Unchained - The Third Bitcoin Halving Just Happened: What Now? - Ep.172

Episode Date: May 12, 2020

Amanda Fabiano, director of Bitcoin mining at the Fidelity Center for Applied Technology, and Christopher Bendiksen, head of research at CoinShares, discuss the third Bitcoin halving, which occurred hours before the publication of this episode. They discuss: the significance of the halving what effect it could have on price and what Amanda and Christopher think of Dan Morehead's projection that it could reach $115,000 next year how macroeconomic events like the coronavirus and quantitative easing could impact uptake of Bitcoin how the halving could affect miners and hash rate how the halving could influence the environmental impact of Bitcoin why mining was the first activity Fidelity pursued with Bitcoin what they think needs to happen in Bitcoin to foster more adoption why hash rate derivatives will be a crucial step what the outlook is for institutional adoption of Bitcoin plus, is it halving or halvening? Take the 2020 Unchained Podcast survey!  I'm doing another survey to find out what you want from the podcasts and how I can make them better! Please take a moment to fill it out here and to tell us at Unchained what you'd like from the show: https://www.surveymonkey.com/r/unchained2020 Plus, Crypto.com has offered our survey respondents a chance to win a metal MCO Visa card -- Crypto.com will stake these cards indefinitely! Ten lucky winners will enjoy card benefits including free Spotify, free Netflix, 3% back on all spending, earn extra interest on their crypto deposit and more!  Thanks, Crypto.com! Again, take the survey now! https://www.surveymonkey.com/r/unchained2020 Thank you to our sponsors!  Crypto.com: https://crypto.com/ Kraken: https://www.kraken.com Stellar: https://www.stellar.org/ Episode links:  Amanda Fabiano: https://twitter.com/_amanda_fab Fidelity Center for Applied Technology: https://www.fidelitylabs.com Christopher Bendiksen: https://twitter.com/C_Bendiksen Coinshares: https://coinshares.com Coinshares’ 5 Popular Bitcoin Halving Theories: https://coinshares.com/research/5-popular-btc-halving-theories Coinshares’ December 2019 Bitcoin Mining Report: https://coinshares.com/assets/resources/Research/bitcoin-mining-network-december-2019.pdf Unconfirmed episode with Dan Morehead: https://unchainedpodcast.com/a-bitcoin-price-of-115000-next-year/ Bitcoin stock-to-flow ratio: https://medium.com/@100trillionUSD/modeling-bitcoins-value-with-scarcity-91fa0fc03e25 Fidelity opens trading to institutional customers: https://www.bloomberg.com/news/articles/2019-05-06/fidelity-said-to-offer-cryptocurrency-trading-within-a-few-weeks Fidelity Digital Assets signs first exchange: https://www.coindesk.com/fidelity-digital-assets-to-sign-up-its-first-crypto-exchange-by-end-of-the-year Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, everyone. A few notes from me before we begin. First, happy Bitcoin having, everyone. What a momentous occasion and accomplishment for the Bitcoin network. I was so excited to be a part of it and to watch it all happen. We will see what happens in this next chapter of the first cryptocurrency. Second, I'm doing another survey to find out what you want from the podcasts and how I can make them better. Last year, we heard you loud and clear on the news front, and so have begun including a weekly news recap at the end of every unconfirmed. This year, what would you like to see from Unchained?

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spending, earn extra interest on their crypto deposit, and more. Thanks, crypto.com. Again, take the survey now for a chance to win a metal MCO visa card. You can go to SurveyMonkey.com slash... R slash Unchained 2020. Finally, I was in a documentary that I think might be of interest to you all. It's called Cryptopia, Bitcoin Blockchains and the Future of the Internet, and it was finally released after the cinema world tour was canceled due to COVID-19. Join the award-winning filmmaker Torsten Hoffman, who made Bitcoin the end of money as we know

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www.cropopiafilm.com. Again, that's www.cropopiafilm.com. Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I'm your host, Laura Shin. Twitter fights, medium posts, scammers, fissures, and promotional content, want to cut through all the noise in crypto? Sign up for my weekly newsletter at Unchained Podcast.com to get a quick and easy summary of the top news stories every week. Cracken is the best exchange in the world for buying and selling digital assets. It has the tightest security, deep liquidity, and a great fee structure with no minimum or hidden fees. Whether you're looking for a simple fiat on-ramp or futures trading, Cracken is the place for you.

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Hey, Laura, thank you for having me on the pod. I'm really excited to be here with Chris, who is one of the first researchers to publish reports on the state of the mining ecosystem. So we're really happy to see some research back up some of what we've been thinking internally about the Bitcoin Mining Network from him. Yeah, thank you for having me. It's an honor and a pleasure. So this is a momentous occasion in Bitcoin's 11 and a half year life so far, the third having. It's an event in which the rate at which new bitcoins being minted is cut in half. When the Bitcoin Network started up in January 2009, it was minting 50 new Bitcoins per block. Then in November 2012, that was dropped to 25 Bitcoins.

In July 2016, it dropped to 12.5 Bitcoins. And when this podcast comes out, just a few. hours before, that will have dropped to 6.25 new bitcoins every 10 minutes. So all of this happening and the new bitcoins being minted, this will happen in perpetuity every 210,000 blocks until asymptotically Bitcoin approaches a supply of 21 million Bitcoins. So Amanda and Christopher, to you, what would you say is the significance of this third having. Why should people care about it? Chris, I can start. So, you know, I think the important thing to note about Bitcoin happening is it doesn't change regardless of economic circumstances, right? So we don't print more

Bitcoin. We all know the rules. And, you know, the halving is expected and it's fair and it's what makes Bitcoin scarcity real. When we think about the past two data points on the happening, there's only two data points, right? We don't have a ton of information. We don't have a ton of information on, you know, what could potentially happen after the happening. And, you know, as the saying goes, past performance is not an indication of future results, right? And I think that really applies here, too. So I'm curious to see, you know, what will happen at the happening. And Chris, we can probably dive into this a little bit more, but I don't want to go too far without your input. Yeah, no, I also think this is quite a momentous occasion. And the timing couldn't be more awesome,

in my opinion. I mean, you have this event that happens every four years programmatically, automatically. It's done without emotion by a bunch of computers that aren't influenced by world events or charismatic politicians or anything like that. It just happens according to plan. And it just shows the credibility of the Bitcoin monetary policy, especially in contrast to everything else that's going on right now. And so like for miners, it's relatively simple to what happens. The revenue gets cut in half, right? And what that means is that the price has to stay above the level.

