of these miners are going to the Central Asia groups and even Canada. So the tariffs are only applied to the U.S. and China. So Canadians have benefited a lot from this as well as other non-American countries. So what's your take on what this ban means for Bitcoin? And just to make clear, so I mean, it sounds like you're saying you think this will be permanent.

Do Chinese miners think at all that maybe like, you know, in a year or two, they can kind of turn the lights on again? Yeah, that's a good question. It's also another question is not everyone's mind. And there are those in China that think that there's this theory that maybe it's only so stringent and so severe. of a crackdown because it's centered around the CCP's 100-year anniversary. But a large part of this actually plays back into what I mentioned before, which is how prevalent and how much of a splash is Bitcoin and crypto at large making in the social circles, right?

If Bitcoin is pushing all-time highs again towards it this year, I'm quite certain that mining will still be suspended, right? The last thing they want to do is to show weakness or show that, oh, we have a actually don't have much authority in that we spend a mining once it's coming back again, right? But if we look back at, say, 2017, exchange is ultimately found a way back into China. They re-registered overseas, and they still targeted the same retail investors that were in China.

Mining, there may be similarities in that if Bitcoin were to correct or were into another fair market or less price action, right? Less volatility and less news media than perhaps Chinese government overlooking. For them, it's all about, I think it's about the perception to show that they're kind of in the driver's seat. They have a good handle of things and limiting financial risks and controls. Yeah. One other factor, I wonder, is as they get rolling with their digital Yuan DCP, if that will

kind of push them to enforce the crackdown more as time goes on because they'll kind of want the population there to interact or to transact with that system. So there's definitely, that's a very popular narrative. And I think there's correlation, but I don't think there's too much causation there. And ultimately, it's the same thing with the environmental stance, right? So the Bitcoin Mining Council, they released some data that shows that Bitcoin's actually largely renewable. and Darren Feinstein over at BlockCat he's tweeting some awesome data and statistics where Bitcoin mining uses just a drop in the bucket

of the total power that's out there. So when people talk about the environmental impact of Bitcoin mining or they talk about how it can challenge a digital yuan, it's very, very, very small percentages in numbers statistically against what they're competing against. So once again, I think it's more of the perception and the narrative around how much they're actually controlling and actually contributing against the networks that they're competing against.

All right. So I think maybe the last thing I want to ask is just what would you say is going to be the overall significance of this ban and the migration for Bitcoin? Yeah. So the overall significance is you're going to see much more decentralization across the entire network, which is great for the security and the longevity of Bitcoin, right? It's very much, it's a very unfortunate for a lot of our colleagues and friends. I first of people say, brother and comrades, right, over in China. And they are, they are very close friends and colleagues, right? And it sucks that they have such a shark stanch and they had to remove a lot of their operations that they've been building up over the years. But the rest of the world stands to benefit, right?

The more decentralized and the more distributed the Bitcoin Mining network becomes, the more secure it is. And I think what this will actually help accelerate, the development of new technologies to support mining activities in previously lower prioritized regions, right? So if you look at buying distribution maps, you'll see that much of the southern hemisphere doesn't have money activities, right? And that's largely because even though they had cheap electricity or access to cheap renewable power,

those are typically much hotter climates, right? They're opposed to the equator or they're more humid, right? So when there was capacity available in China, there was a bunch of capacity in North America, people started prioritized expansions there. But now that these regions now have excess capacity, you touched on El Salvador earlier, these places stand to gain a lot, right? And technologies, they'll be developed to support those regions. Typically, the Bitcoin Myers are cool with open-air solutions. But now we may look at more developments and may be accelerated when it comes to immersion, right? So that's submerging your miner into fluids into cooling your miners.

And we can see much more than that coming out in countries like El Salvador, in South America, in Australia, in Southeast Asia, maybe even parts of Africa, right? I'm hoping to see that much more line spreads out to these regions because they do have dormant capacity and cheap electrical rates that are very conducive to Bitcoin mining. All right. I'm going to have to ask you more about that. But one last thing I wanted to say about this significance for Bitcoin and how you said the hash rate would become more decentralized. I remember back in 2015 when I wrote one of my first really big articles on Bitcoin that I said one of the risks was that since more than half the hash rate was in China, that if the Chinese government ever decided they just were going to take over all the miners, then that would be a way for the Chinese government to kind of like 51% attack the network.

