Speaker 1: This is Bloomberg Crypto and daily Bloomberg Ihad Podcast, and
Speaker 1: I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News.
Speaker 1: It's Wednesday, February eighth. Crypto markets and bitcoin especially have
Speaker 1: had a strong start to the year so far. That's
Speaker 1: had a couple of interesting consequences for some of the
Speaker 1: more important players in the market. The bitcoin miners themselves
Speaker 1: has also seen a lot of pretty significant weather events
Speaker 1: that have affected the United States, including recent ice storms
Speaker 1: in Texas that left hundreds of thousands of people without power. Again,
Speaker 1: energy is one of the most important costs that bitcoin
Speaker 1: miners must absorb, and of course they can't run all
Speaker 1: those machines in their data centers if there's electricity. Now,
Speaker 1: we've talked on this show a few times about the
Speaker 1: challenging conditions that bitcoin miners in the US and around
Speaker 1: the world have been facing in recent months and years.
Speaker 1: Today we're going to discuss how some of them have
Speaker 1: been able to adapt, or at least try to take
Speaker 1: advantage of current market conditions to put themselves on slightly
Speaker 1: more stable financial footing. Joining me today is David Pan,
Speaker 1: a Bloomberg Reports who follows bitcoin mining very closely. David,
Speaker 1: welcome back to the show. Thank you, thank you for
Speaker 1: having me back. I have to admit that every time
Speaker 1: I read one of your stories, and then I read
Speaker 1: another one of your stories, and then like a fourth
Speaker 1: or fifth one, I'm like, wow, bitcoin mining seems like
Speaker 1: a complicated industry. So what we're gonna do today is
Speaker 1: break down a little bit what we mean when we
Speaker 1: say bitcoin miners, who some of these players are, and
Speaker 1: what's been happening to them over the past several months
Speaker 1: and especially coming into the beginning of So just to
Speaker 1: get started, can you remind our listeners what exactly it
Speaker 1: is the bitcoin miners do and why these companies are
Speaker 1: an important part of the ecosystem. Yeah. Sure, the bitcoin
Speaker 1: mining companies they buy very expensive specialized computers produced by
Speaker 1: manufacturers like Main or Canaan. So they buy these computers
Speaker 1: to solve mathematical problems on the blockchain, to actually validate
Speaker 1: the transaction data for people who are doing transactions on
Speaker 1: the blockchain. In return, they will get block rewards from
Speaker 1: the network currently it is about six and have bitcoin
Speaker 1: as a reward to the miners. They are important because
Speaker 1: they are securing the network Essentially because bitcoin network is permissionist,
Speaker 1: is decentralized, that there's no middleman to guarantee that the
Speaker 1: transaction is valid between two parties. But miners can do that.
Speaker 1: That's where they step in. So it sounds to me,
Speaker 1: based on what you're saying, the bitcoin blockchain wouldn't work effectively, safely,
Speaker 1: scalably without the participation of these bitcoin miners exactly. So
Speaker 1: that's actually the very first point of bitcoin mining, you know,
Speaker 1: which is to secure the network, to validate the data
Speaker 1: on the network so that this can be a very
Speaker 1: trustworthy peer to peer payment network. But later, you know,
Speaker 1: it has another meaning, which is their financial abilities. For example,
Speaker 1: you know, at the very beginning of the bitcoin blockchain,
Speaker 1: you can just use a personal computers to mind bitcoin.
Speaker 1: But later as more and more people get into this
Speaker 1: process with you know, bitcoin rising, so it becomes a
Speaker 1: very industrialized sector. You know a lot of companies they're
Speaker 1: investing millions of dollars to actually design a specialized computer
Speaker 1: to compute the problems m bitcoin network. That actually leads
Speaker 1: to increasing competition on the network to compete for a
Speaker 1: limited supply of block rewords in bitcoin. And so it
Speaker 1: has grown from personal computers to warehouses of specialized the
Speaker 1: computer stacking on top of each other in the middle
Speaker 1: of nowhere, probably close to a power grid. So that's
Speaker 1: basically the evolution of bitcoin mining industry. And there are
Speaker 1: it sounds like two important consequences of that evolution that
Speaker 1: you've identified right. One is that it's very capital intensive.