It costs that miner to mine a Bitcoin in order for them to stay profitable. So because many miners are still thought to be operating older machines, we could potentially see a drop after the happening around 20 to 40%. Yeah, well, that's what I was wondering. In the first couple months coming out of the having, what metrics will you guys be watching? We'll be watching the hash rate, first and foremost. It's really the only way to gauge what's going on in, and it's not even in real time.

It's pseudo-real-time. So I'll be watching the hash rate pretty closely, seeing the magnitude with which it drops. If it does, is price dependent, of course. And from the past now, we can't know exactly what the price is today. So. And when you say, you know, the hash rate is really important, like, why is that? That basically signifies kind of the security of the network, the amount of resources being put in by the different miners and the computers to keep the network running. So why is that so important to watch what happens to that metric? So one really interesting thing to consider is the different levers, right, that you can pull when you're thinking about the hash rate and how it could affect hash rate. So there's like three different areas. that I look into. So like Chris said, if the price continues to rise, when the happening happens, miners could remain on because, again, that the whole basis of Bitcoin mining is the price

just has to stay above a miners level that it costs them to mine a Bitcoin, right, so that they can stay profitable. But there's, you know, two other things that I think are pretty interesting to think about. So co-location and power contracts, right? So if the happening is in the middle of the month, which it is, I just wonder if we'll see an instant drop in how. rate. And we could argue that you could, but you could argue that you, maybe that won't happen. And I think it all relates to how minors are built, right? So I've seen a lot of different contracts for minors. And is it, you know, monthly? Do they have long-term contracts? Is it annually? Are they even able to shut off? So I think that's like a really interesting fact to think about when people

turn off their machines. Another data point. Oh, Chris, do you want to jump in? No, I was just going contrasted a tiny bit to what we just saw about a month and a half ago at March 12th, which was an unknown event beforehand, which should change the dynamic a little bit. Yeah. So, you know, there we had an effective happening in not in every single possible way, but in a lot of ways, in that minor revenue was pretty much cut in half overnight. But that event was unknown. Whereas this one is well known. And, can be planned for well in advance. So all things other than that being equal, it should be less likely that we see disruption on that level, at least so rapidly. Yeah, and Chris, that whole point

is really interesting too. So it was a 16% drop, right? And hash rate, which coincided with the price of Bitcoin also dropping. And then two weeks later, we saw the hash rate bounce right back up. And the interesting thing that I think here is the delay of shipment due to coronavirus of new machines. So one hypothesis could be that miners were waiting to refresh their machines before the happening happened because that's something that they can predict. And so maybe they were just waiting for their new machines to come. And because of the delays of COVID, machines weren't really being shipped before March. But like between March and April, middle of March and April, then we're regaining shipment. So, you know, the miners, the dip on Black Thursday could have been, you know, miners weren't profitable with the old gen machines.

So then, you know, when they got their new gen machines a couple weeks later, we saw our hash rate bounce back up. I also heard anecdotally from a couple of lending sources that the March 12th drop kind of accelerated the reinvestment cycle. And that a bunch of miners kind of had a fire lit under them a little bit and sped up that problem. process that they possibly would have waited some more weeks with in the absence of the March 12 drop. So it sounds like what you guys are saying is just there are so many different factors here that could affect what happens to the Bitcoin price in the wake of the happening. And some of it is that because of the way miners can be built, that there might be delays

in terms of the impact that we see, you know, depending on the kinds of contracts that they have, they may not be able to really change much what they're doing. And yet, on the other hand, because of issues with like the supply chain or whatever it might be with the coronavirus or, you know, on the other hand, the massive drop in price we saw on March 12th, even if obviously it did recover somewhat, that that's now kind of hastening people getting new equipment, which would help more of them to be profitable even after the having. So it sounds like there's kind of like a lot of different mixed signals going on and we'll sort of have to see how they all play out and impact each other after the having.

Is that a fair summary? Yeah, I mean, this is a very complex industry and it's also quite opaque. So the estimates that we can give are very often based on assumptions that we can't fully prove, we can make reasonable assumptions and we can look at things like the hash rate and we can we can we can observe the way it behaved after march 12 to get an idea of you know who was swimming naked at the the bottom prices that we saw um but at the end of the day the having is not coming as a surprise but the march 12th event did so it might not be a fully fair comparison either Yeah, and I would just add that that goes back to like a big key theme, just overall that I've been seeing in mining, that before from, you know, 2009 to 2019, a miner was able to have this competitive edge by refreshing their hardware rate to the latest machine.

And now it's really your electrical costs being the lowest is what will keep you above. So, you know, the closer you get to the production of energy, the lower your operational costs will be. And so you'll continue to be more profitable even during some of those bear markets like we saw. or that one day of a bear market rate that we saw in March, or just future bear markets in general. Yeah. So all of this is, I think it's going to keep all of us even more on the edge of our seats to watch what happens. But I also was curious, so kind of what we've been discussing is maybe the more immediate impact on Bitcoin. But what do you think will be the longer term impact that the having has on the price maybe say like a year or so out? again you know this is speculation but um our chairman danny masters had a really interesting take on this

he compared it to the mechanics that he observed around 2016 uh which was that we have a market that is fairly in balance right now you know the price has been ranging um not going other than the the rapid drop and recovery that we had recently, which you could claim was an exogenous event. But in the, you know, if you disregard that, we've had a market that's fairly well balanced, which, you know, all things else considered should mean that inflows are matching new production, more or less. So if inflows continue at the levels that they are right now where the market is pretty much in balance, but supply is cut in half, normal supply demand should, indicate that there would be an upwards pressure on the price, which is what we saw in 2016.