And so now that the hash rate in China has fallen below 50%. I think that's the first time since I've started reporting on this face that I can say, okay, well, now that's not a risk. Absolutely. So it's another stress test that proves just how resilient Bitcoin is, right? Yes, I mean, some of the block times were maybe a little bit longer during this difficulty period. But here in the next other eight hours or so at the end of this Friday, when difficulty readjusts, block times will resume much closer back to 10-minute averages, and the network prevails and

continues soldiering on. So I think that's, it's just further emphasizes how awesome of the technology Bitcoin mining is or Bitcoin is. Yeah, I agree. All right, so in a moment, we're going to talk more about what the drop in this hash rate means, but first a quick word from the sponsors who make this show possible. With over 10 million users, crypto.com is the easiest plays to buy and sell over 90 cryptocurrencies. Download the crypto.com app now and get $25 with the code Laura. If you're a hodler, crypto.com earn pays industry leading interest rates on over 30 coins, including Bitcoin at up to 8.5% interest and up to 14% interest on your stable coins.

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Because of this adaptability, engineers, conservationists, entrepreneurs, collectors, game developers, and artists from around the world are building, creating, and using Tazzo, every day. Discover how people are reimagining the world around you on Tazos. Back to my conversation with Kevin Zhang. So as we've been discussing in the show, the Bitcoin hash rate is going to see what is likely to be its biggest drop ever today. Is that right? It's going to be definitely the biggest drop. All right. So we kind of, you know, talked about how the network is resilient. But still, what does this mean for the network and for all the various actors and, you know, industry players on the network.

I've tweeted out some threads about this, and I've shared some of my thoughts already. But now that we're getting even closer to the difficulty adjustment here in eight hours or so. Economics are pretty much locked in, right? There's only so many more blocks are going to be solved, and we can already forecast, knock on wood, unless Bitcoin moves in very much of one direction.

We can kind of forecast what's going to look like. So we're looking at anywhere from a 27 to 28% difficulty drop, which will be the largest ever. But that being said, it's well within the limits. So the way the Bitcoin difficulty adjustment algorithm works, it can grow or decrease by a factor of four. So it can grow significantly more or drop up to 75%. This is actually well within its normal bounds and well within the network's algorithm.

But what we're going to see is from the market participants, so from users, they're going to be excited because lot times will return back to a much more of a norm around 10 minutes. average despite difficulty dropping so much. The block times did they go higher, right? We're looking at 13, 14 minute blocks. It slows down the network somewhat and fees go up, but the network still worked, right? But people prefer more normal block times. But the people that say in the benefit the most are those that have minors plugged

in, right? So when the difficulty is going to drop 28%, that's effectively 38% increase in revenue. because there's a lot less competition. And especially if you're a very competitive operator with lower costs, you're going to see even bigger impact on your bottom line. So for minors that do have capacity and do have their equipment already plugged in or brain more minors online, they stand the game the most. So much so that the profitability of a minor, I was tweeting this out earlier,

and I've actually just updated the numbers before I call. A minor during the middle of April, when price was around 60,000, so pushing all-time highs. And back when difficulty and hash rate were also at all-time highs, the S-19 100-terahash miner was yielding producing about $35 to $36 a day. Once this difficulty adjustment takes place, that same miner will be making roughly $33 a day. So it's a very, very small drop in revenue. And the Bitcoin price has almost been cut in half. since then. And it's largely because the difficulty and the hash rates dropped with it. So once again,

minors that have equipment plugged in, they stand the game the most. And it's a very good time to be a minor. Yeah. And all of this is happening at the same time that we've been seeing Bitcoin gain much more mainstream adoption, which has also meant that a lot more mainstream concerns have been coming to Bitcoin. and probably top of mind there would be the environmental concerns. And just wanted to ask you, you know, in general, like at this moment in time, especially now where, you know, we're seeing hash rate move out of China and a lot of people tend to think. And I don't know how true this is that a lot of the dirtier energy is the Bitcoin that's mined in China. Do you have a sense of whether or not Bitcoin is

becoming greener? At this moment, like, what do you think are the prospects that it will become greener? Yeah, so I have a couple of thoughts there. Before I dive into that answer, I'll kind of give some context on Foundry. Another reason why we entered in this space, right? Part of brain institutional adoption, obviously is cleaning up ecosystem and making it more credible and transparent. But another is kind of combating these narratives. There's two big narratives that we've been combating since we were found. The first is Bitcoin centralized and it's controlled by China. Well, we just discussed how that's kind of solving itself from our eyes.

