What Bitcoin Did - STRATEGIC BITCOIN RESERVE, NATION STATE ADOPTION & BITCOIN MINING w/ Harry Sudock

Episode Date: December 18, 2024

Harry Sudock is the SVP at CleanSpark. In this interview, we discuss the Strategic Bitcoin Reserve, the game theory behind nation-state adoption, and the impact of Bitcoin on the global monetary system. We also get into sovereign Bitcoin mining, the evolution of Bitcoin mining business models and centralisation risks in Bitcoin. MASSIVE THANKS TO OUR SPONSORS: IREN: https://www.iren.com/ RIVER: https://river.com/wbd CASA: https://casa.io/

I don't hold Bitcoin to a, you know, a pedestal type of expectation. We are a bunch of nerds on the internet who birthed a $2 trillion asset. Let's fucking go out of our collective consciousness. And if that's not winning, I don't know what is. And this project is succeeding. And I'm unwilling to compromise on that view because, you know, if you would have asked me four, six, eight years ago what this would have been like. I couldn't have imagined we would have gotten this far this fast.

Hello there and welcome to the What Bitcoin Did Podcast. I'm your host Danny Knowles and today we have my good friend and legend Harry Sudok back on the show. Now in this one, we got into the strategic Bitcoin reserve, whether that's a good or a bad thing for Bitcoin, whether it's a good or a bad thing for the dollar, as well as a general state of the Bitcoin mining market. Now, I know you're going to love this one. The only thing I'm going to ask you to do is if you have a good, you have a

haven't already subscribed, please subscribe to the YouTube and the podcast, wherever you get the podcast. It really makes a big difference. All right, I hope you enjoy the show. And if you do want to get in touch with me, you can reach out at Danny at what Bitcoin did.com. Harry, welcome back to What Bitcoin did again. Danny, welcome back to what Bitcoin did again. We are back. And if things are good, man, we've got 105K Bitcoin. We've got potential strategic Bitcoin reserve, hash rates at near all-time highs, mine is raising fuckloads of money. is this us winning? I would say that we have been winning

and this is just a continuation of our winning ways but every day you get to work in Bitcoin and own Bitcoin and mine Bitcoin or podcast for Bitcoin that's just another day of winning. 100%.

So I want to talk to you a bit about the Bitcoin Strategic Reserve. Now we're going to get into mining but this has been kind of big topic on Twitter the last couple of days and I couldn't go without asking you your take on this. So I want to go through it from two different sides. One from like the principal Bitcoin aside and then one from the sort of does this weaken or strengthen the dollar side because both of those topics have been pretty hotly debated.

But do you want to first give like your perspective on it so I know? Yeah, I would say that I subscribe to the Pinesian school of thought. the ever, ever-intelligent Matthew Pines, where he, I think he views, I don't want to speak for him. What I believe is that the U.S. entering a strategic Bitcoin Reserve environment, one is a game theoretic inevitability. And if we believe Bitcoin works the way we think it does, which we have 16 years of evidence to support, then nation-state balance sheet inclusion is inevitable and frankly has already happened. We know that the U.S. government owns a significant amount of Bitcoin out of their Silk Road seizures.

We know that El Salvador owns a bunch of Bitcoin out of their purchases. And we know a lot of other governments already own Bitcoin through both mechanisms. So I think one is it's very, very easy and obvious. to say that if they have that Bitcoin, you know, why wouldn't they keep it? It's a great balance sheet asset. I don't see why it would function at the government level any different than it does at the household level or at the corporate level. So, you know, so I think the genesis of Bitcoin continuing to mature into a strong, flexible balance sheet asset, you know, that's obvious. The second piece is that, you know, Bitcoin is kind of a musical chairs game where there's only so many and you get them at the price that your mindset shifts or the will to own it emerges.

And so there's a lot of value in getting to go first. So right now you've just seen the cumulative ETF balances eclipse Satoshi's coins. you see Michael Saylor and Micro Strategy is on their way to a half a million coins. And so right there is the example of going first is a highly preferential position to be in. So I think why would we let somebody else beat us to the punch when we have the opportunity and the liquid assets to take an extremely significant position that may pay off, you know, outsized, over time. So I think from a competitive analysis standpoint, which all strong government policy should be viewed, one, on a gross benefit basis, but secondarily on a relative value basis, you know, we're not just doing the best thing for the American people. We're also doing the best thing for the American people on a competitively advantaged long-term thinking basis when government functions properly. So, I think the thesis for why we should do it is overwhelmingly clear.

I think that the cypher punk in me says, oh, but then governments are going to get bigger and stronger. Well, you have a zero barrier to entry asset. And so anything that can happen will happen. And so I'd rather be first and be big than be second and be smaller. That makes sense. And in terms of these nation states owning Bitcoin on their balance sheet, like 100%. It was always going to happen. It was always inevitable.

But in terms of whether it weakens or strengthens the dollar, I'd like you take on that because my kind of knee-jerk reaction to that would be clearly it weakens the dollar because Bitcoin is an alternative to the dollar. And I feel like also with the US doing this, it feels to me like they're showing their hand and being like, we kind of know the dollar's fucked. Bitcoin might be a way that we can either pay off some of our debt in the future or usher in like a new currency era. But there's obviously a lot of people out there that believe this is going to strengthen the dollar. And I'd be interested to know where you sit on that.