You know, it laid the foundations for a long-term bull market. You know, and on top of that, we have some pretty interesting macroeconomic tailwinds happening right now. So it's hard to give specific predictions, but I personally, I think this will be positive. I'm not expecting some incredibly rapid jump in prices or anything. I think this is a mechanic that takes a while to sort of manifest. And I think it's like a long-term chugging more than a rapid jump, so to speak. And when you talk about the long-term macroeconomic factors, are you just talking about things like quantitative easing that increases the money supply?

Or are you also talking about, you know, I don't know, like some people are saying now that Bitcoin is being perceived as a, as, as, digital gold, which makes it seem less like a risky investment than people used to perceive it in the past? Well, it's both. And, you know, we've observed more interest from people who are now getting increasingly worried about the Fiat financial system. They're getting worried about inflation. Every day that Bitcoin keeps existing and doesn't disappear magically is another day added to the certainty that people feel that Bitcoin will remain here, you know, a year from now, two years from now. So I think it's actually a combination of both. Yeah. And I would just say if we think about just, if we zoom out from the price of Bitcoin and the future price of that,

there's a lot of people building right on top of Bitcoin and investing in companies in Bitcoin. So we could argue that it's not going anywhere anytime soon. Dan Moorhead of Pantara Capital was recently on Unconfirmed. And he mentioned that Pantara projects that Bitcoin could reach $115,000 next year due to the projections of something called the Stock to Flow model. What do you think of that projection? And Christopher, I think you're also familiar with this model if you want to just explain a little bit about what that is. Yeah, it's, you know, I'm not a statistician, so I want to tread carefully here. but I am familiar with the model.

It's a supply-based model, and it looks at the relationship between the Bitcoin price and essentially the supply bands. And the model is predictive in that you can, at least the first version you can extrapolate. I saw the plan B has made a second version, which is the S2FX model where you actually interpolate, interpolate, sorry.

So, I mean, I'm, I, on a personal level, I really love this model because, you know, it tickles my, uh, tickles my inner desires. Um, I am skeptical to supply by itself, uh, being the singular driving factor behind price. Um, I know that there's also been, that, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the. There were some initial outside peer review of the model that seemingly confirmed co-integration. I've seen that since that, one of the authors of those confirmations have not had like second thoughts, but had new realizations that the results might not hold. I really think that the supply constrictions are drivers of, of, of,

positive impact in the price market. But I don't think you could say that that by itself is fully predictive. So I'm intrigued about this model and I like it on a personal level, but I'm still a little bit skeptical because it leaves a lot of questions unanswered for me. And but I mean, according to that model, it's kind of funny because with that model, I did see two versions of price projections. One was the 115,000. Another one was like more than 500K, like forward 2021. You know, so I mean, I think you're right that it's not, you know, some kind of set in stone thing and that there is sort of a band in terms of the projections. But what do you think of that number? Well, it's really hard to say. The model has the price go to infinity over time. And at a certain point, you know, the Bitcoin issuance ratio is going to go negative as we reach zero issuance and a non-zero,

zero permanent loss of coins. And so, I mean, it's hard to say how far ahead you can really look to these results as being predictive. We know that it's going to break at some point. It has to. Right. But for next year, what would you say? I really hope it's right. Amanda, do you have anything to say about that projection, $115,000?

No, I feel like I care more about like long-term Bitcoin. So like the price in, you know, a year from now doesn't really excite me to think about. Yeah, there's a lot of different ways that we can think about the direction that Bitcoin price can go. But I mean, I'm just here with my popcorn. Yeah, yeah, me too. So one other thing is, I mean, we started to talk about this a little bit, but, you know, in terms of the mining industry, you know, what we discussed was maybe more short-term impacts. But I was wondering also where you thought, especially now with the coronavirus, we will see the mining industry maybe like a year from now. So, you know, I think I'm just going to shift your question a little bit to kind of what concerns me about mining now, right?

which I think is essentially what I focus on. So, you know, we could look at the happy side of people building a lot more decentralized locations for mining, both in the U.S. and in, you know, other locations around the world. But, you know, there's kind of like two things right now that I don't lose sleepover, but they worry me. So one of them being the centralization of hardware, right? So like we talked about a little bit, COVID affected mining production of hardware and shipment, right? But when we think about Bitcoin mining overall, the supply chain only has a handful of major mining manufacturers, right?

And all of them operating out of China. So if something was to happen to that region that produces the machines, miners in the West might not have access, right? And if some other large events like a pandemic or something else shuts down this access, miners outside of China would never be able to compete without access to like the new gen machines. So, you know, that's a huge centralization risk for mining. So one of the things I'd love to see happen over the next few years is more distribution of production of machines, despite, you know, the house reality that mining centralization will be a really hard thing to overcome.