So I won't go too much there. But we can also cover how we've become having a narrative that Bitcoin's destroying our planet or going to oceans. And as a Bitcoin miner and as us having access to many different sets of data and many operations that we work closely with, the facts are actually on the Bitcoin miners side. Bitcoin is largely renewable or it's taking advantage of stranded energy that otherwise be wasted, right? And I also talked earlier before that Darren Feinstein at BlockCap,

he issued awesome report statistics. That's a drop in the bucket compared to the total energy usage that's out there, and especially that's being wasted. But the other thing I want to leave listeners with is that Mike, Mike Hallyer, our CEO, he often says that Bitcoin has a ruthless drive towards cost efficiency. And some of the most cost-efficient sources of power are from renewable sources, right? So Bitcoin will naturally become, quote, unquote, greener in that the power consumption that it uses will be largely from renewables

as we naturally trend towards those technologies. One of the things I think is often forgotten is that we can't just flip the switch off overnight and switch from, quote, quote, dirty energy into these renewable sources overnight. And Bitcoin money serves as its incredible opportunity has to be the battery for a lot of these unstable grids. One of the large negatives and the drawbacks

we're using renewable power is that it's not sustainable or it's not very sustained. It's very intermittent. And having an energy consumer that can stabilize and turn off or turn on and flip a switch is a very powerful synergistic tool to keep to empower those technologies. And Bitcoin mining is just that.

Yeah, what you're referencing there, I think is the idea that was posed in this white paper put up by Square in ArkInvest. Can you outline a little bit how that could work about how Bitcoin mining could be a complement to renewable energy production? And how much are we seeing that actually take place now or whether or not there's any critical mass of projects like that in the works? Sure. So I can't speak about specific projects. I'm also not an expert on electrical side, but a very high level. I talked about how a lot of these renewable energies, whether it's solar or wind, oftentimes these are not very stable sources of power because oftentimes there's not someone that's going to be out there taking that power on. So oftentimes there's a ramp up time. There's a need to store the electricity and the batteries that are required. to build out the CAPEX of these deployments to be very cost prohibitive. But if you deploy Bitcoin miners

and you have another revenue source that can readily use the power and also give it back when it's longer needed or when the grid and the energy market spike and peak, Bitcoin miners are the perfect solution to answer to that. They can flip on and off like a switch. Us being New Yorkians, it's very front of mind for us

or top of mind for us because of what happened this week or we got those alerts on our phones to conserve electricity, this and that, like people oftentimes take for granted that power doesn't just come out of thin air, right? It has to be generated and it has to be sustained over time. So I think Bitcoin miners are absolutely the solution to that problem. Well, just for people who don't know, it was like an Amber alert on my phone. Suddenly it just started screeching that, you know, I had to turn off as much energy as I. energy usage as they could. And being a good citizen, I did that. But I was like, oh, oh, wow,

okay. Anyway, one other thing I wanted to ask about was earlier you mentioned something that I'm not super familiar with, which is underwater mining, or I don't remember what phrase you use to describe that? It's called immersion cooling. Okay, yeah. So how does that work? There's several types of immersion cooling technologies. So one of the biggest challenges of running a Bitcoin money operation or running even a single Bitcoin miner is dissipating the heat. So the latest generation Bitcoin miner uses about three and a half kilowatts. So you can imagine three and a half kilowatts being three microwaves condensed into a shoebox

that never turn off, that constantly run. So imagine the heat that's dissipating and the amount of power it's consuming. So the most cost-efficient way and prevailing strategy for cooling those miners has been installing very high frequency fans to move the airflow, right? Move the airflow and dissipate the heat. But we talked about earlier before that now that there's supply crunch and bottom-dex capacity in those open-air cool areas, and there is available capacity, electricity, in a southern hemisphere. coast to the equator where it's hotter and it's more humid, air cooling would longer work. So we can look at immersion technologies.