You know, I try to sit at the most sort of positive and pragmatic intersection on the road. The optimist in me says that, you know, all money is fake. from a Fiat background, right? It's all just a number that that is some abstraction of the likelihood that that economy and that government is able to enable some degree of forward-looking confidence in purchasing power. So let's use a very dumb and obvious example, right? US dollars, relatively stable forward price purchasing power,

certainty relative to something like than naeer. Right? So on a relative basis, certainty and dollar purchasing power is much higher than currency B. That to me is very clear. So the entire Fiat merry-go-round is a relative game. As long as you're better than the next one, you have a decent chance at remaining the global settlement currency.

Now, Bitcoin is materially different than that because there is no ability or there is a highly limited ability to change the monetary policy of the system and in the network. When you introduce a fixed supply reserve asset to a system of unfixed balances, there's two paths. One is all of the floating supply assets trend to zero in Bitcoin terms. That could be true. Two, if the economy with the strongest floating supply currency also has the most fixed supply currency sitting in reserve, it may end up the strongest of the bunch and stronger than it sits relative to today. So the and you'll have to get I don't know, maybe Luke Groman or Preston or somebody else to to walk us through like Eurodollar stuff because I am I am but a wayward traveler in those waters. But you got to think about, you know, what is the dollar reserve system? And really it's a function of treasuries and treasuries are a function of demand plus the confidence.

in repayment. So I think what's going to emerge is there's a, and there's sort of a liquidity track in the way that we talk about this where, you know, country running trade surplus with U.S. holds excess surplus in treasuries and then looks for a way to, you know, to monetize those treasuries over time. You know, then there's sort of the other, the other version of that world, which is store of value land where, you know, and let's use, let's use a relevant current event scenario. The Vision Fund, a previous Vision fund that raised $100 billion, basically went to the Middle East, raised that money, and bought huge equity positions in United States tech companies. That's a store of value diversification play for a country that is almost entirely exposed

to a company like Saudi Aramco. to layer in exposure to things like Uber, Lyft. We all know how we work went, but ultimately the Vision Fund was an enormously successful cash-on-cash-on-cash-returning fund because of some of the other deals they did. And so now that country used to be entirely exposed to something like Saudi Ramco. Now they've got significant equity positions in diversified foreign market, domestic for me, market, technology companies. So that other store of value Mary Garand spends. Now let's use a different example for how that store of value mechanism plays out on a cross geopolitical basis.

I'm a centa millionaire in a foreign land. Maybe there's capital controls. Maybe there's a regulatory regime that makes it a little nerve-wracking for me to try to hold, you know, $100 million in pick your country. I would sure love to diversify into an $18 million, New York City apartment or Toronto apartment or Miami apartment or something U.S. farmland, you know, pick your flavor. That capital flight sink would maybe be far better served in Bitcoin. So, you know, the question is, where does the monetary premium live?

because monetary premium is derived through the weakness of the existing currency. So, you know, it's the melting ice cube effect. The other is the turkey risk, which is, you know, the turkey is having the best day of its life every single day until November 27th. And then it drops to zero. So, you know, I would call capital controls or, you know, some version of an asset. forfeiture regime to introduce turkey risk into a high net worth individual's portfolio. So the monetary premium can also accrue to assets because of those dynamics as well as the long-term purchasing power preservation that comes from sort of the melting ice cube piece.

So why do I say all that and how does it relate to a strategic Bitcoin reserve or dollar strength? ultimately the monetary premium that has accrued across asset classes is potentially misplaced once you introduce a stronger store of value mechanism into the system and the stronger store of value mechanism emerges both through Bitcoin's fixed supply property but also through its censorship resistant and self-custodial properties as well. So those are reasons why I think, you know, there may be pressure on. the real estate market. There may be pressure on portions of the equity market. There may be pressure

on portions of the bond market. Treasuries aside. But ultimately, I think dollar strength and increasing strategic Bitcoin reserve status or increasing Bitcoin store of value performance, those two things don't necessarily need to be at odds whatsoever, at least on the medium term basis. But additionally, you've got the emergence of this whole stablecoin regime. So I think you're seeing an interesting netting between reduction in monetary premium as a result of Bitcoin's reserve status, but an increase in the demand because of the mechanisms that exist within the stablecoin environment. So you may see some really interesting offsetting in demand for treasuries, which ultimately reads through to the relationship between Bitcoin reserve status

and dollar strength. Okay, so I definitely want to talk to you about the tether, well, any stable coin buying treasuries. But before we do that, you talked about countries that are under capital controls and Bitcoin's obviously an alternative to them, whether as opposed to buying real estate in New York or whatever it might be. But if the US do this strategic reserve, you'd imagine that game theory plays out and a lot of other countries scramble to do a similar thing. Now, right now, Bitcoin's relatively tiny compared to the size of, like, the bond market or whatever. But as it gets bigger, do you not think other countries buying Bitcoin rather than U.S. Treasuries is going to cause an issue for the dollar?

I don't know. I don't think so, particularly. I think that ultimately the ability to participate in the global economy requires. requires a diversity of capital assets. And the, I guess, I guess it would, you know, I guess that let's ask the question with two, with two lenses. The first is that Bitcoin volatility remains relatively similar to what it is today. There's portions of balance sheets that cannot be put into something that high all.