Is there anything that you can do at Fidelity to incentivize? incentivize, you know, that kind of production somewhere else? So, you know, we started out small with what we're doing. You know, I can give a little bit of background of what we've done. So, you know, we've been mining Bitcoin since 2013, and that started in one of our offices as a very small experiment. You know, the cost of electricity was certainly not a factor in this portion of our journey. And, you know, we just aim to understand how this whole thing worked, like how this whole

protocol worked. And, you know, we set it up there, let it run for a couple years, and we refreshed the machines in 2015. And then time passed, and we began to see about a decent amount of failure rate on the machines themselves, right? So we also realized that the mining industry evolved quite a bit. And so we ordered machines from all the major manufacturers looked into better operational setup, both within the walls of fidelity and also at like external hosting facilities. And so, you know, I think that we kind of follow this scan try scale. methodology, right, where we like scan the ecosystem, which is what we've done, we try things out, which is what we've been doing. And then hopefully we can scale. I, you know, I don't know what the

future will be for mining at Fidelity, you know, in 10, 15 years. But I hope that we're able to help just generally secure Bitcoin's network and, you know, secure this like future world where, you know, Bitcoin could be the open network and open permissionless network that financial services, sits on top of. So one other thing before we, because I actually do you want to ask you more about Fidelity's role in all this, but a bit later. But I wanted to ask a little bit more about like the hash rate and mining and stuff. There was something that I guess miners or large-scale miners have, which is called off-take agreements with utilities. And I feel like maybe you did mention those, but could you just describe a little bit more in-depth what those are and how those could

influence the behavior of miners after the having? It's basically an agreement where this is common in a lot of power demanding industry, that you agree with the utility that you're going to take off a certain amount of electricity from them per month, no matter what. So what that means is that even if you as a miner sit on a bunch of unprofitable equipment, your contract with your utility doesn't allow you to not take that power off them. So you're kind of forced to mine at a loss. So I think situations like that are probably more relevant in episodes where the profitability

is unexpected, like March 12th, whereas going into the halving, I think there's at least a higher chance that miners would try to protect themselves by, you know, you know, doing specific contracts around that time or trying to come to an agreement, since it is well known beforehand that this would happen. So, but at the same time, you also do think that miners plan for the profitability loss. So again, this is, this is a mechanic that's very hard for us to sit and watch from the outside. individual miners are the ones that know which agreements they have with their local utility. But yes, it is the case that sometimes miners don't have a choice.

They have to keep mining. They have to take that electricity off the hands of the utility. And that also works in the opposite direction too, right? So sometimes if there's a load, like too much of the load, they will turn off specific areas or specific access to power. And so we've seen that happen before in certain locations where, like, say, if, you know, energy becomes increasingly a demand, then, you know, in every power contract, it will say, like, we might have the ability to turn off up to X amount of days. So it goes both ways with power contracts. And one other thing I wanted to ask about is, you know, Christopher, you, I think, have done quite a bit of calculation on various things. And I know you published this pretty extensive report in December where you looked at, you know,

kind of all the different types of miners. And you said, quote, the current market average, all in marginal cost of creation at four cents per kilowatt hour, 15% non-electricity, OPEX, and 30 months depreciation schedules is approximately $6,300. And I wondered, is that still your basic estimate? And so like around the time of recording Bitcoin's like roughly 9,000, is it fair to assume that some percentage of Bitcoin miners will drop out? And if so, do you have a sense of like what percentage that might be? So that estimate is a little higher right now. So right now that estimate is around seven and a half. But it's not the all in ROI estimate that's actually important for when miners shut off their machines. It's the it's the cash cost estimate. And so the cash flow estimate right now for four cents with 15% additional OPEX is around 5,000. But there's a very important thing to remember here is that these figures are market average, but there is a big split in the market between the previous and the new generation hardware.

So the best thing would probably be to estimate these bands separately. because the new generation hardware probably have a much lower, they definitely have a much lower cash cost than that, and the older generation hardware might have a higher one. And individual miners could have both generations of hardware in their operation as well. So I think it's likely that at the price that it is at the time of recording, we see some drop-off of gear that is just made obsolete, but this gear could come back again later

if either the price increases or if they get sold off to miners that have access to cheaper electricity. But around, you know, the 9,500 band, we could... I made an estimate for this the other day. Let me see if I can find it for you. So 9500 is a newer miner? No, 9,500 being the Bitcoin price.

Oh, oh, oh. Yeah. So let me see here. I made an internal estimate for this. I have to caveat that these are a little rough. But I think in between 9 and 10,000 Bitcoin price, my estimate would be that we could see a hash rate drop of around 10 to 20%. Oh, okay.

One really interesting research report that came out, I think it was a couple weeks ago, coin metrics. They researched into the nonce distribution. And so they're estimating that about 23% of hash rate online is coming from old gen S9 hardware. So if we think about, you know, if old gen equipment becomes unprofitable to run, unless the price of Bitcoin is where it is today, or you have really low electricity, it seems like that band of 20 to 40% of hash rate drop or even 10%, like Chris is quoting with the price, where it is, doesn't seem that far off. Yeah. So actually, that isn't a huge drop. I mean, hash trade is kind of, so I didn't research

this right for this show, but I seem to have looked at this somewhat recently. I think it's like near all-time highs. Can either of you correct me on that? It is definitely near all-time highs. Okay. So it doesn't sound like the security of the network would suddenly drop a significant amount from where it was, you know, like a year ago or whatever. Right. And the other thing to keep in mind there is that, you know, how much security is enough? We don't really know. So, you know, at 10% drop, it's significant, yes. But, you know, we don't know if, you know, 80% lower than this was quint and quino, quote enough or, you know, if we need more, it's, it really comes down to individual transaction sizes and how many confirmations transactors want to accept before being comfortable with having fully received a batch of money. Okay.

Well, speaking of whether or not the hash rate is, quote, unquote, enough or too much, maybe is the more important direction to go. as I'm sure you both know, there's been a lot of concern about the environmental impact of Bitcoin. And I was curious to know how you expected the having to affect that, the environmental impact. I don't know that it will have much. I mean, of course, a 15% reduction in hash rate is a 15% reduction in, you know, I guess the current environmental impact of whatever that is. But, you know, it's mainly the price that is the driver of that. If the price doubled, then the hash rate would go up, you know, password was before. So the energy consumption question, right, is something that we often hear.