Speaker 1: It's expensive to run these big data centers. It's expensive
Speaker 1: to buy these machines, to maintain these machines, to pay
Speaker 1: for the electricity that these machines may need. And it
Speaker 1: looks like, you know, based on your reporting over the
Speaker 1: past twelve months, that various of the companies in the space,
Speaker 1: even the biggest ones, running too a lot of financial difficulty.
Speaker 1: In two call Scientific, one of the biggest publicly traded
Speaker 1: companies creating or mining cryptoccurrences in the US filed from
Speaker 1: bankruptcy protection blamed slumping bitcoin prices. But some of them
Speaker 1: seem to have started three in a much better situation
Speaker 1: than just a few months ago. So what's going on there?
Speaker 1: They're actually a variety of reasons why, you know, we're
Speaker 1: seeing a mixed performance from like different miners. But stepping
Speaker 1: back a little bit, we have to talk about the
Speaker 1: size of the loans the mining companies are taking. I
Speaker 1: mean just looking at the public filings and also talking
Speaker 1: to private mining companies, we have as much as four
Speaker 1: billion dollars, just like in bitcoin mining machine backed loans.
Speaker 1: And then you have bigcoin backed loans, which is actually
Speaker 1: a more common and popular financial tool for bitcoin miners
Speaker 1: to raise money. And then you also have family office
Speaker 1: and and the people from the RAT five sector are
Speaker 1: funneling money into the sector by traditional financial channels. The
Speaker 1: miners have a variety of ways to raise money. And
Speaker 1: then we can talk about why some of them are
Speaker 1: doing better than others. It is because the leverage leverage
Speaker 1: is in the debt that they're exactly looking at the
Speaker 1: balance sheet of the miners and you can actually see
Speaker 1: they actually have a lot of debt. Their debt to
Speaker 1: equity ratio is very high. And then you have some
Speaker 1: other relatively healthy miners, for example Hoidad, and they keep
Speaker 1: their operations in general very lean, so like they don't
Speaker 1: actually want to expand very large projects. They don't want
Speaker 1: to have like one giggle, what mining side in the
Speaker 1: next few years and then one giggle, what is that
Speaker 1: very big? That is very very big? And another reason
Speaker 1: is that the timing of the debt. You know, for example,
Speaker 1: one of the best examples will be Marathon Digital Holdings.
Speaker 1: They actually borrowed money at a very low rate from
Speaker 1: civil date through a feel of credit facilities, so they're
Speaker 1: definitely less burdened with interest the payments over time just
Speaker 1: because the timing when they took out the debt, the
Speaker 1: rate was really really low. So that's another reason why
Speaker 1: you know, some miners are doing better than others. Up next,
Speaker 1: you'll hear more from Bloomberg reposted David pan on what
Speaker 1: will likely affect the prospects for bitcoin miners in three
Speaker 1: So one question that I have for you is why
Speaker 1: would very very traditional, as we say trad fi entities
Speaker 1: like an Apollo or a black Rock find themselves lending
Speaker 1: money to extremely non traditional companies like bitcoin miners. Yeah,
Speaker 1: I think crypto money is kind of like was regarded
Speaker 1: as as a way for people to get exposure to
Speaker 1: cryptole and especially for these traditional financial services companies, it's
Speaker 1: harder for them to directly hold crypto assets just because
Speaker 1: of the compliance and regulatory raisins. But getting into crypto
Speaker 1: mining companies who are publicly traded, that is much easier,
Speaker 1: for example, to convertible bond is a very conventional financial
Speaker 1: channel for for big companies to tracify companies to get
Speaker 1: involved in cryptole and kind of looking forward, one of
Speaker 1: the things that has been true of January going into
Speaker 1: February is that crypto related stocks, whether it is banks,
Speaker 1: whether it is the exchanges, and to some extent the
Speaker 1: miners that really got i'll use the scientific term hammered
Speaker 1: in two have you know, kind of started the year
Speaker 1: with a rally, and various folks, analysts, investors are kind
Speaker 1: of asking like, is this sustainable? Right? Is there something
Speaker 1: fundamental that shifted about the market, or it's just people
Speaker 1: just being like, who finally is not the worst news
Speaker 1: in the world. What are what are you hearing on
Speaker 1: the mining side of this conversation? Yeah, so the miners um.