Yeah. Because they need to be used as, I don't know, a trade payable or, you know, shipping collateral or I don't know what the right sort of international, multinational use cases. And so volatility, liquidity, and duration risk would exist. But I think that, you know, if Bitcoin were a $150 trillion asset with volatility, lower than treasuries, then maybe we're having a different conversation. We're really, really far away from that. And over that time period and that type of monetization event for the emerging asset,

we may see the dollar get pegged to Bitcoin or Bitcoin plus a basket during that period. And then the problem doesn't even exist at that point. So I think ultimately we're exiting a low optionality environment and entering a high optionality environment. And I think about that as a business leader, you know, fundamentally, but I think we need to have that same consideration as a government, you know, things like we will never or we will always. Like those don't hold true when you start to look back more than 30 to 50 years, right? Everything changes. Everything's dynamic. And so when you have a fundamental,

innovative technological breakthrough, which Bitcoin unequivocally is, right, the ability to have provable digital scarcity on the internet that's transferable on a censorship-resistant basis. That is a sea change in the asset mix that's available to us as individuals and to us as nation states. And so you've added a new ingredient to the mix. And what that will mean for the for the working dynamics, I think is a very, very wide range of potential outcomes. But I know that the opportunity set for high productivity growth, high quality savings, and high quality balance sheet improvement, all of those levers just got more exciting with the invention of Bitcoin, not less.

And so when you take a population of 8 billion industrious people and ask them to use a new tool in creative and productive ways, I believe in their ability to do that. What Bitcoin did is brought to you by our lead sponsor and Massive Legends, Iron, the largest NASDAQ list of Bitcoin miner using 100% renewable energy. Iron are not just powering the Bitcoin network. They're also providing cutting edge computing resources for AI, all backed by renewable energy. We've been working with their founders Dan and Will for quite some time now and have been really impressed with their values, especially their commitment to

local communities and sustainable computing power. So whether you're interested in mining Bitcoin or harnessing AI compute, Iron is set in the standard. Visit iron.com to learn more, which is iri-en.com. Okay, so take your macro hat off and put your Bitcoin a hat back on. And the other kind of criticism about this executive order piece is that it's going to change the incentives for Bitcoin and whether we're kind of giving up our principles in some way. Lola Leets put a post on Noster today, which was really interesting. She was basically

highlighting the risk of this just pushing ossification again further. And I think one of her big problems was the fact that it's specifically called a store a value asset in the bill rather than money. And if it comes to a point where we want to bring covenants into Bitcoin or something like that, it may be against the US's sort of national security interest to do something like that. and then sort of add risk or danger, whatever you might want to call it, to the developers. What would your take on that be? I don't think those are terribly unfounded views,

but I return to the more principled version of this, which is, okay, we all agreed that government ownership of this asset was inevitable. What were we planning to do? So, you know, I'm still of the opinion that, you know, the game theoretic mechanisms for Bitcoin ownership and the knock-on effects to the developer community, we've known those. Yeah. And ultimately, I don't believe that this type of executive order or this type of legislation fundamentally changes anything. I think that I'm going to leave the advocacy work and the political activism to people who have decided to make more of a full-time go of it. So, you know, I love the work that, you know, David, Grant, Matt and the BPI folks are doing.

I think there's a number of other incredibly smart lawyers and legislators, future legislators, maybe I should say, in the mix. who are going to have more reasoned opinions than I will. You know, but if I take my left curve view of the environment, I think the job of the development community, and this is going to be mean or controversial or whatever, but make the BIP compelling enough to motivate adoption. And the community will adopt it. you know, we, you know, we, Bitcoin is super hard to upgrade.

And I don't expect that to change. Now, could it get harder to upgrade? Totally. Do I think there's really, really smart people who are, who are, I don't want to say dying on the Covenant Hill, but, but certainly sitting out there in the, in the wind and the rain. Yeah, they are. And, and I feel for them because I think from all I've read, it's a pretty, it's a pretty

reasonable set of proposals. I think one of them needs to emerge. But ultimately, you know, the miners work for the nodes. And that's kind of my seat in all of this, is that if there's, if there's an established consensus view on a proposal for Bitcoin, we're going to mine it. There you go. That's a fair take. One of something that I think about quite often, Thomas said it to us. I think it was on the show. It may have been in private. I'm not 100% sure. But a little, while ago, Thomas from Pubkey this is, he said that we're all going to be rich and depressed because the project failed. And I feel like Nostra Thomas is coming out again there.

I'm not in the business of letting perfection erode improvement. I don't hold Bitcoin to a, you know, a pedestal type of expectation. We are a bunch of nerds on the internet who birth the $2 trillion asset. Let's fucking go out of our collective consciousness. And if that's not winning, I don't know what is. And, you know, is it going to, you know, we've already learned that, you know, B-Cash and Satoshi's vision and the true, the true value of Bitcoin has already died. You know, there's all, all of these narratives continue to kind of, you know,

come back around every so often. And a lot of the time it's when we're doing well that those narratives come back. And I'm not saying this about Thomas, but I think more broadly, you know, we all don't own enough Bitcoin. And so when Bitcoin goes up, it's just the depression of, you know, all the credit cards I should have maxed out eight years ago. So, you know, I think that's more so what it is. But this project is succeeding. and I'm unwilling to compromise on that view because, you know, if you would have asked me four, six, eight years ago what this would have been like, I couldn't have imagined we would

have gotten this far this fast. That's, yeah, I 100% agree with that. One of the really interesting things on kind of like the nation state adoption side of Bitcoin to me in the last few years has been Bhutan. So this like tiny Buddhist nation in the hills is mined a fuckload of Bitcoin. I think it's now worth over a billion dollars. Do you think this, obviously they've got amongst the first move of advantage, they've absolutely crushed it, but do you think this is going to be something we see a lot in the coming years, like as in the coming short term? Country's mining?