And so, you know, when you think about, is Bitcoin ruining the world with its energy consumption, we think it's not. Clearly, Fidelity wouldn't be doing this whole thing with mining if they believed that it was ruining the world. So, you know, the energy consumption question is interesting, but I think you have to zoom out a little bit. So when we think about the mining network energy spend, right, the first reaction I've had was to try to compare it to something, some other type of energy spend that already exists today, right? But the reality is it's really difficult to find a comparison because there's no benchmark. So Bitcoin gets in trouble for the transparency, right? Because you can check the network at any time to see the Bitcoin energy stuns. But it's really difficult to determine, for example, how much energy is expended for any type of other transaction, including financial transactions, and just, you know, how much energy is expended to secure the entire financial industry as a whole, right?

So Bitcoin is truthful to a fault, and people see this energy spend and think it's really, really bad. But the thing to remember is this energy spend is being used to secure the entire Bitcoin network. Yeah, I agree with you. It's one of those things where Bitcoin can be criticized because the energy or maybe not environmental impact, but the energy, yeah, the energy expense is known, whereas with other financial systems, I mean, does V's, let us know what the energy costs are for running the Visa network? Christopher, did you want to add something?

Well, and that comparison isn't quite fair either because Visa is a payments network and Bitcoin is a monetary system. And so, you know, if you want to compare Visa to anything, you have to compare it to something like Lightning because, you know, you can bake an incredible amount of

economic weight into a single Bitcoin transaction. So, I mean, we've been using the Bitcoin payments network as if it was like a straight up payments network. But in my opinion, it's more akin to a settlement network. And it gets more efficient with increasing settlement value. So you can transfer as much money as you want in a single Bitcoin transaction. And it doesn't have any impact on how much energy the network uses. All right.

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To learn more, please go to crackin.com. That's KRAK-K-E-N dot com. back to my conversation with Amanda Fabiano and Christopher Ben Dixon. So Amanda, you started to go into this a little bit where you talked about how Fidelity began mining Bitcoin in 2014. But I was curious, why was that one of the first things that Fidelity tried to do with cryptocurrency mining? That's like a pretty unusual step for a financial institution.

Yeah, so that's a really great question. And it is an interesting project that we worked on pretty early on. So, you know, Fidelity right now cares about Bitcoin mining for a few reasons. And it's important to stress that our operation has always been research first. But learning about how this underlying Bitcoin mining network works, we think is essential when you're trying to do things like building businesses on top of it, right, or investing in Bitcoin companies. And so mining is critical to this ecosystem. So, you know, it's critical that we understand mining.

And being plugged in is important. We don't just mean like physically plugging in the machines, but more, you know, understanding this opaque space that secures the network. So that's what we aim to do with that experiment. We have a group in FCAT called the blockchain incubator. And we do a lot of different experiments with Bitcoin, and this was one of many. And so what does Fidelity do with the Bitcoin at mines? So we don't disclose any of that information. I'm sorry. It's, you know, all proprietary Harry information. So we can't talk about that, sadly. But, you know, it, it does allow us to, I think the thing that matters most is it allows us to understand how this all works, right,

versus like the profit that we make off of it. Hmm. Hmm. Hmm. Being very secretive. It's like maybe you guys are hanging out with Satoshi and Akamoto. One could dream, right? And I also wanted to ask, and this is going to take us down a slightly, you know, know, a slight tangent, but I was also curious. Fidelity has also mined Ether. When did you guys start doing that? And do you still do that? And if so, what would you say is different about mining ether versus Bitcoin? Yeah, so we explore all different types of projects and products, right? And when we were mining Bitcoin, we said, hey, we have some servers that could also mine Ether. So we explored that for a little bit. We have about 45 different POCs that we've put on a shelf and said, like, maybe this

is something that we'll explore later, but it just doesn't make sense for us right now. So we could loop back into the ether, you know, mining. But right now, what I focus on is, is mining Bitcoin for Fidelity. And was that just because of the kind of specific characteristics of Bitcoin due to its monetary policy, or did it have something to do with the actual mining of the cryptocurrency itself? You know, I think it's a little broader than that, Laura. For every project that we bring in the door, which is a lot. We have a lot of ideas. We kind of almost have to get rid of one project, right? So because something doesn't make sense for us to work on right now doesn't mean that it, you know, it doesn't make sense for everyone or it doesn't make sense for us to repick that up in the future.

So basically we just had to shift what we wanted to do. Excuse me. And, you know, we just, that was something that we didn't pursue at the time, but it could potentially come back. You never know. And can you also fill out what the other initiatives are that Fidelity is working on? Obviously, I know you guys have Fidelity Digital Assets, which does custody. You also have trading for institutional investors. Can you just sort of fill out everything going on under that? Yeah, sure. So, you know, we're a large company.

There's often some confusion on the different names, right, initiatives within the Fidelity Walls. So there's like three main areas. So there's Fidelity Center for Applied Technology, the group that I work on. There's Fidelity Digital Assets and then Avon Ventures. So we covered, you know, what FDFAT does. But Fidelity Digital Assets, we also covered that a little bit. You know, the interesting story here is the research group in FKAT, you know, we build and test these different ideas. And when we started mining, I mentioned this too.

We had this like, how do we custody this asset question, right? And so that led to us exploring how, you know, how custody works. And that service, right, blossomed into what is known now as Fidelity Digital Assets. And Fidelity Digital Assets is our commercialized business unit building projects for institutions who want exposure to Bitcoin. And then I also mentioned Avon Ventures. So we have an affiliated venture fund. And that focuses on the crypto landscape and investing in early stage crypto companies. All right.