Speaker 1: So there's a term called a miner's competulation when the
Speaker 1: bigcoin price is going down at the same time the
Speaker 1: hash rate is going down and along with a few
Speaker 1: other conditions. When it hits those conditions, there will be
Speaker 1: a situation called a minor competulation, which means the market
Speaker 1: has hit the bottom. So, and to be clear, that's
Speaker 1: not minor capitulation like M I, N O are small.
Speaker 1: It's like minor compitulation, Like the miners themselves are are
Speaker 1: flying a white flag of defeat. Yeah, the sector's compitulation. Yeah.
Speaker 1: So basically what it means, like, you know, the low
Speaker 1: price have been going on for so long, it has
Speaker 1: driven out some of the miners. So historically it was
Speaker 1: a pretty good indicator that shows the market is hitting
Speaker 1: the bottom. But like, not so sure this in this
Speaker 1: cycle because in the last cycles, miners were actually more
Speaker 1: powerful with larger bitcoin holdings because when they were facing
Speaker 1: financial pressure, they needed to sell their coin reserves, so
Speaker 1: that would create and they were selling in a down market, right,
Speaker 1: like actually getting a lot of money from them, got it. Yeah,
Speaker 1: And then like they were imposing more selling pressure into
Speaker 1: the market just because their coin holdings were still large
Speaker 1: in the previous cycles. But in this cycle, a lot
Speaker 1: of the miners already emptied their bitcoin on the balance sheet,
Speaker 1: so they actually don't have a lot of power or
Speaker 1: like influence over the market because they don't have as
Speaker 1: many coins as before. And I think you had just
Speaker 1: reported that one miner sold tokens for the very first
Speaker 1: time this year. Marathon Firstly, I think, like the company
Speaker 1: do need to capture the higher prices because I think
Speaker 1: they've learned the lesson along with so many other miners
Speaker 1: that maybe, like, you need to sell some of these coins.
Speaker 1: I mean, you can be a hoddler, you know, you
Speaker 1: can't hold hold on, hold on forever, like hold on
Speaker 1: dear life. But at the same time, I mean, is
Speaker 1: that a rational like decision for for a bitcoin minor.
Speaker 1: I mean, it has turned a lot of the miners
Speaker 1: have realized that that wasn't the best interest, you know,
Speaker 1: to just keep all the coins, so like they decided
Speaker 1: to sell some of the coins rather than selling them
Speaker 1: in a bear market. And if they can sell them
Speaker 1: in a in a rally like this, you know, like uh,
Speaker 1: relatively longer rally in the crypto market, if they can
Speaker 1: capture some of the prices, they'll be good, you know,
Speaker 1: for their for their balance sheet, especially now they are
Speaker 1: burning cash. So I think that's that's one of the
Speaker 1: reasons why Marathon was doing that in January. And then
Speaker 1: another reason might be they are increasing their production. They
Speaker 1: are producing more bitcoins just because you know, they're operations
Speaker 1: have been growing over the last year, so they figured
Speaker 1: that you know, like by selling some of those coins,
Speaker 1: I wouldn't affect their holdings that much because they're like
Speaker 1: adding to their holdings at a faster rate than they're
Speaker 1: selling them. All. Yeah. Well, I'm going to end with
Speaker 1: one of the things that we say on the team
Speaker 1: all the time, which is like never a dull moment.
Speaker 1: So thank you as always for coming on the show.
Speaker 1: Thank you. That was Bloomberg, reported David Panton. You can
Speaker 1: find more of his reporting on the Bloomberg Terminal and
Speaker 1: on Bloomberg dot com, and be sure to check out
Speaker 1: our twice weekly news less of Bloomberg Crypto. This is
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Speaker 1: Stacy Marie schmal We'll be back tomorrow.