Emerging technology is actually submerging your minor into dilettric fluids. At a high level, there's two different types. There's what's called a single-phase coolant, and there's also two-phase cooling. A single-phase coolant means that they're moving the fluids that you're submerging your minor into and the chips and the hashboard into, and it moves the fluids, and it cools the fluids in the heat exchanger, And it recirculates it. Instead of moving air, you're moving these fluids that dissipate and grab the heat off of the boards and the chips. The other methodology is two-phase.

Two-phase sounds a lot fancy, it's a lot cooler, but it's also much more expensive, which is it's actually taking the state that the fluids are in and change it into gas to cool the fluid before it recirculates it into the miner. So these technologies, they haven't been as prevalent or as proven. at a large scale because they have largely not been prioritized. But as we see these other regions and the need for decentralization pop back up, right, I think these type technologies will see a lot more, a lot more interest and a lot more growth. Okay. You know, I had Miami Mayor Francis Suarez on the show and he didn't seem aware that,

that, you know, the temperature in a certain location would affect whether or not you would want to mind there. but if I ever have him on the show again, I'll mention this to him and say, well, if you want to bring mining to Miami, then I think this is the way. Well, so speaking of mining in North America, there's been a lot of talk in recent years about more mining moving to this continent. And I don't, you know, I don't really know, but is that just kind of like patriotic Americans and Canadians wanting to see more mining here? Or are there tangible benefits to having more mining in North America? Absolutely. I think there certainly are a lot more benefits, right? Well, first of all, it is very much real and the data stands behind it. And it's that much more multiplied now that China has shut off a lot of their operations, right? China has been anywhere from 50 to 70% of the global mining network for the past few years. And when you lose 90% in that capacity in the last few months, the other percentages and the other distribution of network across the network grows. So right now, we're looking at anywhere from 25% of the entire network being in North America. That's both U.S. and Canada, right?

I talked before about the differences between China and the U.S. as far as from the building side, when they can source cheaper electrical equipment and they can build on shorter timeframes because it's not as stringent from the permitting and regulatory side. But the one advantage the U.S. has is the capital markets. And we've seen that play out in the last half year or so, right? When Bitcoin won it's run, some of the biggest winners in the space has been the publicly listed companies. So the capital markets is the one big advantage that can really accelerate the growth and the amount of capital you have at your disposal to build large-scale mining operations.

And many of those have already come online and they continue to grow and expand. Where it gets really ironic and interesting is we talked about previously, oh, China, it's so centralized there. They made 51% of the network. The government takes over for that. well, we're actually going to be trending to the point where the U.S. or North America maybe too much of the global hash rate. But where I have confidence that that scenario will play out is, obviously, the U.S. and the West for the large part is a lot more democratic.

The government's not going to step in and just kind of seize all your equipment. Not completely, right? But ultimately, it's a lot of the regulations that come at the federal level is very mixed and is not consistent across the states. So what you're going to see a lot more regulations on the local jurisdictions at the state level, right? Where it's very different from China where essentially the state or their national or state or federal level, right? Whatever they say goes, right? So even though certain provinces want to keep mining, like the UNIs or Citrusans that held off a little longer,

they were ultimately their hands were forced and they had shut off mining even though they were previously compliant. Here in the U.S. it's a lot more up to the local jurisdictions. You have some states that are a lot more friendlier to miners, like the Kentucky's, the Texas's, the Georgia's of the world, or of the U.S. And then you have other states that have issued moratoriums or actively trying to stop Bitcoin mining, right? You have moratoriums in Chilean County over in Washington and Plattsburgh, New York, and we saw that the recent bill proposed up in the state of New York that was clearly

targeting specific Bitcoin miners. So that's a long-witted way of saying, certainly hash rate is growing in the U.S. almost too fast, and it's great to see being a company that is based here. But we'd also like to see growth not only in the U.S., North America, but all over the world. One thing that I found interesting was your previous firm Green Ridge used a behind-the-meter system. Can you explain what that is and why it is that that was beneficial for your company? Yeah, so behind the meter is a fancy way of saying, like, you generate your own. power, right? It's power that you're not pulling from the grid. And ultimately what that means

is you're going to be extremely cost efficient. So long term, I think more or more of the Bitcoin miners that are in the interim ecosystem are these large energy companies and power generation assets, right? Grish prior to instituting Bitcoin mining was a struggling peaking plant, right? it was on the verge of shutting down and a lot of jobs and taxes would have been lost but because they implemented a Bitcoin mine the grid previously was not given them a sustainable enough business model

to be a piker plan right so we talked about how state in New York or New York City struggled with electrical stability and everyone takes for granted that the power is readily available but it's not like these piquor plans need to be insensipivized to stay there to provide stability to the grid right and the market economics, as they weren't conducive to do that.