And now let's turn to Christopher. Can you give us a background on what CoinShares does and why it regularly publishes these extensive Bitcoin mining reports? Sure. So CoinChrys is a digital asset manager, and our business is to offer customers a wide range of investment products that are all related to the digital asset industry. So we have a suite of eight passive exchange traded trackers for Bitcoin, Ether, XRP, and Lightcoin that trade on NASDAQ and Stockholm and Nordic growth market and Bursus Sturtkart. we also have some passive products you know one of them being meltham's VC fund and we recently launched a physically backed gold token so the the reason we're into bitcoin mining is as part of our research effort you know we we believe that education is a huge open gap that needs to be further filled in this space and we believe that that if investors are fully informed, they will come to the right decisions on their own

without having to be influenced by, you know, others. So this is just part of our comprehensive effort to track everything that concerns the Bitcoin space. And, you know, the supply side of the equation there is extremely important. So that's basically why we're in there. And so at this point in Bitcoin's history, as we've been talking about, we're at this inflection point of the third halving. And I imagine, you know, you could look at each period of Bitcoin's history in between the halvings and kind of put a narrative on how Bitcoin developed during that period.

And so I wondered, you know, for this phase, what do you two feel needs to happen in Bitcoin to kind of further promote its adoption? A few different things. And some things that are already happening for you. example, the rise of proper institutional level custody like Amanda and them are doing at Fidelity is a huge thing. I think one of the other things that needs to happen is the proliferation of financial products for miners. Miners are currently unable to fully hedge their production the way that normal commodities producers can, which again sort of hinders the flow of capital

into this whole space. So, I mean, those are some of the things that I hope can happen. I think that if we do get proper hedging products for miners, we can dampen the volatility of the market a little bit by getting some more certainty on part of miners as to what their incomes are going to be over time, which will allow for professionalization of that sector. And yeah, Chris, there's a lot of momentum in that space right now, right, with several companies designing those financial products to help miners reduce their risk.

So, you know, like Chris was saying, with the network cash rate, how it fluctuates, right? Like we've been talking about all day, miners have exposure to these swings of difficulty adjustments resulting in a lower than expected Bitcoin return from, you know, their mining operation. So things like cash rate derivatives with a difficulty swap can be used to hedge, hedge against this risk. Yeah. It's, you know, for potential listeners who are not quite familiar with, with why that's important. I mean, if, say that you're a normal commodities producer, like an oil producer, you have a really good idea of how many barrels you're going to pump out of the ground over a certain time. If you're a Bitcoin miner and, you know, as an oil producer,

you can, you can hedge by selling that production forward using deliverable futures contracts. If you're a Bitcoin miner, you don't have that luxury right now because you don't actually know how many coins you're going to produce. And that is because of the difficulty. You know how much hash rate you're going to produce over a certain time. But without having some way to hedge your exposure to the difficulty, you don't actually know how many coins that hash rate is going to produce. And that's a problem. Yeah, there's a lot of things that you don't know in Bitcoin mining. And two of the biggest one being the price of Bitcoin and the rate of hash rate. So it's fun. These things, these future products like hash rate derivatives would be super helpful for miners

to hedge out that risk. How does that work? Like if I'm a miner, just walk me through the steps of how it is that a hash rate derivative helps me, you know, hedge my risk when it comes to mining. Yeah. So if a minor, a minor would be like long difficulty in the contract. So the minor receives a payout in Bitcoin if the difficulty increases more than expected. So it would make up for the lower than expected Bitcoin revenue from the mining operation. Oh, I see. So every mining operation sets up with a certain set of assumptions for where the price and difficulty will be in the future. But having access to these types of derivatives would allow them to protect themselves if the difficulty increases by more than what they thought it would.

And what is the cost of purchasing something like that? Is it nominal? So right now, it has a long way to go. This is like, I think, very beginning stages of, you know, this type of product being delivered. So our team has been exploring some of these contracts and just their structures overall. And we've even conducted some paper trades, which has been an interesting learning experience for us. But ultimately, I think there's just a long way to go to figure out exactly how these would work. Yeah, pricing is a big open question there.

And so most of the current products that are out there have been OTC and bilateral for the most part. And they rarely extend past one single difficulty period. and for these products to be fully functional in terms of what the miners need, they would have to have a much longer range than that. So pricing is a big, big open question here. And I don't think anyone has to answer yet. Another really interesting product that is coming out that we see is fun-like structures. So this is allowing exposure to Bitcoin mining without some of the operational headaches.

So if you can mine a Bitcoin for a lower cost, cost and you can buy it on the open market and you take on this long Bitcoin mentality, funds are an alternative way to diversify your exposure to Bitcoin. Because with the right operational setup, you can mine a Bitcoin at a discount rate. So how does that work? So it's similar to like traditional funds. So say if an investor invests money into this type of operation, they get, give money to the operation, and then they would just get out Bitcoin or U.S. dollar in the end,

depending on how it's set up. So, you know, we've seen some companies exploring this type of structure, which should be really interesting. Some of our research has also backed up that there's institutional demand for this for just generally, not funds, but just generally structuring products around Bitcoin mining. So in 2019 and again, and in 2020, we held a survey for institutional customers. And we asked them if they would be interested in a product focusing on crypto mining. In both years, we saw about a 20% group of people that said, yes, they would be. So, you know, this gives us hope that there's a demand for an institutional grade mining product. However, I think there's still quite a bit of work that needs to be done on the mining side if we

want an inflow of institutional investors. I for one cannot wait to have Western capital markets unleashed on the mining space. That is going to be awesome. And when you say that, like, what are you, like, what would that look like to you? What would, what would be exciting to you? I mean, just having the ability to create products that look and feel like current investment products that proliferate in the Western capital market space, I just think that would lower the cost of capital for Western miners, which, you know, could hold. hopefully at least act as a bit of a balance against the advantages that Chinese miners currently have by proximity and lower setup costs and so forth.