Yeah. I'm kind of bearish on countries mining. Okay, why? Mining's hard. This is a hard business. It's really hard if you're not a for-profit entity to do. it the right way at the right scale with the right incentives. I think the incentives for countries are much, much more closely aligned to buying Bitcoin

than mining Bitcoin with some notable exceptions. So large, wholly owned, unencumbered energy resources with no path to revenue, countries with a lot of those and a relatively small GDP are probably a reasonable candidate to enter the mining space. But like, there aren't that many of those. So, you know, I was actually, I was talking, I was talking to worry about this. You'll get a kick out of it because he, you know, he was thinking about the Middle East and what role they could play in increasing difficulty over time. And again, I live on the left curve where I belong.

And so I was kind of just like, they have. more money than energy, right? It's easier to buy Bitcoin than it is to mine Bitcoin for that. And mining has a lot of CAPEX risk and a lot of operational risk. And, you know, are they really incentivized to do it really, really well? You know, again, I'll go back to the Vision Fund example from where Masa raised the money from, you know, the Saudi sovereign wealth fund didn't build Uber. They gave Masa $100 billion or some portion of it, and he took a huge investment in Uber.

They didn't build that company. They paid somebody else a fund manager's fee to get them equity in Uber. I don't believe those are the same people who are going to build the next 100 X-A-Hash, you know, sovereign business. I just don't think it's likely when there's such a lower friction option available to them, which is to go buy a bunch of Bitcoin. That's a great opportunity. And I think over time, many, many, many countries are going to take that opportunity. But I think that the capital allocators viewpoint is own the asset, own equity in businesses that produce the asset.

And then in a distant third is, oh, we're going to be large participants in the heavy industrial manufacturing process required to produce the asset. I just think on a risk-adjusted basis, it's not that compelling. And, you know, the network has grown so large that you need to put a lot of mining power in place, a lot of compute in place to be able to generate a meaningful Bitcoin yield. It takes time. It takes, it takes, you know, detailed supply chain navigation. It takes, you know, significant operational experience to be able to do it. And so I just look at the risk adjustment. profile of trying to build a global leader in mining on a sovereign basis.

I just don't find it to be quite as compellingly likely. Yeah, I guess that makes sense. Especially governments aren't known for their efficiency. So to think they can run a large-scale mining operation might be a bit far-fetched. Well, like, why would you do that when you can just buy the Bitcoin or buy stock in a public entity, right? I can guarantee you that a lot of foreign nationals and potentially sovereigns have ownership positions in the biggest companies in the U.S. That's a pretty well-understood dynamic.

Those countries are not in the business of building competitors to those. They just want to ride along and diversify their exposure at the sovereign wealth level. So let's get into the sort of state of Bitcoin mining, because obviously you guys had a pretty tough time in the start of this year. You had your revenues cut in half, which is always nice. How are things now? Now price is ripping. A miner is good again? I mean, I would say that the best miners have always been good.

Okay. You know, it's been a big year for me and a big year for my role in the mining industry, started the year having just taken grid public. Now, ending the year, having been acquired by Clean Spark, and having started there a couple of months ago. So big, big transition year in the midst of a big transition year for Bitcoin. So it's always nice when your personal cycle matches the macro cycle. The perspective that we've taken at Clean Spark is always be having.

So the having comes every four years. But having impact can happen at any time. So difficulty could double. price could have or the having can show up. And two of those are not driven on a four-year clock. And so the trick is you want to build your business such that if a halving occurred in any one of those formats, you would be able to thrive on either side of it. And thankfully, we have the track record to say that we can do that. One is, and, you know, how do you build a business that's resilient to these types of shocks?

The first is to be absolutely disciplined around the operating business, the machine efficiency that you install, and the power cost structure that you run with. So we have the third lowest marginal cost to mine, and we have the second most efficient fleet. That kind of solves the impact of having style events. And we've been able to achieve both of those while we increased our operating hash rate, like 330% year over year. So we went from 9.6x a hash to 33.7 as of the end of November. So that's just 14, you know, 14, 13, 14 months. So scale, because you've got. you've got the whole corporate side of the business that you have to be able to support

out of the cash flows. You've got the marginal cost around power. And then you want to have some left over because that's why you're a for-profit business. Putting the profit back in for-profit. And we think we've designed that business at enormous scale that's able to support us through almost any type of macro cycle. And then The second piece is making sure that you're capitalized to be incredibly opportunistic. So what did we do during the halving period? Bought a ton of companies. I added a ton of infrastructure, built out the fleet, did all of the accretive growth on a countercyclical basis.

So, you know, it's a, it's a, it's a, I'm a reluctant Warren Buffett quota these days because of his Bitcoin views. but, you know, this is a be greedy when others are fearful type of environment and being able to step in to a ton of infrastructure that's either no longer economically viable or undercapitalized to upgrade their fleet to the best efficiency. Those are all great places where we want to be acquisitive. And our M&A muscle has gotten very strong over the years and I'm a product of it. Were you surprised to see, were you surprised that you didn't see more companies go, bust in the like throughout the last halving um i mean we saw some go bust you know the the large the single largest hosting provider with compute north went bust and the single largest mining company in core scientific went bust so i think we saw a significant amount of that i think you know

i think the other players either had enough room in their cost structure to weather the storm or they had enough cash on balance sheet to kind of, you know, bleed through it. And that's largely what we saw is the least efficient operators who didn't get challenged during, you know, the having event and sort of lack of price appreciation shortly thereafter. They just had enough cash to get through. And that's the, and that's sort of the business reality of it. But I think, you know, all the consolidation that we saw is really the different flavor of that happening, which is, you know, people are looking at their power bills. They're looking at 30, 40 watts per T fleet efficiency and saying this isn't going to last another year.