So Bitcoin money allowed Greenwich to run base loaded, and they can ramp on much quicker now that they have the power plant constantly running supervised ability to the grid. But anyways, I kind of went on a tangent there. But behind the meter, once again, you're using the own power that you're generating, right? And you're no longer paying a lot of the same transmission of distribution costs that you're competitors on. And that's why I think over time, as there's more clarity and as there's more data,

that backs just how environmentally friendly and quote quote green Bitcoin actually is, more of these players are going to enter into the ecosystem. And the people that move first, they're going to have an advantage because they're going to have to know how the capital built out. And once again, we talk about timing, right? They're going to be first movers. And Greenwich is certainly one of them. And we've mentioned this a few times, but haven't really discussed it in depth.

So as we know, in El Salvador, they're looking into volcano mining. Is that going to be a real thing? What do you think is the plausibility of that? If it's not a real thing, we're going to make it in a real thing, right? Jokes aside, geothermal technology for the coin mining has been happening for a long time, right? Iceland has been mining off of Coenco volcano power for quite some time now. So I think the challenges that they face is obviously going to be, once again, how do you mine in a hotter and a more humid climate?

But the technologies are there, right? immersion is not some new foreign technology that hasn't been used before. It just hasn't been built largely at scale at cheap enough cost. But now that we're seeing a lot of miners being displaced, the economic incentive is there to solve that equation. There is going to be new hurdles of biotics with like, how do you source and get miners over from China and the South America? What is the regulatory framework going to look like, right?

Is it going to always be this stable? So that's one of the risks you look at and evaluate when you enter into New Jersey. jurisdiction and region. Can they bridge the cultural language barriers for minus coming out in China? And I think these are all problems that will get solved, right? The president is obviously very Bitcoin friendly. It's pushing it very hard and we must see that. But a lot of it is one of those things where only time will time, right? It's one thing to be all, have massive buying and crypto in Bitcoin when Bitcoin's pushing all-time highs and isn't in a bulk market. But is your operation or are UBS interested when the market's in a very down cycle, right?

Which is when you actually should be built and investing more capital. So time will tell. So amidst all of these changes, there's also been this new Bitcoin Mining Council. Tell us what you think the significance that will have for the industry. Yeah. So I talked earlier about the importance of using real data and facts to combat these narratives that are hurting the reputation of Bitcoin, right? And the big one they're combating is a lot of the concerns around climate and ESGs, right?

So they, I think we need yesterday, this is Thursday, Thursday night, they had a meeting where they issued and they released data reports that show that Bitcoin, once again, is over, I think it's 53% carbon or emissions free. So once again, the data is on our side, right? So it's important, it's awesome to see that these miners have banded together, right, to collect data. and hard facts to kind of combat these narratives. And I think over time, as Bitcoin gave more credibility and maturity, and it'll largely be on the back of these miners being more transparent, disclosing more data. So another thing that people have talked about for a while is the financialization of

Bitcoin mining. What does that mean exactly and what new developments are you seeing on that front? Yeah, that's a great topic. So this has been a tricky puzzle that a lot of people, people have been trying to solve for some time, right? Financialization of Bitcoin products is another way of saying, how do we make sure that miners can actually hedge their profitability, right? Right now, let's take Greenwich as an example or any other data center that's out there.

It's very easy to actually hedge your energy costs or your input costs on the electrical side. Either you're locking in your energy rates along PPAs or you're purchasing your energy source hedged out for a long period of time. So you can lock in your input costs for your, your output costs are where you're exposed, right? Or your output variables are where you're exposed. Bitcoin money, we talked about it all this entire call. There's many variables going to, right?