And I just think that would be, you know, one way to level out the playing field at least a little bit. Now, what it would exactly look like is hard to say. But if we do get these types of difficulty and hash rate derivatives in place, you could start to imagine structures like Amanda talking about like funds or even fixed income products. We, and so just so I'm clear, like essentially what you're saying is the kind of the more robust hash rate derivatives that we have that could even foster more mining outside of China. Is that where you were going with that? Well, at least I think if you have these types of products in place, you can start building

financial products that you could sell in Western capital markets, which tend to be, you know, more efficient and are much larger. And I think that could help. And I also don't think that the investors that would be buying these products would want to have the operations outside of their either home jurisdictions or similar jurisdictions to their own where they can feel confident in, you know, rule of law. Yeah. And I would just add here that like, look, mine is this really. weird opaque industry, right? Even some of the experiences that we've had have been really interesting from an institutional perspective. So, you know, one of the manufacturers that we ordered

machines from 50% of our hardware arrived broken. And when we reached out to them, we said, hey, how do we fix this? And they told us to use duct tape. I think that there's like quite a bit of work that needs to be done on the mining side. But from an, you know, from an, you know, from an institutional investor perspective, if we can figure out all those operational complexities for them and offer them a product where they can have access to Bitcoin at a lower rate that they can buy it on the market, and they don't have to deal with some of those weird complexities of how you structure all of this in a warehouse, I think that then it becomes more real. And when products are structured in ways that they already know, I think that it will be more appealing

to them. Okay. So this is a little bit different from the, you know, kind of like have your own keys ethos. Like this is saying build up infrastructure essentially in such a way where people, that's abstracted away for people and they don't have to deal with that kind of thing. Yeah, it could happen, right? It's also about choice. I mean, not everyone wants to custody their own gold or custody of their own Bitcoin. You know, Bitcoin gives you the optionality to be self-sovereign, but you don't have to. You know, sometimes it can be more efficient for you to not be. It depends on how you want to interact with it. So what makes Bitcoin fantastic as a monetary system is that it at least gives everyone

the optionality to be self-sovereign and interact with it the way that you want. I'm just pointing out that it would be fantastic if we, on top of that, additionally got the types of financial products that we have. have that are already quite excellent in their ways. Yeah. Yeah, more choice, obviously, is better. But so at some point, one of you mentioned something about, yeah, I think as Christopher you said something about the Western financial markets being unleashed on Bitcoin. But one other thing that we had heard about in recent years was that there was going to be this wall of institutional money that was going to enter Bitcoin. And I think.

think people were saying that like, you know, three years ago. And that hasn't exactly materialized. So I kind of wondered, especially Amanda, since you are more on that institutional side, how you would say institutions have been thinking about Bitcoin over this period and whether you think that that has changed over the last few years. Yeah. So I was recently listening to a podcast with our head of sales in marketing in FDAS. And Christine Sandler is the head of sales and marketing for FDAS. And she said that she has had a ridiculous amount of inflow over the past like three to four months. So I think that, you know, there is inflow coming in, which is really interesting. I don't work on the FDAS side. So I can't speak to, you know, the inflow of that specifically. But, you know, I think the things like

that survey that we had is really interesting that 20% are people are just interested in mining. And AFDAS will be, they'll be publishing some more of those stats and data points coming out soon. So I think, you know, that's something to look out for to see what our research is showing from institutions, like what they're looking for. I think it's also important to note that institutions need products that have certain structures. They can't necessarily go ahead and buy whatever they want. A lot of them have very tight mandates. So I think it's very important to you that we, we get. get more financial products around Bitcoin that are fit for purpose and that actually suit the

demands of institutional investors. And that is something that we are working on actively at coin shares too. So sort of broadening of the availability of financial products, I think is going to help this as well so that institutions can go and buy products that look and feel exactly the same as the ones that they're used to handling, and that doesn't require them to, for example, self-custody or do anything like that. And Christopher, I'm sure Coin shares also deals with institutions. When, you know, you deal with them, what do you see in terms of their interest with Bitcoin?

Like, you know, why are they interested in it or what do they plan to do with it? I mean, it's a lot of different reasons, but worrying about, the health of the current fiat monetary system is a common thread. Thinking about it as an inflation hedge, over the past years, Bitcoin has been very uncorrelated to the remaining financial markets, which is also an attractive trait. Now, we've seen that fall off a little bit lately,

but having uncorrelated assets is a rarity these days. And it's something that many of them are looking for. But again, it just really depends on the institution and it depends on their individual funds and what they want to achieve with their portfolio. And do you guys see other institutions also taking an interest in mining Bitcoin the way fidelity is? I would say that that's not something that I've seen a ton of at the very least. I think Fidelity are very much the pioneers there. So kudos to them for that. But I think other institutions should take note. But not everyone can be as awesome as Fidelity. Thanks, Chris. We've seen some other institutions looking into mining. And like they're essentially just coming to you kind of for advice asking you how you did it or like is this something where they would, you know, partner up with you in some way or hire you for their mining efforts?

We haven't provided like advisory services to anyone. I think, you know, through our exploration of just being super nerds about Bitcoin mining. We've come across some groups that have been doing it for a while, some being, you know, these traditional what we would expect from a miner and some. more of the institutional grade. So it's, you know, miners come in all shapes and sizes, right? And anyone can mine Bitcoin, which is the beauty of it. So, you know, I think that we will see a more influx of institutional activity within mining, you know, over the next however long. But, you know, there are some people out there doing it, maybe just not as public as we are. And earlier when you talked about how Christine had said that there was an uptick in institutional interest. in the last few months. Did she say that whether that was, you know, due to the coronavirus and the economic fallout from that? Or is, was that just kind of already happening? So on the podcast with

Zach, she didn't say that. But, you know, one could imagine that that was that was the case, right? With the current climate as it is today, it makes sense to think about different different strategies for your portfolio. And Christopher, is coin shares noticing that that's having an impact on interest in what you guys are doing? I think interest in Bitcoin is just accumulating in general. It's always hard to pinpoint single things in particular that are raising interest. I think there's pretty much the totality of everything that's happening in the world right now is increasing interest.