We need to find the right buyer. And so in the cases where that infrastructure was high quality, we either bid or acquired. And then I think, you know, and then I think, you know, the sort of company to company acquisition stuff didn't really end up playing out. It was much more of an infrastructure play grid being, you know, one of the outliers. And last time you were on the podcast, we did Bitcoin mining level two. And you were saying that sort of post-harving, everyone needs to level up at that point. Do you think we're going to get towards sort of peak efficiency this cycle? Or if not, where is like the edge still left in the market?

Yeah, I think, I think, you know, not to not to do too much of a victory lap, but I think the the Bitcoin mining level two thesis has completely played out. We are now seeing a significant variety of business models across the sector. And I'd categorize them really in four kind of core tracks. The first is what we are, which is a pure play. We believe we know what we do best. We're going to keep it laser focused. We're going to continue doubling down on operational excellence, discipline, and margins. And that's one way to approach level two.

The second is, hey, we're a fairly break-even efficiency type of miner. We're just going to buy Bitcoin instead of producing it below spot. And we've obviously seen Riot and Marathon take that view most recently. The third is, I'm going to call the AIHPC integration, where you're layering in a second revenue stream to diversify through the business. I think, you know, we mentioned core to the negative before, but I think coming out of bankruptcy, I think they've had the most successful post-bankruptcy exit of any company ever. Wow.

And I think Adam is a phenomenally gifted CEO and we respect their entire team. They're probably the only ones well positioned to really pull that off. But they've done a phenomenal job, you know, shifting their focus to AIHPC and they're still running, I don't know, 19 or 20 X-Aash today, which is a significant Bitcoin mining business, obviously. And then the fourth one, and this is probably the least mature, but really interesting, is what I'll call sort of the vertical integrators. and I use two examples, and the jury is very much still out on whether or not these will be successful. But I think it's interesting anyway, which is bit gear getting into the chip production business, whether or not that's for their own consumption or more of a thing to sell into the market and be a bit main competitor. I don't know what that's going to end up looking like, but it's interesting.

And then the other is Bitfarms and their stronghold acquisition, stronghold owned or owns two coal, waste coal power plants. And that comes along with the deal. So ownership of power generation assets directly and playing sort of in the flexible energy market space. You know, that's another place where you can sort of vertically integrate into the chip side or you could vertically integrate into. the energy production side and those are companies that are taking that angle on it. I love the way that we're doing it because I'm selfish, but also I'm focused. You know, I'm not good at that many things. And I think being able to have the discipline and focus at the corporate level makes us a better

minor. And I think you see it through the diversity of areas that we focused on. obviously the most recent capital raise is going to fund the expansion of those efforts, but ultimately it's not about being the best minor at a single metric. So we don't have the most efficient fleet. There's another competitor who has a more efficient fleet than we do. And that's great. But if we wanted to rip out productive assets and buy the lower efficiency units,

we could get a better number there. but ultimately the mining business is about cash on cash returns. And so I want to be able to take all of the profitable, useful life, what I call the economic useful life, out of all of our hash rate for its entire life cycle. And we'll drive down fleet efficiency because we've got access to great units. And we're growing. So rather than pulling an old unit out and putting a new unit in,

I'd rather add a new site and have them both. and then when those old units go unprofitable on an economic basis, then we'll go replace those. And so rather than saying we're going to go from whatever, 20 something, 20 something, joules per terahesh, right down to 15 or right down to 13, you see us kind of gradually driving that efficiency number down over time because we're basically dollar cost averaging into efficiency where we believe that there's always a push and pull between where do you make a countercyclical significant timed bet and where do you try to blend down over time. So we make the significant timed bets on machine cost basis, on Bitcoin held on balance sheet. Those are

things where the cycle matters. But if you look at things like efficiency, I'd rather blend that down over time because it means that the overall footprint and productivity of our business at the macro scale is just growing and performing. So as long as there's positive, profitable margins to be had, I want to use those machines and run through the tape. This episode is brought to you by River. There are many places to buy Bitcoin, but there's no exchange like River. They have innovative products, phone support, and a dedication to security that I haven't seen anywhere else. With River, buying Bitcoin is easy. You can set up zero fee recurring buys to automatically build your stack, and while you're waiting for the perfect buying opportunity, River even

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So they're building their own chips. I assume are they doing that out of Taiwan? I don't have insight into where they're doing it. I would assume Taiwan if they're looking to the three nanometers scale. I think that, you know, Samsung and TSM are really the partners that are able to perform at that level of granularity. But, you know, ultimately Bitter is run by Jehan, who was the co-founder of Bitmain,

so he's got the background to do it. I just think that any time a new chip comes to market, I want to see it perform and see a performance scale before I'm ready to get really excited. I'm cautiously optimistic, but the jury's out. So in the last sort of, probably end the last ball market into the bear market, there was a lot of talk about Intel releasing a chip,

and they obviously pulled that project. Do you think now prices ripping again will see more people come back into the chip market? I want to take a step back and talk about as a purchaser, the criteria that makes for a good vendor to us, and then I'll tell you what I think about,

about new entrance or continuing, improving existing entrance. There are really, three factors that matter when we think about what ASIC deal to sign. And the first is performance above all else. We want to understand how is this hard we're going to perform in the field and not just a hundred of them or a thousand of them. I want to know how between 10,000 and hundreds of thousands are performing. Is that because they have vastly different performance on like a machine basis?