It's not just Bitcoin price. It's also what's the difficulty in the network hash rate. Where's that at? So oftentimes people say, well, why don't you just lock in a Bitcoin price? Well, a Bitcoin could be more expensive or less expensive to purchase based off of what the network and the hash rate's doing. Like just tonight, we're going to see that it's going to be 30. 38% quote unquote cheaper to mine a Bitcoin when a difficulty readjust.

Difficulties dropping 28% where your revenue goes up 38, right? So being able to find a product in a market for these miners is very, very powerful. The tricky side of it and why it hasn't been proven at scale is that who are the buyers, right? even though there's obviously a demand from the sellers, the Bitcoin miners, there largely hasn't been a business case or a use case for the buyers of these products. And once again, I think it all circles back into the credibility and maturity of Bitcoin, right? Obviously, if a market's were efficient, there would be buyers here because miners are able to produce Bitcoin as such a steep discount. So how can we actually close this loop and actually make an efficient market where people are,

there's interest in buying these products. So that's kind of one thing that a lot of different people have to try to solve over the years. Some of it has been in hash rate contracts, this and that. But oftentimes, the buyer gets earned. Either they're buying it at two steeper prices or the demanding very, very large discounts. So that's one thing that we're keeping a very close eye on is the financialization of hash rate products. All right. And so why don't we wrap with kind of what you're,

predictions are for what will happen to Bitcoin mining by the end of the year. What will, what will it look like in the second half of 2021? Man, putting me on the spot. So I think I was a little overly eager and I already shared as several predictions, right? So I think immersion technology will be more prevalent. I think we'll see more projects announced where there'll be immersion deployments at scale. I also think that global hash rate will struggle to give back to its all-time highs earlier this year, largely because there's such long lead time. for miners to come back online, especially when it comes to building new capacity

and new infrastructure. So I think we're going to not see those all-time highs on the difficulty in the hatcher's side. I also see that over time, I'm not sure if it's about the end of this year or not, you'll see more countries embracing Bitcoin mining and more jurisdictions, openly welcoming Bitcoin miners,

because as there's more data, there's more facts being shared, and there's more transparency from groups like our group, the founding group, the mining council, and other market participants, the business case is going to be undemiable for Bitcoin. All right. And what about the future for Foundry? Oh, future for Foundry. So that's a good question. We're so busy working every day. I'm hard to think about the future.

So here we offer several different services on the mining side, right? We've been a very large financier mining equipment. I talked before how one of our mandates is breaking up the that China or Bitcoin is very centralized, right? And in doing so, we actually financed over 50% of all the latest generation equipment that came into North America back in 2020. So a large majority of the S-19s and 30s is were financed by boundary. We also have deployed our money equipment and made different sites all across North America, and we're branched out to other parts of the world to help them get up the speed and leverage

our expertise. And that's also through our advisory business, right? So we also offer advisory for miners that are new to the space, public and trade companies, large firms that know that there are financial incentives here, but they don't have expertise and experience to execute, as well as helping Chinese miners move out of China because they're now displaced, right? Where can they actually plug in their miners? What operators and builders are actually credible for them to work with and lock into contracts even before the sites are built? And lastly, certainly not least is our mining pool, right? Part of the decentralization effort that we've been very, very large proponents of has been our mining pool, right? Our mining pool is called Foundry USA pool to really emphasize even its namesake that we are a U.S.-based, fully compliant mining pool, right?

We're leveraging once again our balance sheet and capital. When times were tough, that's when we started building, because we knew no one else, had the capabilities of doing so. So having alternatives outside China, even ready beforehand and in place, was one of the smartest moves we could have made and would continue to do so to help decentralize the network. Great. And where can people learn more about you and Foundry?

Yes, you can visit our website at Foundrydigital.com. And you also check me out on Twitter. I guess I'm a little bit more active than I used to be. I had a lot of peer pressure from some of my close friends and colleagues in the space. so you can find me at SinoCrypto on Twitter. Perfect. All right. Well, thank you so much for coming on Unchained.

Awesome. Thanks for having me, Laura. Thanks so much for joining us today. To learn more about Kevin and Foundry, check out the show notes for this episode. Unchained is produced by me, Laura Shin, with help from Anthony Yun,

Daniel Nuss, and Mark Murdoch. Thanks for listening.