And what I mentioned earlier too, the way people interact with Bitcoin, I think, has a lot to do with when they first heard about it and how long it's been since then and the fact that a lot of them, when they first interacted with it, thought that it would be gone within a few months because that's everything they were ever told. And the longer they observe that no, that's actually not happening, the more motivated they are to actually look at things deeper and deeper. And that's what I think is happening right now. Like a lot of these companies are dedicating more and more mental capacity towards trying to understand Bitcoin and trying to to get a better grip on how it works and the things that it can do. So yeah,

it's hard to pick out specific reasons. But do you, so obviously there is this like increased interest and we even have these kind of macroeconomic effects that probably are fueling that. But I wonder, you know, when you sort of look at what, where the industry is broadly, what do you feel like are the current obstacles in getting more institutions on board or they don't even have to be obstacles, but just like, you know, what are the challenges that institutions have in trying to get into the space? Product fit is a big one. They can't necessarily go and, yeah, I mean, Amanda, if you you want to follow up on this. I was just going to say, I think, you know, product pick makes

total sense. And just like generally, if we think back to like when we started thinking about Bitcoin, it's kind of difficult to figure it all out, right? A lot of, I think what Chris and I both do is focus on research, right? And like sharing back that research with people to help them make decisions and just help be better suited for if they wanted to jump in. So I think that that's really helpful. Yeah, we say that a lot too. We get a lot of questions for about research and questions of where people can find more. And, I mean, you know, another obstacle is still the volatility.

The volatility makes people uncomfortable. There's just no way around it. Well, nowadays, maybe it seems tame compared to what's happening in, you know, for instance, oil. Absolutely. I mean, I don't know about you guys, but I found it hilarious that oil went to zero before Bitcoin. Well, so just kind of gathering together all the different thoughts or threads that we've been covering here, it sort of feels like in this sense, this sort of next epoch of Bitcoin is maybe greater institutionalization. or financialization, if, you know, where we are is like there sort of needs to be more products. And we do have this demand that's, you know, knocking at the door, but there aren't really, you know,

products suitable for those institutions. Would you say that that's kind of like a fair assessment of what might happen between now and the next Bitcoin having? I certainly think so. I think that we're going to get better financial products around Bitcoin. between now and the next having. And in terms of volatility, I mean, you know, this is a bit of a self-fulfilling prophecy, right? Like the smaller the market, the more volatility you have when you have large movements.

A lot of the large institutions are not going to get out of bed in the morning unless we're talking about, you know, dozens of millions of dollars in clip size. So in order for them to be able to even get their toes wet, they need certain liquidity sizes in these products. So we, you know, we, we have to build it kind of step by step. And I, you know, I don't expect like a sudden flow, you know, like a tsunami hitting this market. I think it's going to take time. But I do think that this will happen over this time. Four years in Bitcoin is like a lifetime, right?

Bitcoin years are like dog years. Seriously. I think that it's reasonable to that one scenario could be that there, by, you know, in four, years from now, if the three of us have a conversation again, that we'll see more institutional investors. That's definitely one possible scenario. All right. Well, it's funny what you said about how four years in Bitcoin is really, it's like 20 years because actually when I was researching this show, I got to thinking and I was like, oh, I think actually right around the Bitcoin having is when it's my five-year anniversary of covering Bitcoin regularly. And, you know, you can't,

put it on like an exact date, but when I looked at my calendar, it's roughly around, yeah, the middle of May. And so for me, it is a significant anniversary. And you're right. It does feel like ages ago. Congratulations. You've been 40 years in this industry. I actually have one question for you guys. Is it the having or the happening? I think it's the having. But what happened is that back in 2017 when everybody was talking about the flippinging, I think people at that point thought it would be funny to call the having the happening. So I think that's why this time around people, some people are also calling it the happening because it's like that combo of flippinging and having. But last time people really like the happening. And I was having a conversation

with someone in January who has been in Bitcoin for a while. And I kept using having. And he said, you know, I feel like as Bitcoiners, we make up these terms. So I kind of also like the happening. That's true. So that's what I've been going with. This is our universe. We make up the words. That's right. Seriously, we make up anything we want to make up. So that's what's so fun about working in this face. Like, we can just be creative. And we all have really different backgrounds. It's not like anybody's an expert in this stuff because we're all new in it. So agreed. And I often say, I often say that, you know, to a large extent, like everyone, in this space, you know, we got dropped this technology that no one that's currently in this space

made. And, you know, we're making it up as we go. Like, we're figuring this out. And we have large senses of curiosity. And, and there's like a fearlessness about it too. Everyone's just diving in the deep end, like, head first and, you know, see what comes out of it. It's amazingly motivating and interesting. Yeah, and for me, it's fun to watch. I tell my friends that for the last few years, I've had a front row seat to the most suspenseful movie that you could ever imagine and that it's going to last decades. And I, yeah, I just, I feel so lucky to be sitting here and being a journalist covering it. Absolutely. The single funnest industry on the planet. All right. Well, thank you both so much for coming on the show. It's been great having you on Unchained. Thanks for having us, Laura. Yeah, thank you so much. Thanks for tuning in. To learn more about Amanda,

Christopher, and the Bitcoin halving, be sure to check with the links in the show notes of your podcast player. Whatever your favorite crypto meme is, Lambo's unicorns, or the Guy Fox mask, it's probably on the Unchained Rabbit Hole T-shirt. Check it out at shop.unchainedpodcast.com. And also be sure to check out our hats, mugs, and stickers too. Unchained is produced by me, Laura Shin, with help from factual recording, Anthony Youen, Daniel Ness, Josh Durham, and the team at CLK transcription. Thanks for listening.