No, ideally they won't. And so, you know, the reason that I talk about those scaled numbers is because, you know, I'll use a different example. I can cook a really nice steak. I cannot cook a hundred nice steaks at once. Right? I don't have the kitchen. I don't have the silverware. It's not happening. Right? But I can get you one. You've never cooked me one steak. What's going on, Harry? Come back to Nishville, I'll cook for you. You know, so the manufacturing capabilities really change when you start to drive the numbers up. And so being able to see a vendor perform in the tens of thousands, if not hundreds of thousands of units is critical. So to give you a sense of that scale, we've signed two contracts with Bitmain in the last year. The first one was for 60,000 units with a 100,000 unit option. The second one was for 25,000 units with a 50,000 unit option.

Those are real volumes. Those are hundreds and hundreds of millions of dollars in hardware. And those are big volumes in terms of what they're going to be required to produce. And they've delivered. So that's the type of scale that we would expect a leading vendor to be able to perform. for just a single client. That's not to mention their other clients. So I want to see a new entrant have a clear, verifiable, demonstrable path to being able to deliver that scale with the performance indicated in the spec sheets. So that's the first criteria. The second is price,

which Bitmain's done an incredible job, driving price down over time, you know, my hope is that we don't see any of the $140.40 tarahesh's come to market because those never R.O.I. And the third is terms. So I mentioned that we struck the option. With them as part of the purchase, we innovated on the contract structure with that. So the ability to lock in price certainty on the initial order

plus price certainty on the flexible option means that we're willing to give them more of our business because they're giving us the flexibility to plan for the infrastructure, plan for the capital and all those types of things, and really work in more close partnership around some of this stuff. So that fixed price, flexible option structure is a big, big selling point as to why we're able to work really productively with them. I would expect a new entrant to be able to perform on at least two of those three. variables for them to be compelling. Would you not be concerned about the kind of centralization in chip production? Yeah, I'm concerned about centralization, but my obligation is to my shareholders

not to, you know, the centralization deity or the decentralization deity, as the case may be. So I have to make a pragmatic business decision around that. And I have data and I have data and I comparative analysis to point to when I try to make that decision. So, like, yes, hypothetically, it would be phenomenally positive to have a diverse range of vendors who are able to service this market at scale, at compelling pricing with flexible terms. That's just not the market dynamic yet. I'm hopeful. And what about centralization of, like, in general in Bitcoin mining? So obviously, Pubco's in the US are getting huge. There's a lot of miners plugging in there.

Are you worried that the US is going to be too dominant? Let's take the centralization risk layer by layer. So am I worried about the centralization risk of ASIC manufacturing? No, because there's 700, 800 X-A-Hesh of install base already out there in the market that is running and in the hands of individuals responsible. for managing it. So the escape velocity point for hash rate has been achieved and the incremental hash rate that comes out of the manufacturing line is small enough on a relative basis at this point where I think it would be very hard to try to do something malicious from a net new hash perspective.

So no, I put that risk quite low. from a centralization risk of hash production or compute production. Now, so the total across all of the public miners at this point is somewhere in the 24 to 26% of network hash range at this point. And that's across whatever, 15 or 20 publics. I just don't think that that's particularly concentrated. So do I think that too much hash rate in a single country creates jurisdiction risk beyond that? I don't know. I mean, of the 24 to 26 percent, a bunch of its ex-U.S. anyway.

U.S.-based company, but not domestic production. We, and I'll, I'll toot my horn, CleanSpark is the single largest producer of American hash rate. even though we're the second largest by total production. So I'll be the first to know if there ends up being some United States jurisdictional risk. And we'll come back on and talk about it when or if that ever happens. But ultimately, America has incredible capital markets. And with the coming administration, a really strong regulatory regime that incentivizes at this point the good behavior. in the Bitcoin context.

And that's not to be, you know, that's not to be naive and say, you know, governments won't exert whatever powers that they could. But I think ultimately, we've got an administration that sees the value in our industry. I've been shouting from the rooftops for six years that Bitcoin mining is really a huge net positive for energy markets, a huge net positive for rural communities in the U.S. And a huge net positive for Bitcoin to have Bitcoiners run the country. companies that produce the hash rate. So that's that's kind of where I land on it. Is there centralization risk? There always will be. Do I think that that risk is well managed and well

diffused across a number of strong operators and actors within the space? Also yes. And of that 24 to 26 percent, there's pubco's. Is that a growing number or a shrinking number? it's relatively flat sometimes growing sometimes shrinking but but net net it's relatively flat who makes up the 24 to 26 that reshuffles pretty frequently as we grew from 9.6 to 33.7 we obviously took a larger percentage of that market share some peers are also growing some peers are also slowing growth. And so there's a real range of businesses within that. But the overall net net mix has been relatively stable. It surprises me actually that sort of private miners can

keep up with the public miners in this sense, because obviously they do have the access to capital markets in a way that private companies just don't. Do you think the US is still the place to be building these mining operations? Or do you think they'll increasingly go to South and Central America and Africa and elsewhere? The short answer is yes. I think hash rate's going to go up and all of those places are places where there's opportunity. I think you need to look at the

I would call it like the structural opportunity in each of those places. In the US we produce 14% more power than we consume every year. So there's a huge opportunity still. Yeah, that number is like way bigger than the entire Bitcoin network. Yeah. So, you know, I don't know. I love building in the U.S. I love the regulatory certainty, the rule of law. If, you know, if we were to have an issue, I know the court that we would go to over it. I know the regulatory body that I would have to talk to, you know, that level of certainty and clarity, I think doesn't get enough credit. Now, the question, you know, the question, you know, the question. inside your question is basically how much cheaper does the power have to be to convince me to go somewhere else. Exactly. Yeah. And I don't have a number, but it would need to be material.

So if there was a materially lower power cost that was available, you know, with the same type of 98% uptime that we've been delivering for the last several years, then that's really interesting. What is your power price at Cleans Park? I believe last fiscal year we reported 4.6 cents, which is all in. So this is important. So you'll hear numbers from some of our peers that are lower than that. But if you look at our average cost to mine, we're kind of right in lockstep. There's two reasons, three reasons for that. One is that we report an all in power cost.

That includes transmission and delivery. That includes taxes. That includes any margin that gets paid to the municipality or the utility. So there's an apples to orange as a fact where our wholesale power price is 3.1 cents. But when I get a bill at the end of the month, you know, I don't tell you the pre-tax number. I tell you the number at the bottom that we actually have to pay. So, you know, so there's a reporting issue, I think, between us and some of our peers. The second is uptime.

So, you know, let's use, let's use Texas as an easy example. We don't have any mining facilities in Texas. We're open to go into Texas one day, but the right opportunity hasn't presented itself. And one of the reasons it hasn't is we run at 98% uptime. I don't have visibility into the internal metrics of all of our peers, but I'm pretty damn sure that that's the number one in the industry. Because they're operating with demand response. Is that right?

And there's two components to demand response. There's economic demand response where they get paid, the ancillary services programs, they get paid for those. There's other demand response where it's too expensive. So, and if you look at some of their 10Ks or 10 cues and reporting, you know, one of our peers was down 41% of the last quarter.

That's 40% of the first quarter. That's 40% of the revenue that just never gets produced. You still have to buy 20, 30, 40, X a hash worth of machines, and you're only going to get 59% of the productivity out of them. We have to go by 33.7 X a hash, and we get 98% of the value out of those, rather than 59% out of the same CAPEX for those other type of deployments. So there's a unit economic component to the,

analysis when we think about designing the business for the long term, but there's also just the cash on cash returns. So, you know, if, if you told me that I could produce a billion and I'm going to use round, round representative numbers, if you told me I could produce a billion dollars of revenue at 55% margin, I would rather have that than 500 million dollars of revenue at 60% margin. Because ultimately, the cash your business produces, is the metric that you get judged by. And I would rather produce more at incredible margins than a lot less at slightly better margins.

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to protect your stack and sleep easy. That is CASA.io, which is c-a-i-o. So I know you're all kind of limited on time and you guys had a pretty big announcement. Do you want to explain what that was? Yes. So we talk about Bitcoin level two, Bitcoin mining level two. I want to talk about how we capitalize the business heading it at 25 in what I believe

is a level two funding vehicle. So we raised a $650 million convertible note at zero percent interest with a combined conversion premium of up 100%. So that's very different than what we've done historically, which is use an ATM to sell shares into the market, to raise cash, to grow. We also believe that that was a great decision. That was where the market was at for the last couple of years. And we believe that we deployed those dollars intelligently and on an accretive basis. But since then, the market's matured, miners have matured, and Bitcoin has matured.

and the capital markets have made available this type of more accretive financing than was available to us previously. So the additional thing that we did with the proceeds is we also bought back $145 million worth of our stock. And we did that because we're going to bet on ourselves. We're not going to use those proceeds to go buy Bitcoin. We're going to use those proceeds to buy back our stock and to grow the business. So we're fully funded through 50X a hash in 25, which is the guidance that we put out earlier this year.

It actually only costs just north of 160 million in remaining spend to get us there. So that leaves us with a really healthy slug of capital to stay opportunistic and do more coming into the year. What could the more look like? It could look like growth beyond 50. It could look like more M&A activity. And it could look like continuing to keep. keep the vast majority of Bitcoin that we mine on our balance sheet and paying or operating expenses out of that funding.

So today we've got 9,297 Bitcoin on our balance sheet as of close of November. That's just in the neighborhood of a billion dollars of Bitcoin. And we want to grow that. But we do not want to grow that by going to market and buying Bitcoin because we're producing it for 36-250 as of our last quarter's energy cost per dollar. coin. I don't understand why there's sort of all of this, you know, pressure or incentive to go buy Bitcoin in the open market when we're producing it at whatever, 50, 60, 70% margins. So that's that's one piece of it. The other is that this is a significantly less dilutive financing

opportunity than the ATM product. So because of the cap call that increases, the conversion premium, you know, we're converting shares to repay the note at, I think, 2466 a share. But then you include the value of the buyback and the cap call, and that number climbs north of 30. So basically, we're only issuing net shares into the market above $30 a share when we're trading in the 12 range at the time that we did the offering. So we're really, really excited that the capital markets understand the value in our business. We took 30 some odd meetings with the biggest funds in the world who said, you guys are a differentiated credit profile, which means we're happy to lend you money at zero percent coupon. And we believe that you investing

in your growth is the most valuable use of our money, essentially. So really, really excited by the vote of confidence that they put into us and the entire management team. You know, hats off to Zach for leading us down this road. Hats off to Gary, our CFO. He's a rock star who has been pounding the table for getting to market with this type of financing and was really one of the key architects in putting the deal together. So, you know, you take what is a convertible bond? It's basically you borrow money and then you pay back with either cash or shares at a

ratio down the road. Our down the road timeline is five and a half years. But there's then all of the financial engineering that we were able to layer on with the cap call, the buyback. There's a put call component of three and a half years to continue to protect our shareholders and put a very clear forward-looking view on the dilution impact that it could mean for the business. But most importantly, we want to raise money to continue to bet on ourselves. and grow the business. And that's exactly what we're going to do. We've got the power contracts in place.

We've got the construction expertise to go execute. We put on 24X a hash in the last 13 months. Putting on 13 in the next 12 months should be relatively trivial relative to what we've done over the last year. Love it. And there's obviously been a few mining companies do this. Big shout out to Iron and sponsor the show. They also did one of these in the last month or so.

Why is the time now for this? 100K Bitcoin things and raising money is easier than ever? Or what's the reason that now is the right time? I think it's a fewfold. The first is that the mining space is more mature. If you reround the clock two or three years ago, we had no track record as public companies, really. It was just a couple of players,

and we were all significantly smaller. So maturity is number one of our sector. maturity of Bitcoin is number two. And then number three is that the capital markets go through their own cycles of being excited and interested in this type of exposure. And we're thrilled with the feedback that we've got. I'm sure, you know, they wrote a bunch of checks into micro strategies and the other miners. And so they're really excited about it. I think Preston tweeted it.

But the Bitcoin exposed convertible. notes represent 20% of all convertible note returns over the last year. And so when you have a fund manager who does really well on these types of investments, they want to do more. And so our job as an operator is to differentiate ourselves as to why we're the best place for the next check they write. But ultimately, these guys want more exposure to our sector and we know what to do with the capital. And do these add risk to your business? So do these add risk to businesses? Yes.

Do these add risk to CleanSparks business? I believe the risk is very, very, very well managed. We are conservative by nature with how we take leverage. We have almost no leverage outside of our convertible note. And if you look at the 650 that we raised, that's two-thirds of the Bitcoin that we own today. So from a ratio perspective, I feel great. about how we sized it relative to our balance sheet. So our total balance sheet is north of $2 billion.

We took on $650 in debt, potentially convertible in shares. We think that that type of sizing is incredibly conservative and low risk. It's also one of the reasons that we didn't go and buy Bitcoin. Because if you raise debt to go by Bitcoin, one, the people who write you the checks are making a bet on Bitcoin's price. And two, you as a company are betting your company on the price of Bitcoin. And, you know, all your listeners know that I am wildly constructive on where I think Bitcoin is headed.

But the trail that Bitcoin takes from point A to point B has never been a straight line before. It goes like this and it goes like this, up and down for listeners. And if it goes down at the wrong time in your debt maturity cycle, you could be introducing significant risk into your business. And so, you know, we don't want to take Bitcoin price risk directly into the note. We want to take our operating expertise and bet that on our ability to perform on the note rather than saying, I need Bitcoin to be $131,000 for this note to be performing. So it's really about how you size the bet and then what do you do with the proceeds that matters from a risk profile. And we think that the menu of options that we baked into our offering is the one on a risk adjusted basis that offered the best view to our investors.

And with the way that they got excited in the meetings, I think that we did it the right way. It doesn't make sense to me the other way either. Like if you're mining Bitcoin, I don't know what you mine out right now, but let's say it's like 60K a coin. Why would you go out and buy it 100K? Do you think that's people with operations that aren't necessarily very efficient doing that? Yes. Yes. I think that if you, if it's better for your business to buy Bitcoin than mine Bitcoin,

I have to ask the fundamental question, why are you mining Bitcoin at all? And I guess there's obviously the benefit of getting it up front, right? like, who knows what you'd be mining at in two years. But, yeah, I agree with what you're saying. But if you take a reasonable view of difficulty, you should know within a range of what you expect to be able to produce. And you know the cost structure associated with that. And if you can't get to one-year visibility where it's better to mine it than buy it,

you know, I think that you need to re-examine the cost structure that it takes for you to produce Bitcoin. And who are the people buying these bonds? Would it be similar players to the people that are buying micro strategy bonds? Or is it very different in the mining world? No, it's a small community of folks who play in the convertible debt space. A lot of the funds are big multistrats. You know, they're big funds that everybody's heard of. The community, I believe, is in the 200 fund type of range who are significant players.

all of those types of folks are writing checks into a range of these different convertible structures. The two pieces to think about, you know, why do they write these checks? You know, one is the convertible structure puts you senior in the capital stack. So if things were to go really badly, you're in line ahead of the shareholders to get value out of the company. two is that a lot of these funds invest in lots of different asset classes, but the groups that are committed to the convertible note space are limited. They couldn't buy Bitcoin natively, for instance. They couldn't buy a miners' equity directly, potentially.

And so they have a mandate that pushes them towards taking only credit bets, but they like the mining business that they've written a check into, and they believe in that thesis, in the company, and the best way on a risk-adjusted basis from their perspective to express that bet is to write a check into a convertible note offering from an operating company. I know you've got a hard stop coming up, so I won't take up too much more of your time.

But appreciate you, Harry. Congrats on the rallies. I'll be out in Nashville early next year, so we'll have to do one of these in person again, and you can finally cook me that steak. But where do you want to send anyone? Um, easiest place to find us is at CleanSpark.com. And easiest place to find me is on X.com at Harry underscore Sudak. My DMs are open. Send me a resume. Send me a question. Um,

it's important to me to always be available. Love it. Well, appreciate you, Harry. Thank you very much the time. Danny, appreciate you.